UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------

For the quarterly period ended September 30, 2008



| ̈ | TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE EXCHANGE ACT
|- | ---------------------------------------------------------------

For the transition period from  to

Commission file number: 000-51888





BASELINE OIL & GAS
CORP.

(Exact name of small business issuer as specified in its charter)







|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Nevada                                                         |  | 30-0226902                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)

411 North Sam Houston Parkway East, Suite 300

Houston, Texas 77060

(Address of
principal executive offices)

(281) 591-6100

(Issuers telephone number)



(Former name, former address and former fiscal year, if changed since last report)





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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                                              |  |  |  |                             
|--------------------------------------------- |  |  |  | ----------------------------
|Large accelerated filer   ̈                    |  |  |  | Accelerated filer   ̈        
|Non-accelerated filer   ̈                      |  |  |  | Smaller reporting company  x
|(Do not check if a smaller reporting company) |  | 

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

At November 10, 2008, Issuer had 151,497,530 shares of common stock, $.001 par value, issued and outstanding.









---

PART I

FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

BASELINE OIL &
GAS CORP.

BALANCE SHEETS

(Unaudited)



|                                                                                                   |  |                   |             |   |                  |   |             |  
|-------------------------------------------------------------------------------------------------- |  | ----------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                   |  | September 30,2008 |             |   | December 31,2007 |  
|ASSETS                                                                                             |  |                   |             |   |                  |   |             |  
|                                                                                                   |  |                  
|CURRENT ASSETS                                                                                     |  |                   |             |   |                  |   |             |  
|Cash and cash equivalents                                                                          |  | $                 | 14,638,722  |   |                  | $ | 5,014,455   |  
|Short term investmentstrading securities                                                          |  |                   |            |   |                  |   | 13,901,275  |  
|Accounts receivable                                                                                |  |                   | 3,544,912   |   |                  |   | 3,774,033   |  
|Deferred loan Costs                                                                                |  |                   | 390,300     |   |                  |   | 2,310,975   |  
|Prepaid and other current assets                                                                   |  |                   | 997,612     |   |                  |   | 111,884     |  
|                                                                                                   |  |                   |             |   |                  |   |             |  
|Total current assets                                                                               |  |                   | 19,571,546  |   |                  |   | 25,112,622  |  
|                                                                                                   |  |                  
|OIL AND NATURAL GAS PROPERTIESusing successful efforts method of accounting                       |  |                   |             |   |                  |   |             |  
|Proved properties                                                                                  |  |                   | 142,878,910 |   |                  |   | 128,381,629 |  
|Unproved properties                                                                                |  |                   | 8,416,268   |   |                  |   | 8,475,666   |  
|                                                                                                   |  |                  
|Less accumulated depletion, depreciation and amortization                                          |  |                   | (6,245,425  | ) |                  |   | (1,823,233  | )
|                                                                                                   |  |                   |             |   |                  |   |             |  
|Oil and natural gas properties, net                                                                |  |                   | 145,049,753 |   |                  |   | 135,034,062 |  
|                                                                                                   |  |                  
|Other assets                                                                                       |  |                   | 37,939      |   |                  |   | 15,989      |  
|Deferred loan costs, net of accumulated amortization of $21,349,051 and $6,390,283, respectively   |  |                   |            |   |                  |   | 13,038,093  |  
|Other property and equipment, net of accumulated depreciation of $75,160 and $17,519, respectively |  |                   | 384,337     |   |                  |   | 184,551     |  
|                                                                                                   |  |                   |             |   |                  |   |             |  
|TOTAL ASSETS                                                                                       |  | $                 | 165,043,575 |   |                  | $ | 173,385,317 |  
|                                                                                                   |  |                   |             |   |                  |   |             |  

The accompanying notes are an integral part of the financial statements



---

BASELINE OIL & GAS CORP.

BALANCE SHEETS

(Unaudited)



|                                                                                                                                                |  |                   |             |   |                  |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                                |  | September 30,2008 |             |   | December 31,2007 |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                  |  |                   |             |   |                  |   |             |  
|                                                                                                                                                |  |                  
|CURRENT LIABILITIES                                                                                                                             |  |                   |             |   |                  |   |             |  
|Accounts payable                                                                                                                                |  | $                 | 4,252,710   |   |                  | $ | 2,151,549   |  
|Accrued interest                                                                                                                                |  |                   | 7,187,500   |   |                  |   | 5,466,250   |  
|Accrued expenses                                                                                                                                |  |                   | 2,101,764   |   |                  |   | 326,886     |  
|Royalties payable                                                                                                                               |  |                   | 4,865,583   |   |                  |   | 3,827,901   |  
|Short term debt and current portion of long-term debt                                                                                           |  |                   | 118,450,017 |   |                  |   | 65,006      |  
|Derivative liabilitiesshort term                                                                                                               |  |                   | 4,672,105   |   |                  |   | 3,076,709   |  
|                                                                                                                                                |  |                   |             |   |                  |   |             |  
|Total current liabilities                                                                                                                       |  |                   | 141,529,679 |   |                  |   | 14,914,301  |  
|                                                                                                                                                |  |                  
|Long term debt, net of discount of $0 and $4,436,137, respectively                                                                              |  |                   |            |   |                  |   | 160,816,395 |  
|Asset retirement obligations                                                                                                                    |  |                   | 306,266     |   |                  |   | 282,947     |  
|Derivative liabilitylong term                                                                                                                  |  |                   | 6,970,709   |   |                  |   | 5,759,471   |  
|                                                                                                                                                |  |                   |             |   |                  |   |             |  
|Total liabilities                                                                                                                               |  |                   | 148,806,654 |   |                  |   | 181,773,114 |  
|                                                                                                                                                |  |                  
|COMMITMENTS AND CONTINGENCIES                                                                                                                   |  |                   |            |   |                  |   |            |  
|                                                                                                                                                |  |                  
|STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                  |  |                   |             |   |                  |   |             |  
|Common stock, $0.001 par value per share; 300,000,000 shares authorized; 151,497,530 and 34,408,006 shares issued and outstanding,
respectively |  |                   | 151,498     |   |                  |   | 34,408      |  
|Additional paid-in capital                                                                                                                      |  |                   | 105,884,725 |   |                  |   | 33,617,266  |  
|Accumulated other comprehensive loss                                                                                                            |  |                   | (7,416,198  | ) |                  |   | (7,362,151  | )
|Accumulated deficit                                                                                                                             |  |                   | (82,383,104 | ) |                  |   | (34,677,320 | )
|                                                                                                                                                |  |                   |             |   |                  |   |             |  
|Total stockholders equity (deficit)                                                                                                            |  |                   | 16,236,921  |   |                  |   | (8,387,797  | )
|                                                                                                                                                |  |                   |             |   |                  |   |             |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                            |  | $                 | 165,043,575 |   |                  | $ | 173,385,317 |  
|                                                                                                                                                |  |                   |             |   |                  |   |             |  

The accompanying notes are an integral part of the financial statements



---

BASELINE OIL & GAS CORP.

STATEMENTS OF OPERATIONS

(Unaudited)



|                                                      |  |                                  |             |   |      |   |            |  
|----------------------------------------------------- |  | -------------------------------- | ----------- | - | ---- | - | ---------- | -
|                                                      |  | Three Months Ended September 30, |            
|                                                      |  | 2008                             |             |   | 2007 |  
|REVENUES                                              |  |                                  |             |   |      |   |            |  
|Oil and gas sales                                     |  | $                                | 10,723,245  |   |      | $ | 3,246,129  |  
|Oil and gas hedging                                   |  |                                  | 1,121,955   |   |      |   | (467,812   | )
|                                                      |  |                                  |             |   |      |   |            |  
|Total revenue                                         |  |                                  | 11,845,200  |   |      |   | 2,778,317  |  
|                                                      |  |                                  |             |   |      |   |            |  
|COSTS AND EXPENSES                                    |  |                                  |             |   |      |   |            |  
|Production                                            |  |                                  | 2,942,919   |   |      |   | 1,549,383  |  
|General and administrative                            |  |                                  | 1,381,146   |   |      |   | 1,699,289  |  
|Depreciation, depletion and amortization              |  |                                  | 1,512,527   |   |      |   | 322,061    |  
|Accretion expense                                     |  |                                  | 8,014       |   |      |   | 12,332     |  
|                                                      |  |                                  |             |   |      |   |            |  
|Total costs and expenses                              |  |                                  | 5,844,606   |   |      |   | 3,583,065  |  
|                                                      |  |                                  |             |   |      |   |            |  
|Net income (loss) from operations                     |  | $                                | 6,000,594   |   |      | $ | (804,748   | )
|                                                      |  |                                 
|OTHER INCOME (EXPENSE)                                |  |                                  |             |   |      |   |            |  
|Other income                                          |  |                                  | 35,146      |   |      |   | 1,501      |  
|Interest income                                       |  |                                  | 178,574     |   |      |   |           |  
|Interest expense                                      |  |                                  | (5,289,717  | ) |      |   | (1,400,336 | )
|Loss on conversion of debt                            |  |                                  | (35,840,649 | ) |      |   |           |  
|Realized and unrealized loss on marketable securities |  |                                  | (89,283     | ) |      |   |           |  
|Unrealized gain on derivative instruments             |  |                                  |            |   |      |   | 26,570     |  
|                                                      |  |                                  |             |   |      |   |            |  
|Total other expense, net                              |  | $                                | (41,005,929 | ) |      | $ | (1,372,265 | )
|                                                      |  |                                  |             |   |      |   |            |  
|NET LOSS                                              |  | $                                | (35,005,335 | ) |      | $ | (2,177,013 | )
|                                                      |  |                                  |             |   |      |   |            |  
|OTHER COMPREHENSIVE INCOME (LOSS)                     |  |                                  |             |   |      |   |            |  
|Unrealized gain (loss) on derivative instruments      |  |                                  | 17,257,566  |   |      |   | (90,031    | )
|                                                      |  |                                  |             |   |      |   |            |  
|Total comprehensive loss                              |  | $                                | (17,747,769 | ) |      | $ | (2,267,044 | )
|                                                      |  |                                  |             |   |      |   |            |  
|NET LOSS PER SHAREBasic and Diluted                  |  | $                                | (0.27       | ) |      | $ | (0.07      | )
|                                                      |  |                                  |             |   |      |   |            |  
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING         |  |                                  | 127,335,029 |   |      |   | 33,172,691 |  
|                                                      |  |                                  |             |   |      |   |            |  

The accompanying notes are an integral part of the financial statements



---

BASELINE OIL & GAS CORP.

STATEMENTS OF OPERATIONS

(Unaudited)



|                                                 |  |                                 |             |   |      |   |            |  
|------------------------------------------------ |  | ------------------------------- | ----------- | - | ---- | - | ---------- | -
|                                                 |  | Nine Months Ended September 30, |            
|                                                 |  | 2008                            |             |   | 2007 |  
|REVENUES                                         |  |                                 |             |   |      |   |            |  
|Oil and gas sales                                |  | $                               | 31,738,252  |   |      | $ | 6,065,868  |  
|Oil and gas hedging                              |  |                                 | (9,427,179  | ) |      |   | (467,812   | )
|                                                 |  |                                 |             |   |      |   |            |  
|Total revenue                                    |  |                                 | 22,311,073  |   |      |   | 5,598,056  |  
|                                                 |  |                                 |             |   |      |   |            |  
|COSTS AND EXPENSES                               |  |                                 |             |   |      |   |            |  
|Production                                       |  |                                 | 8,152,288   |   |      |   | 2,858,770  |  
|General and administrative                       |  |                                 | 4,574,649   |   |      |   | 2,551,218  |  
|Depreciation, depletion and amortization         |  |                                 | 4,479,833   |   |      |   | 839,766    |  
|Accretion expense                                |  |                                 | 23,319      |   |      |   | 24,664     |  
|                                                 |  |                                 |             |   |      |   |            |  
|Total costs and expenses                         |  |                                 | 17,230,089  |   |      |   | 6,274,418  |  
|                                                 |  |                                 |             |   |      |   |            |  
|Net Income (loss) from operations                |  | $                               | 5,080,984   |   |      | $ | (676,362   | )
|                                                 |  |                                
|OTHER INCOME (EXPENSE)                           |  |                                 |             |   |      |   |            |  
|Other income                                     |  |                                 | 120,848     |   |      |   | 24,867     |  
|Interest income                                  |  |                                 | 476,154     |   |      |   | 860        |  
|Interest expense                                 |  |                                 | (17,495,924 | ) |      |   | (4,920,275 | )
|Loss on conversion of debt                       |  |                                 | (35,840,649 | ) |      |   |           |  
|Realized loss on marketable securities           |  |                                 | (47,197     | ) |      |   |           |  
|Unrealized gain on derivative instruments        |  |                                 |            |   |      |   | 32,199     |  
|                                                 |  |                                 |             |   |      |   |            |  
|Total other expense, net                         |  |                                 | (52,786,768 | ) |      |   | (4,862,349 | )
|                                                 |  |                                 |             |   |      |   |            |  
|NET LOSS                                         |  | $                               | (47,705,784 | ) |      | $ | (5,538,711 | )
|                                                 |  |                                 |             |   |      |   |            |  
|OTHER COMPREHENSIVE INCOME (LOSS)                |  |                                 |             |   |      |   |            |  
|Unrealized gain (loss) on derivative instruments |  |                                 | (54,047     | ) |      |   | (1,781,717 | )
|                                                 |  |                                 |             |   |      |   |            |  
|Total comprehensive loss                         |  | $                               | (47,759,831 | ) |      | $ | (7,320,428 | )
|                                                 |  |                                 |             |   |      |   |            |  
|NET LOSS PER SHAREBasic and Diluted             |  | $                               | (0.73       | ) |      | $ | (0.17      | )
|                                                 |  |                                 |             |   |      |   |            |  
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING    |  |                                 | 65,624,835  |   |      |   | 32,069,998 |  
|                                                 |  |                                 |             |   |      |   |            |  

The accompanying notes are an integral part of the financial statements



---

BASELINE OIL & GAS CORP.

STATEMENTS OF CASH FLOW

(Unaudited)



|                                                             |  |                                 |             |   |      |   |             |  
|------------------------------------------------------------ |  | ------------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                             |  | Nine Months Ended September 30, |            
|                                                             |  | 2008                            |             |   | 2007 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                         |  |                                 |             |   |      |   |             |  
|Net loss                                                     |  | $                               | (47,705,784 | ) |      | $ | (5,538,711  | )
|Adjustments to reconcile net loss to net cash                |  |                                 |             |   |      |   |             |  
|Used in operating activities                                 |  |                                 |             |   |      |   |             |  
|Share based compensation                                     |  |                                 | 1,436,261   |   |      |   | 1,134,020   |  
|Stock issued for consulting services                         |  |                                 |            |   |      |   | 300,000     |  
|Depreciation, depletion and amortization                     |  |                                 | 4,479,833   |   |      |   | 839,766     |  
|Amortization of debt discount                                |  |                                 | 476,334     |   |      |   | 426,999     |  
|Amortization of deferred loan costs                          |  |                                 | 2,258,732   |   |      |   | 2,554,452   |  
|Loss on derivative instruments                               |  |                                 | 2,752,587   |   |      |   | 377,533     |  
|Loss on conversion of debt                                   |  |                                 | 35,840,649  |   |      |   |            |  
|Loss on sale of short term investments                       |  |                                 | 47,197      |   |      |   |            |  
|Accretion expense                                            |  |                                 | 23,319      |   |      |   | 24,664      |  
|Changes in operating assets and liabilities                  |  |                                 |             |   |      |   |             |  
|Accounts receivable                                          |  |                                 | 229,121     |   |      |   | (1,397,981  | )
|Prepaid and other current assets                             |  |                                 | (907,678    | ) |      |   | 134,611     |  
|Accounts payable                                             |  |                                 | 2,101,161   |   |      |   | 1,273,831   |  
|Accrued interest                                             |  |                                 | 7,486,728   |   |      |   | 512,316     |  
|Accrued expenses                                             |  |                                 | 1,774,878   |   |      |   |            |  
|Royalties payable                                            |  |                                 | 1,037,682   |   |      |   | 584,148     |  
|                                                             |  |                                 |             |   |      |   |             |  
|Net cash provided by operating activities                    |  |                                 | 11,331,020  |   |      |   | 1,225,648   |  
|CASH FLOWS FROM INVESTING ACTIVITIES                         |  |                                 |             |   |      |   |             |  
|Change in restricted cash                                    |  |                                 |            |   |      |   | (1,277,625  | )
|Investment in proved properties                              |  |                                 | (15,045,281 | ) |      |   | (28,943,470 | )
|Investment in unproved properties                            |  |                                 |            |   |      |   | (493,530    | )
|Proceeds from disposal of unproved properties                |  |                                 | 59,398      |   |      |   |            |  
|Property acquisition deposit incurred                        |  |                                 |            |   |      |   | (2,500,000  | )
|Deferred acquisition costs incurred                          |  |                                 |            |   |      |   | (499,374    | )
|Purchase of marketable securities                            |  |                                 | (10,563,674 | ) |      |   |            |  
|Proceeds from sale of marketable securities                  |  |                                 | 24,417,752  |   |      |   |            |  
|Purchase of property and equipment, other                    |  |                                 | (257,427    | ) |      |   | (51,585     | )
|                                                             |  |                                 |             |   |      |   |             |  
|Net cash used in investing activities                        |  |                                 | (1,389,232  | ) |      |   | (33,765,584 | )
|CASH FLOWS FROM FINANCING ACTIVITIES                         |  |                                 |             |   |      |   |             |  
|Proceeds from debt                                           |  |                                 | 6,471,546   |   |      |   | 35,150,724  |  
|Repayments of debt                                           |  |                                 | (6,789,067  | ) |      |   | (2,307,668  | )
|Deferred loan costs incurred                                 |  |                                 |            |   |      |   | (345,000    | )
|                                                             |  |                                 |             |   |      |   |             |  
|Net cash provided by (used in) financing activities          |  |                                 | (317,521    | ) |      |   | 32,498,056  |  
|INCREASE IN CASH AND CASH EQUIVALENTS                        |  |                                 | 9,624,267   |   |      |   | (41,880     | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD               |  |                                 | 5,014,455   |   |      |   | 123,678     |  
|                                                             |  |                                 |             |   |      |   |             |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                     |  | $                               | 14,638,722  |   |      | $ | 81,798      |  
|                                                             |  |                                 |             |   |      |   |             |  
|SUPPLEMENTAL DISCLOSURES:                                    |  |                                 |             |   |      |   |             |  
|Cash paid for interest                                       |  |                                 | 7,196,062   |   |      |   | 1,294,403   |  
|Cash paid for income taxes                                   |  |                                 |            |   |      |   |            |  
|NON-CASH ACTIVITIES                                          |  |                                 |             |   |      |   |             |  
|Unrealized loss on derivative liability                      |  |                                 | (54,047     | ) |      |   | (1,781,717  | )
|Debt issued in lieu of cash interest                         |  |                                 | 3,500,000   |   |      |   |            |  
|Stock issued in lieu of cash interest                        |  |                                 |             |   |      |   | 149,099     |  
|Stock issued on conversion of debt                           |  |                                 | 53,041,544  |   |      |   | 250,000     |  
|Stock issued for make whole premium                          |  |                                 | 17,906,744  |   |      |   |            |  
|Warrants issued in conjunction with debt                     |  |                                 |            |   |      |   | 3,050,850   |  
|Overriding royalty interest granted in conjunction with debt |  |                                 |            |   |      |   | 2,678,000   |  
|Stock issued for note extension                              |  |                                 |            |   |      |   | 190,000     |  
|Asset retirement obligation incurred                         |  |                                 |            |   |      |   | 438,447     |  



---

BASELINE OIL & GAS CORP.

NOTES TO FINANCIAL STATEMENTS

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, 2007, and notes thereto, which are included in the Companys annual report on Form 10-KSB filed with the
SEC on March 31, 2008. 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 2007 annual financial statements have been omitted. Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications had no effect on previously reported results of operations or
retained earnings.

Concentrations of credit risk

Baseline maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Accounts are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. At September 30, 2008
and December 31, 2007, Baseline had approximately $7,433,499 and $4,774,678, in excess of FDIC insured limits, respectively. Baseline has not experienced any losses in such accounts.

New Accounting Pronouncements

In May 2008, the FASB issued SFAS
No. 162, The Hierarchy of Generally Accepted Accounting Principles, (SFAS 162), which identifies a consistent framework for selecting accounting principles to be used in preparing financial statements for nongovernmental entities
that are presented in conformity with United States generally accepted accounting principles (GAAP). The current GAAP hierarchy was criticized due to its complexity, ranking position of FASB Statements of Financial Accounting Concepts and the fact
that it is directed at auditors rather than entities. SFAS 162 will be effective 60 days following the United States Securities and Exchange Commissions (SECs) approval of the Public Company Accounting Oversight Board amendments to
AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The FASB does not expect that SFAS 162 will result in a change in current practice, and the Company does not believe that SFAS 162
will have an impact on operating results, financial position or cash flows.

In March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities (SFAS 161), an amendment of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 161 requires entities to
provide qualitative disclosures about the objectives and strategies for using derivatives, quantitative data about the fair value of and gains and losses on derivative contracts, and details of credit-risk-related contingent features in their hedged
positions. The standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged but not required. SFAS 161 also requires entities to disclose more
information about the location and amounts of derivative instruments in financial statements how derivatives and related hedges are accounted for under SFAS 133 and how the hedges affect the entitys financial position, financial performance,
and cash flows. The Company is currently evaluating whether the adoption of SFAS 161 will have an impact on its financial position or results of operations.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)). SFAS 141(R) replaces SFAS 141, Business Combinations, however it retains the fundamental requirements that the
acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141(R) requires an acquirer to recognize the assets acquired, liabilities assumed, and any noncontrolling
interest in the acquiree at the acquisition date, be measured at their fair values as of that date, with specified limited exceptions. Changes



---

subsequent to that date are to be recognized in earnings, not goodwill. Additionally, SFAS 141 (R) requires costs incurred in connection with an
acquisition be expensed as incurred. Restructuring costs, if any, are to be recognized separately from the acquisition. The acquirer in a business combination achieved in stages must also recognize the identifiable assets and liabilities, as well as
the noncontrolling interests in the acquiree, at the full amounts of their fair values. SFAS 141(R) is effective for business combinations occurring in fiscal years beginning on or after December 15, 2008. The Company will apply the
requirements of SFAS 141(R) upon its adoption on January 1, 2009 and is currently evaluating whether SFAS 141(R) will have an impact on its financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159
permits companies to elect to measure many financial instruments and certain other items at fair value. Upon adoption of SFAS 159, a company may elect the fair value option for eligible items that exist at the adoption date. Subsequent to the
initial adoption, the election of the fair value option should only be made at initial recognition of the asset or liability or upon a remeasurement event that gives rise to new-basis accounting. The decision about whether to elect the fair value
option is applied on an instrument-by-instrument basis, is irrevocable and is applied only to an entire instrument and not only to specified risks, cash flows or portions of that instrument. SFAS No. 159 does not affect any existing accounting
standards that require certain assets and liabilities to be carried at fair value nor does it eliminate disclosure requirements included in other accounting standards. Baseline adopted SFAS No. 159 effective January 1, 2008 and did not
elect the fair value option for any existing eligible items.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(SFAS 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 does not impose fair value measurements on items not already
accounted for at fair value; rather it applies, with certain exceptions, to other accounting pronouncements that either require or permit fair value measurements. Under SFAS No. 157, fair value refers to the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market. The standard clarifies that fair value should be based on the assumptions market participants would use when
pricing the asset or liability. In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157 (FSP FAS 157-2), which delays the effective date of SFAS 157 for all non-financial assets
and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until fiscal years beginning after November 15, 2008. These non-financial items include assets and liabilities such
as non-financial assets and liabilities assumed in a business combination, reporting units measured at fair value in a goodwill impairment test and asset retirement obligations initially measured at fair value. Effective January 1, 2008,
Baseline adopted SFAS 157 for fair value measurements not delayed by FSP FAS No. 157-2. The adoption resulted in additional disclosures as required by the pronouncement (See Note 5  Fair Value Measurements) related to our fair value
measurements for oil and gas derivatives and marketable securities but no change in our fair value calculation methodologies. Accordingly, the adoption had no impact on our financial condition or results of operations.

NOTE 2  GOING CONCERN

The accompanying financial statements
have been prepared assuming the Company will continue as a going concern. On October 31, 2008, the Company completed a restructuring of its debt. As a result of such restructuring, the majority of its debt will mature on June 15, 2009. The
future of the Company is dependent on its ability to obtain addition capital through debt or equity offerings or the sale of oil and natural gas properties. Given the current instability in the financial and equity markets and current oil and
natural gas pricing levels there is no assurance that the Company will be able to raise the capital needed.

These conditions raise substantial doubt about
the Companys ability to continue as a going concern. These financial statements do not include any adjustments that might arise from this uncertainty.

NOTE 3  ACQUISITIONS

On April 12, 2007, Baseline acquired producing oil and natural gas properties located in Stephens County,
Texas, from Statex Petroleum I, L.P. and Charles W. Gleeson LP. The properties consist of a 100% working interest in approximately 5,200 acres in the Eliasville Field. The preliminary adjusted purchase price was $26.6 million. Upon execution of the
Purchase and Sale Agreement Baseline paid a $1,000,000 non-refundable deposit 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.



---

On October 1, 2007 Baseline acquired producing natural gas and oil properties located in Matagorda County, Texas,
from DSX Energy Limited LLP, Kebo Oil & Gas, Inc., and 25 other related parties for a preliminary adjusted purchase price of $96.6 million. The properties acquired by Baseline consist of a greater than 95% working interest in 2,374 net
acres in the Blessing Field which contained twelve (12) producing wells. The effective date of the acquisition was June 1, 2007.

The Blessing
Field acquisition was funded with proceeds from Baselines issuance of $115 million of 12.5% Senior Secured Notes due 2012 at a purchase price of $110.9 million, plus $50 million of 14.0% Senior Subordinated Convertible Secured Notes due 2013
at a purchase price of $49.5 million. In addition, Baseline retired $33.1 million of indebtedness with proceeds of the offering, with the remainder being utilized for general corporate purposes, fees and expenses. Baseline also entered into a $20
million credit facility with a senior lender. The line of credit will be used for implementing Baselines oil and natural gas hedging strategy, and for working capital if needed. The line of credit was not drawn at closing.

The following unaudited pro forma information assumes the acquisitions occurred as of the beginning of each period. The pro forma results are not necessarily indicative
of what actually would have occurred had the acquisition been in effect for the period presented.



|                                      |  |             |            |   |           |   |            |  
|------------------------------------- |  | ----------- | ---------- | - | --------- | - | ---------- | -
|                                      |  | As Reported |            |   | Pro Forma |  
|Three months ended September 30, 2007 |  |             |            |   |           |   |            |  
|Revenues                              |  | $           | 3,246,129  |   |           | $ | 10,376,939 |  
|Net Loss                              |  |             | (2,177,013 | ) |           |   | (1,508,829 | )
|Loss Per Share                        |  |             | (0.07      | ) |           |   | (0.05      | )
|                                      |  |            
|                                      |  | As Reported |            |   | Pro Forma |  
|Nine months ended September 30, 2007  |  |             |            |   |           |   |            |  
|Revenues                              |  | $           | 6,065,868  |   |           | $ | 28,830,811 |  
|Net Loss                              |  |             | (5,538,711 | ) |           |   | (611,393   | )
|Loss Per Share                        |  |             | (0.017     | ) |           |   | (0.02      | )

NOTE 4  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Baseline utilizes hedge accounting for our cash flow hedges, which include our collars, swaps and floors. For the three months ended September 30, 2008 Baseline
recognized a derivative liability of $11,642,814 with the change in fair value reflected in other comprehensive income/loss. Realized hedge losses totaled $6,674,592 for the nine months ended September 30, 2008.

As of September 30, 2008 Baseline had the following hedge contracts outstanding:

Crude Oil Hedges (1)



|           |  |               |  |            |  |       |       |         |   |       |  |               |       |               |        |               |         |               |        |  |       
|---------- |  | ------------- |  | ---------- |  | ----- | ----- | ------- | - | ----- |  | ------------- | ----- | ------------- | ------ | ------------- | ------- | ------------- | ------ |  | ------
|Instrument |  | BeginningDate |  | EndingDate |  | Floor |       | Ceiling |   | Fixed |  | TotalBbls2008 |       | TotalBbls2009 |        | TotalBbls2010 |         | TotalBbls2011
|Collar     |  | Oct-08        |  | Dec-08     |  | $     | 68.20 |         | $ | 74.20 |  |               |       |               | 30,000 |               |         |               |        |  |       
|Collar     |  | Oct-08        |  | Dec-08     |  | $     | 68.00 |         | $ | 79.81 |  |               |       |               | 15,000 |               |         |               |        |  |       
|Collar     |  | Jan-09        |  | Dec-09     |  | $     | 68.00 |         | $ | 74.05 |  |               |       |               |        |               | 42,000  |               |        |  |       
|Swap       |  | Jan-09        |  | Dec-09     |  |       |       |         |   |       |  | $             | 68.20 |               |        |               | 117,000 |               |        |  |       
|Swap       |  | Jan-10        |  | May-10     |  |       |       |         |   |       |  | $             | 68.20 |               |        |               |         |               | 47,500 |  |       
|Floor      |  | Oct-08        |  | Dec-08     |  | $     | 75.00 |         |   |       |  |               |       |               | 15,000 |               |         |               |        |  |       
|Floor      |  | Jan-09        |  | Dec-09     |  | $     | 75.00 |         |   |       |  |               |       |               |        |               | 48,000  |               |        |  |       
|Swaption   |  | June-10       |  | Dec-10     |  |       |       |         | $ | 73.20 |  |               |       |               |        |               |         |               | 49,000 |  |       
|Swaption   |  | Jan-11        |  | Dec-11     |  |       |       |         | $ | 73.20 |  |               |       |               |        |               |         |               |        |  | 84,000
|           |  |               |  |            |  |       |       |         |   |       |  |               |       |               |        |               |         |               |        |  |       
|           |  |               |  |            |  |       |       |         |   |       |  |               |       |               | 60,000 |               | 207,000 |               | 96,500 |  | 84,000
|           |  |               |  |            |  |       |       |         |   |       |  |               |       |               |        |               |         |               |        |  |       



|(1) | All indexed to NYMEX WTI Cushing Light Sweet Crude
|--- | --------------------------------------------------



---

Natural Gas Hedges (1)



|           |  |               |  |            |  |       |      |         |   |       |  |                |  |                |  |                |  |                |  |  
|---------- |  | ------------- |  | ---------- |  | ----- | ---- | ------- | - | ----- |  | -------------- |  | -------------- |  | -------------- |  | -------------- |  | -
|Instrument |  | BeginningDate |  | EndingDate |  | Floor |      | Ceiling |   | Fixed |  | TotalMMBtu2008 |  | TotalMMBtu2009 |  | TotalMMBtu2010 |  | TotalMMBtu2011
|Collar     |  | Oct-08        |  | Dec-08     |  | $     | 7.50 |         | $ | 7.83  |  |                |  | 210,000        |  |                |  |                |  |  
|Collar     |  | Jan-09        |  | Dec-09     |  | $     | 7.50 |         | $ | 8.44  |  |                |  |                |  | 660,000        |  |                |  |  
|           |  |               |  |            |  |       |      |         |   |       |  |                |  |                |  |                |  |                |  |  
|           |  |               |  |            |  |       |      |         |   |       |  |                |  | 210,000        |  | 660,000        |  |               |  | 
|           |  |               |  |            |  |       |      |         |   |       |  |                |  |                |  |                |  |                |  |  



|(1) | All indexed to inside FERC Houston Ship Channel
|--- | -----------------------------------------------

NOTE 5  FAIR
VALUE MEASUREMENTS

Baseline has various financial instruments that are measured at fair value in the financial statements, including marketable debt
securities and commodity derivatives. Baselines financial assets and liabilities are measured using input from three levels of the fair value hierarchy. A financial asset or liability classification within the hierarchy is determined based on
the lowest level input that is significant to the fair value measurement. The three levels are as follows:

Level 1  Inputs are
unadjusted quoted prices in active markets for identical assets or liabilities that Baseline has the ability to access at the measurement date.

Level 2  Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are
observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3  Unobservable inputs reflect Baselines judgments about the assumptions market participants would use in pricing the asset of liability
since limited market data exists. Baseline develops these inputs based on the best information available, using internal and external data.

The following
table presents Baselines assets and liabilities recognized in the balance sheet and measured at fair value on a recurring basis as of September 30, 2008:



|                      |  |                                          |  |         |            |         |   |       |   |           
|--------------------- |  | ---------------------------------------- |  | ------- | ---------- | ------- | - | ----- | - | ----------
|                      |  | Input Levels for Fair Value Measurements
|Description           |  | Level 1                                  |  | Level 2 |            | Level 3 |   | Total
|Liabilities:          |  |                                          |  |         |            |         |   |       |   |           
|Commodity derivatives |  |                                         |  | $       | 11,642,814 |         |  |       | $ | 11,642,814
|                      |  |                                          |  |         |            |         |   |       |   |           
|                      |  |                                         |  | $       | 11,642,814 |         |  |       | $ | 11,642,814
|                      |  |                                          |  |         |            |         |   |       |   |           

Baseline uses various commodity derivative instruments, including collars, swaps, floors and swaptions. The fair
value of commodity derivatives is determined using forward price curves derived from market price quotations, externally developed and commercial models, with internal and external fundamental data inputs. Market price quotations are obtained from
independent energy brokers, direct communication with market participants and actual transactions executed by Baseline. Market price quotations for the natural gas trading hubs utilized in our commodity derivatives are generally readily obtainable
for the first six years, and therefore Baselines forward price curves reflect observable market quotes.



---

NOTE 6  DEBT

Total debt at September 30, 2008 and December 31, 2007 consists of the following:



|                                                           |  |                    |              |   |                   |   |             |  
|---------------------------------------------------------- |  | ------------------ | ------------ | - | ----------------- | - | ----------- | -
|                                                           |  | September 30, 2008 |              |   | December 31, 2007 |  
|Short term notes                                           |  | $                  |             |   |                   | $ | 65,006      |  
|Senior secured notes, net of discount                      |  |                    | 118,450,00   |   |                   |   | 111,051,530 |  
|Convertible notes, net of discount                         |  |                    |             |   |                   |   | 49,512,333  |  
|Revolving line of credit                                   |  |                    | 17           |   |                   |   | 252,532     |  
|                                                           |  |                    |              |   |                   |   |             |  
|                                                           |  |                    | 118,450,017  |   |                   |   | 160,881,401 |  
|Less short term debt and current portion of long-term debt |  |                    | (118,450,017 | ) |                   |   | (65,006     | )
|                                                           |  |                    |              |   |                   |   |             |  
|Long-term debt                                             |  | $                  |             |   |                   | $ | 160,816,395 |  
|                                                           |  |                    |              |   |                   |   |             |  

On October 1, 2007 Baseline completed a debt offering
consisting of $115 million aggregate principal amount of 121/2% Senior Secured Notes due 2012 (the Senior Secured Notes) and $50 million in aggregate principal amount of 14% Senior Subordinated Convertible Notes due 2013 (the Convertible
Notes). The bulk of the proceeds from these bond offerings were used to fund the purchase of the Blessing Field Properties, retire prior outstanding indebtedness and to pay fees and expenses related to the offerings.

Interest on the Senior Secured Notes was due semi-annually on April 1stand October 1st. The principal on the Senior Secured Notes was due on October 1, 2012. The Senior Secured Notes were subject to an optional redemption beginning
October 1, 2009 in the amount of 25% per quarter, at Baselines option and upon certain conditions being met. Upon a Change of Control (as defined in the indenture governing the Senior Secured Notes), the Senior Secured
Notes could be put back to us at 101% of par, plus accrued unpaid interest.

Interest on the
Convertible Notes was payable semi-annually on April 1stand October 1st, with Baseline having the option of paying any interest in cash
or, subject to certain conditions being met, as additional principal amounts under the Convertible Notes, or PIK Notes. On April 1, 2008, Baseline elected to issue PIK notes to the holders of the Convertible Notes for interest payable for the
period from October 1, 2007 through March 31, 2008 in the amount of $3,500,000. The Convertible Notes were convertible into shares of our common stock at an initial conversion price of $0.72 per share, or 1,389 shares of common stock for
each $1,000 principal amount of the Convertible Notes converted.

On October 1, 2007, Baseline also entered into a Credit Agreement with Wells Fargo
Foothill, Inc. (the Credit Agreement). Subject to the satisfaction of a Borrowing Base formula (based on Proved Developed Producing and Proved Developed Nonproducing reserves of Baseline minus certain reserves established by the
administrative agent related to credit exposure created by other bank products, including 125% of the mark-to-market value of the hedge positions), and numerous conditions precedent and covenants, the Credit Agreement provided for a revolving
commitment of up to $20 million, with a sublimit of $10 million for the issuance of letters of credit. Unless earlier repayment was required under the Credit Agreement, advances under the loan facility were due on or before October 1, 2010.
Baselines oil and gas properties were pledged as collateral under the Credit Agreement, as well as the Senior Notes and the Convertible Notes. Baseline also agreed not to pay dividends on its common stock.

During July 2008, a group of related investors acquired all of Baselines outstanding Convertible Notes and converted all of such debt into common stock.
Accordingly, Baseline issued to the investors a total of 74,311,500 shares of its common stock, valued at the $53,500,000 face value of the debt net of the unamortized discount of $458,456. In addition, Baseline issued an additional 42,723,748
shares of its common stock under the related conversion make-whole premium, valued at $17,906,744. As a result of these transactions, the investors beneficially held, as of July 30, 2008, approximately 77.25% of Baselines issued and
outstanding common stock which constituted a Change of Control. Issuance of the above conversion shares of common stock, together with the make-whole payment, satisfied in full Baselines obligations under the Convertible Notes.

As a result of the conversion of the Convertible Notes, the remaining unamortized balance of deferred loan costs, totaling $4,531,634, was expensed during the quarter as
loss on conversion of debt. In addition, Baseline expensed the $17,906,744 related to the conversion make-whole premium, net of $2,265,478 in interest accrued through the date of conversion as loss on conversion of debt.

On August 8, 2008, by reason of the Change of Control, Baseline commenced an offer to purchase for cash all of its Senior Secured Notes at a price equal to 101% of
the principal amount of the Senior Secured Notes tendered prior to the close of business on October 2, 2008, plus all accrued and unpaid interest. In addition, Baseline solicited consents from the holders of



---

the Senior Secured Notes to amend the indenture governing the Senior Secured Notes and other collateral agreements. The proposed amendments among other
things eliminated or modified substantially all of the restrictive covenants, certain events of default and related provisions contained in the indenture and limited the rights of the holders of the Senior Secured Notes and, consequently the
practical benefit of the liens securing the Senior Secured Notes allowing Baseline to utilize the collateral to obtain financing to be used to purchase the Senior Secured Notes. As an incentive to holders of the Senior Secured Notes, Baseline agreed
to pay a consent payment equal to 2% of the principal amount of the Senior Secured Notes for which consents were validly delivered under the consent solicitation. Consents were delivered by holders of Senior Secured Notes having an aggregate
outstanding principal amount of $115 million, representing 100% of the outstanding Senior Secured Notes. As a result, Baseline was obligated to repurchase all of the outstanding Senior Secured Notes for $118,450,000, plus accrued and unpaid
interest. On October 6, 2008, Baseline failed to repurchase the notes and by virtue of such non-payment, was in default of the Indenture governing the Notes, as well as its Credit Agreement. Accordingly, the Senior Secured Notes and amounts
outstanding under the Credit Agreement have been reflected as a current liability in the accompanying financial statements. Subsequently, Baseline reached an agreement with the majority of the note holders to restructure the terms of the Senior
Secured Notes (See Note 9  Subsequent Events).

As a result of the purchase offer for the Senior Secured Notes, the remaining unamortized balances of
deferred loan costs and note discount, totaling $8,716,402 and $3,501,347, respectively, were expensed during the quarter as loss on conversion of debt. In addition, the face amount of the Senior Secured Notes was increased by $3,450,000 related to
the premium under the Change of Control purchase offer and the consent solicitation. Such amount was expensed during the quarter as loss on conversion of debt.

Total loss on conversion of debt expensed during the quarter ended September 30, 2008 consists of the following:



|                                                                                      |  |   |           
|------------------------------------------------------------------------------------- |  | - | ----------
|Conversion make-whole premium, net of interest accrued through the date of conversion |  | $ | 15,641,266
|Unamortized deferred loan costs related to the Senior Secured Notes                   |  |   | 8,716,402 
|Unamortized debt discount on the Senior Secured Notes                                 |  |   | 3,501,347 
|Unamortized deferred loan costs related to the Convertible Notes                      |  |   | 4,531,634 
|1% premium under the Change of Control purchase offer                                 |  |   | 1,150,000 
|2% premium under the consent solicitation                                             |  |   | 2,300,000 
|                                                                                      |  |   |           
|                                                                                      |  | $ | 35,840,649
|                                                                                      |  |   |           

NOTE 7  ASSET RETIREMENT OBLIGATION



|                                                  |  |                                     |        
|------------------------------------------------- |  | ----------------------------------- | -------
|                                                  |  | Nine Months EndedSeptember 30, 2008
|Asset retirement obligations, beginning of period |  | $                                   | 282,947
|Accretion expense                                 |  |                                     | 23,319 
|                                                  |  |                                     |        
|Asset retirement obligations, end of period       |  | $                                   | 306,266
|                                                  |  |                                     |        

NOTE 8  STOCKHOLDERS EQUITY

On July 14, 2008, Baseline filed a Certificate of Amendment with the Secretary of State of Nevada which amended our Articles of Incorporation to increase the number of authorized shares of common stock, from
140,000,000 shares to 300,000,000 shares. The Certificate of Amendment became effective upon filing.

During July 2008, Baseline issued 74,311,500 shares
of its common stock upon the conversion of Convertible Notes. Such shares were valued at the $53,500,000 face value of the debt net of the unamortized discount of $458,456.

During July 2008, Baseline issued 42,723,748 shares of its common stock related to the conversion make-whole premium on the Convertible Notes. Such shares were valued at $17,906,744.

On April 22, 2008, Baseline granted to its employees options to purchase up to 375,000 shares of its common stock at $0.50 per share. Such options vest in various
amounts through April 22, 2010. The stock options have a five year term expiring on April 22, 2013. The options were valued using the Black-Scholes model with the following assumptions: $0.34 quoted stock price; $0.50 exercise price; 142%
volatility; 3 year estimated life; zero dividends; 2.43% discount rate. The fair value of these options was $94,608.



---

On June 19, 2008, Baseline granted to its Chief Executive Officer, Thomas R. Kaetzer, an option to purchase up to
3,000,000 shares of its common stock, immediately exercisable at $0.40 per share, in recognition of Mr. Kaetzers performance and achievement to date. Such options vested on the grant date. The stock options have a five year term expiring
on June19, 2013. The options were valued using the Black-Scholes model with the following assumptions: $0.40 quoted stock price; $0.40 exercise price; 141% volatility; 2.5 year estimated life; zero dividends; 3.28% discount rate. The fair value of
these options was $896,527.

A summary of stock option transactions follow:



|                           |  |                                |      |                  |            |  
|-------------------------- |  | ------------------------------ | ---- | ---------------- | ---------- | -
|                           |  | Weighted AverageExercise Price |      | Number ofOptions |           
|Balance January 1, 2008    |  | $                              | 0.40 |                  | 9,265,000  |  
|Granted                    |  |                                | 0.41 |                  | 3,375,000  |  
|Exercised                  |  |                                | 0.05 |                  | (62,500    | )
|                           |  |                                |      |                  |            |  
|Balance September 30, 2008 |  | $                              | 0.41 |                  | 12,577,500 |  
|                           |  |                                |      |                  |            |  

The weighted average remaining contractual term of the options is 3.11 years. The intrinsic value of the
exercisable options at September 30, 2008 was $389,750.

NOTE 9  SUBSEQUENT EVENTS

Baseline successfully reached an agreement with the majority of its note holders with respect to its failure to repurchase the Companys outstanding 12.5% Senior
Secured Notes due 2012 (the ``Old Notes) on October 6, 2008. As previously disclosed, the Company failed to pay the holders of the Old Notes $118.45 million, constituting aggregate offer consideration and consent fees payable with respect
to its August 8, 2008 Change of Control Offer to Purchase and Consent Solicitation.

On October 31, 2008, holders of $100 million (the ``Majority
Holders) of the $115 million outstanding aggregate principal amount of the Old Notes exchanged all of their Old Notes for new Senior Secured Notes (the ``New Notes) in the aggregate principal amount of $106,681,250. Such amount
represents 103% of the principal amount of Old Notes held by the Majority Holders, plus an additional $3,681,250 (payable as satisfaction of certain consent, solicitation and other fees owing from the Company, including fees associated with the
waiver of certain existing defaults under the Indenture for the Old Notes). In addition, there remains outstanding $15 million in principal amount of Old Notes.

The New Notes mature on June 15, 2009 and will accrue annualized interest of 15%, 12.5% of which is payable in cash, and 2.5% of which may be payable by the Company in additional New Notes (the ``PIK Interest). Interest under the
New Notes will be payable quarterly. The New Notes and the Old Notes will share in the existing security interest on substantially all of the Companys properties that had been held by the holders of the Old Notes, on a pro rata basis.

If a holder of Old Notes delivers a consent to the Company prior to the maturity or earlier repayment of the New Notes, such holder will be entitled to
receive, in exchange for its Old Notes, New Notes in a principal amount equal to (i) 104.25% of the principal amount of its Old Notes being exchanged and (ii) the amount of PIK Interest that would have accrued with respect to such New
Notes had they been issued to such holder on October 30, 2008 through and including the date of such consent, offset by any interest received under such holders Old Notes since October 1, 2008.

The New Notes have not been and will not be registered under the Securities Act of 1933, as amended, may not be offered or sold in the United States absent registration
or an applicable exemption from registration requirements, and will therefore be subject to substantial restrictions on transfer.

The Companys
senior lender, Wells Fargo Foothill, Inc., also subject to certain conditions, agreed to forbear from exercising remedies available to it under its senior credit facility and hedge agreement with the Company until April 15, 2009. The senior
credit facility has also been amended to provide, among other things, for (i) a new maturity date, with respect to any advances under the revolving credit commitment, of the earlier of October 1, 2010 or sixty days prior to the maturity
date of the New Notes and (ii) an increase of 2% on the interest rate margin for both Prime and LIBOR based loans thereunder (as of today, there are nominal borrowings under the senior credit facility). The Intercreditor Agreement was also
modified to permit the restructuring of the Companys obligations under the Old Notes and to extend the standstill period, during which time the Trustee for the Old Notes and New Notes cannot enforce any rights with respect to collateral from
90 to 180 days.

As part of the restructuring, on October 17, 2008, the Company also paid to the holders of record on September 15, 2008 all
accrued and unpaid interest initially due on October 1, 2008 under the Old Notes.



---

|Item 1A. | Risk Factors
|-------- | ------------

In light of the difficult
conditions of the current credit market and as a result of the recent restructuring of our debt obligations (as previously disclosed in our Current Report on Form 8-K filed with the SEC on October 13, 2008 and elsewhere herein), you should
carefully consider each of the risks described below, together with all of the other information contained in this report, when making any investment decision with respect to our securities. The below risks supplement, and are in addition to, the
risk factors set forth in our annual report on Form 10-K. If any of the following risks develop into actual events, our business, financial condition or results of operations could be materially adversely affected.

We may be unable to refinance our debt obligations, which become due in the second quarter of 2009.

In October 2008 we restructured our existing credit agreement and $100 million outstanding aggregate principal amount of our Senior Notes after we failed
to repay on October 6, 2008 our outstanding Senior Secured Notes under a change of control offer triggered by the earlier purchase and conversion of our outstanding Convertible Notes by related third parties. As restructured, the new Senior
Secured Notes mature on June 15, 2009 (rather than June 1, 2012 under the original notes) and accrue annualized interest of 15% (rather than 12.5% under the original notes), of which 15% interest rate 12.5% is payable in cash and 2.5% is
payable by us in additional Senior Secured Notes. Interest is also payable quarterly (rather than semiannually) under the new Senior Secured Notes. In connection with the restructuring of our Senior Secured Notes, our senior lender agreed to forbear
from exercising remedies available to it under the credit facility and hedge agreement until April 15, 2009 and the credit facility was amended to provide, among other things, for (i) a new maturity date, with respect to any advances under
the revolving credit commitment, of the earlier of October 1, 2010 or sixty days prior to the maturity date of the new Senior Secured Notes and (ii) an increase of 2% on the interest rate margin for both Prime and LIBOR based loans
thereunder.

If we are unable to refinance the obligations described above when they become due, we will have no choice but to seek
protection under the United States Bankruptcy Code, which would have an adverse effect on the value of our common stock.

The recent restructuring of
our credit agreement and Senior Secured Notes may adversely affect our cash flow and business operations.

As a result of the
earlier maturity dates under our amended credit facility and our new Senior Secured Notes, together with the increased interest payments provided therein, a greater portion of our cash will be needed to satisfy our debt obligations and we will be
more dependent upon cash flow from operations to finance our business, including funding such debt obligations. In addition, the shortened horizon for retiring, replacing or restructuring these debt obligations may cause us to delay and/or forego
certain development activities, adversely affecting our business operations, financial condition and prospects.

We remain in default on $15 million
of Senior Secured Notes.

In connection with the restructuring of the Senior Secured Notes described above, we were unable to obtain
the consent to such restructuring from the holder or holders of $15 million in principal amount of Senior Secured Notes (the Remaining Old Notes). The holder(s) of Remaining Old Notes have the ability to demand payment from us of
principal, interest and consent fees at any time. However, because of the restructuring referred to above, such holders would not have the right to instruct the Trustee under the Senior Secured Notes to take any action against our properties. We do
not believe such an action by the holders of the Remaining Old Notes is likely, but if such holders were successful in a claim against us for payment, we would not be able to satisfy such claim and would likely seek bankruptcy protection as
described above.

Recent economic conditions in the credit market may adversely affect our financial condition.

The disruption experienced in U.S. and global credit markets during the latter half of 2008 has resulted in projected decreases in demand for oil and
natural gas, resulting in a sharp drop in energy prices, and has affected the availability and cost of capital. Prolonged negative changes in domestic and global economic conditions or disruptions of either or both of the financial and credit
markets may have a material adverse effect on our results from operations, financial condition and liquidity. At this time, it is unclear whether and to what extent the actions taken by the U.S. government, including, without limitation, the passage
of the Emergency Economic Stabilization Act of 2008 and other measures currently being implemented or contemplated, will mitigate the effects of the financial market turmoil. The impact of the current difficult conditions on our ability to obtain,
and the cost and terms of, any financing in the future, including funding for our operations after the earlier expiration of our existing credit facility. as amended, and the retirement of our new Senior Secured Notes on June 15, 2009, is
unclear. An inability to obtain adequate financing on acceptable terms would adversely affect the satisfaction or replacement of our debt obligations, result in a deterioration of our financial condition and may raise substantial doubt as to our
ability to continue as a going concern.



|Item 2. | Managements Discussion and Analysis
|------- | ------------------------------------

The
following discussion will assist you in understanding our financial position, liquidity, and results of operations. The information below should be read in conjunction with the financial statements, and the related notes to financial statements set
forth in Item 1 of this quarterly report.

We desire to take advantage of the safe harbor provisions of the
Section 21E of the Securities Exchange Act of 1934 with respect to the forward-looking information contained in this report. Forward-looking statements reflect managements current views and expectations with respect to our business,
strategies, future results and events and financial performance and 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. Statements concerning results of future exploration, exploitation, development, and acquisition expenditures as well as expense and reserve levels are
forward-looking statements. We make assumptions about commodity



---

prices, drilling results, production costs, administrative expenses, and interest costs that we believe are reasonable based on currently available
information. Factors that could cause or contribute to such differences include those set forth in our annual reports filed with the Securities and Exchange Commission, and 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.

Business Strategy

We are a Houston, Texas-based independent oil and natural gas company engaged in the exploration,
production, development, acquisition and exploitation of crude oil and natural gas properties, with interests in: (i) the Eliasville Field in North Texas, or the Eliasville Field Properties; (ii) the Blessing Field in Matagorda County,
Texas, onshore along the Texas Gulf Coast, or the Blessing Field Properties; and, (iii) the New Albany Shale resource play in Southern Indiana, or the New Albany Shale Play. Our properties cover 39,945 net acres in these three core areas.

We currently have a number of opportunities to increase production and expand our reserve base through infill and extension drilling of
new wells, workovers targeting proved or non-proved reserves, stimulating existing wells and the expansion of enhanced oil recovery projects such as waterflood operations. In addition, we plan to investigate the application of surfactant flooding
techniques at our Eliasville Field Properties to potentially recover significant incremental oil reserves. On the Blessing Field Properties, we continue to evaluate the middle and upper Frio formations where we have identified over 30 bcfe of
probable reserve potential which could expand our drilling program in the field. In the New Albany Shale Play, we plan to complete and flow test a group of previously drilled wells for a significant period, evaluate our participation in new wells
proposed by our partner, and install gas gathering and compression facilities.

We expect to utilize 3-D seismic analysis, enhanced oil
recovery processes, horizontal drilling, and other modern technologies and production techniques to improve drilling results and ultimately enhance our production and returns. We believe the use of such technologies and production techniques in
exploring for, developing and exploiting oil and natural gas properties will help us reduce drilling risks, lower finding costs and provide for more efficient production of oil and natural gas from our properties.

We frequently review opportunities to acquire additional producing properties, leasehold acreage and drilling prospects that are located in our core
operating areas, or which might result in the establishment of new core areas. When identifying acquisition candidates, we focus primarily on underdeveloped assets with significant growth potential. We seek acquisitions which allow us to absorb,
enhance and exploit properties without taking on significant geologic, exploration or integration risk.

The implementation of our strategy
requires that we make significant capital expenditures in order to replace current production and find and develop new oil and gas reserves. In order to finance our capital program, we depend on cash flow from operations, cash or short term
investments on hand and committed credit facilities, as discussed below in Liquidity and Capital Resources.

The recent restructuring of
our Senior Secured Notes and the amendment of our credit agreement with Wells Fargo Foothill, Inc. have raised our interest costs and also shortened our required horizon for retiring, replacing or restructuring these debt obligations. Specifically,
the majority of our Senior Secured Notes will now mature on June 15, 2009, while all amounts owing under the credit agreement are due 60 days prior to the maturity of any of the Senior Secured Notes. Combined with the significant drop in
commodity prices which has occurred during the third quarter of 2008, these factors are likely to cause us to delay certain development activities which would otherwise have occurred during the fourth quarter of 2008 and calendar year 2009. No final
decisions have yet been made concerning our spending on development activities during the balance of 2008 and 2009.

Liquidity and Capital Resources

Our primary sources of liquidity and capital resources for 2008 are cash, short-term cash equivalent investments on hand, internally
generated cash flows from operations and committed credit facilities.

On
October 1, 2007 Baseline completed a debt offering consisting of $115 million aggregate principal amount of 121/2% Senior Secured Notes due 2012 (the Senior Secured Notes) and $50 million in aggregate principal amount of 14% Senior Subordinated Convertible
Notes due 2013 (the Convertible Notes). The bulk of the proceeds from these bond offerings were used to fund the purchase of the Blessing Field Properties, retire prior outstanding indebtedness and to pay fees and expenses related to the
offerings.



---

Interest on the Senior Secured Notes was due
semi-annually on April 1stand October 1st. The principal on the Senior Secured Notes was due on October 1, 2012. The Senior Secured
Notes were subject to an optional redemption beginning October 1, 2009 in the amount of 25% per quarter, at Baselines option and upon certain conditions being met. Upon a Change of Control (as defined in the indenture
governing the Senior Secured Notes), the Senior Secured Notes could be put back to us at 101% of par, plus accrued unpaid interest.

Interest on the Convertible Notes was payable semi-annually on April 1stand October 1st, with Baseline having the option of paying any interest in cash or, subject to certain conditions being met, as additional principal
amounts under the Convertible Notes, or PIK Notes. On April 1, 2008, Baseline elected to issue PIK notes to the holders of the Convertible Notes for interest payable for the period from October 1, 2007 through March 31, 2008 in the
amount of $3,500,000. The Convertible Notes were convertible into shares of our common stock at an initial conversion price of $0.72 per share, or 1,389 shares of common stock for each $1,000 principal amount of the Convertible Notes converted.

On October 1, 2007, Baseline also entered into a Credit Agreement with Wells Fargo Foothill, Inc. (the Credit Agreement).
Subject to the satisfaction of a Borrowing Base formula (based on Proved Developed Producing and Proved Developed Nonproducing reserves of Baseline minus certain reserves established by the administrative agent related to credit exposure created by
other bank products, including 125% of the mark-to-market value of the hedge positions), and numerous conditions precedent and covenants, the Credit Agreement provided for a revolving commitment of up to $20 million, with a sublimit of $10 million
for the issuance of letters of credit. Unless earlier repayment was required under the Credit Agreement, advances under the loan facility were due on or before October 1, 2010. Baselines oil and gas properties were pledged as collateral
under the Credit Agreement, as well as the Senior Notes and the Convertible Notes. Baseline also agreed not to pay dividends on its common stock.

During July 2008, a group of related investors acquired all of Baselines outstanding Convertible Notes and converted all of such debt into common stock. Accordingly, Baseline issued to the investors a total of 74,311,500 shares of its
common stock, valued at the $53,500,000 face value of the debt net of the unamortized discount of $458,456. In addition, Baseline issued an additional 42,723,748 shares of its common stock under the related conversion make-whole premium, valued at
$17,906,744. As a result of these transactions, the investors beneficially held, as of July 30, 2008, approximately 77.25% of Baselines issued and outstanding common stock which constituted a Change of Control. Issuance of the above
conversion shares of common stock, together with the make-whole payment, satisfied in full Baselines obligations under the Convertible Notes.

On August 8, 2008, by reason of the Change of Control, Baseline commenced an offer to purchase for cash all of its Senior Secured Notes at a price equal to 101% of the principal amount of the Senior Secured Notes tendered prior to the
close of business on October 2, 2008, plus all accrued and unpaid interest. In addition, Baseline solicited consents from the holders of the Senior Secured Notes to amend the indenture governing the Senior Secured Notes and other collateral
agreements. The proposed amendments among other things eliminated or modified substantially all of the restrictive covenants, certain events of default and related provisions contained in the indenture and limited the rights of the holders of the
Senior Secured Notes and, consequently the practical benefit of the liens securing the Senior Secured Notes allowing Baseline to utilize the collateral to obtain financing to be used to purchase the Senior Secured Notes. As an incentive to holders
of the Senior Secured Notes, Baseline agreed to pay a consent payment equal to 2% of the principal amount of the Senior Secured Notes for which consents were validly delivered under the consent solicitation. Consents were delivered by holders of
Senior Secured Notes having an aggregate outstanding principal amount of $115 million, representing 100% of the outstanding Senior Secured Notes. As a result, Baseline was obligated to repurchase all of the outstanding Senior Secured Notes for
$118,450,000, plus accrued and unpaid interest. On October 6, 2008, Baseline failed to repurchase the notes and by virtue of such non-payment, was in default of the Indenture governing the Notes, as well as its Credit Agreement. Accordingly,
the Senior Secured Notes and amounts outstanding under the Credit Agreement have been reflected as a current liability in the accompanying financial statements.

Baseline successfully reached an agreement with the majority of its note holders with respect to its failure to repurchase the Companys outstanding 12.5% Senior Secured Notes due 2012 (the Old Notes)
on October 6, 2008. As previously disclosed, the Company failed to pay the holders of the Old Notes $118.45 million, constituting aggregate offer consideration and consent fees payable with respect to its August 8, 2008 Change of Control
Offer to Purchase and Consent Solicitation.

On October 31, 2008, holders of $100 million (the Majority Holders) of the
$115 million outstanding aggregate principal amount of the Old Notes exchanged all of their Old Notes for new Senior Secured Notes (the New Notes) in the aggregate principal amount of $106,681,250. Such amount represents 103% of the
principal amount of Old Notes held by the Majority Holders, plus an additional $3,681,250 (payable as satisfaction of certain consent, solicitation and other fees owing from the Company, including fees associated with the waiver of certain existing
defaults under the Indenture for the Old Notes). In addition, there remains outstanding $15 million in principal amount of Old Notes.



---

The New Notes mature on June 15, 2009 and will accrue annualized interest of 15%, 12.5% of which is
payable in cash, and 2.5% of which may be payable by the Company in additional New Notes (the PIK Interest). Interest under the New Notes will be payable quarterly. The New Notes and the Old Notes will share in the existing security
interest on substantially all of the Companys properties that had been held by the holders of the Old Notes, on a pro rata basis.

If
a holder of Old Notes delivers a consent to the Company prior to the maturity or earlier repayment of the New Notes, such holder will be entitled to receive, in exchange for its Old Notes, New Notes in a principal amount equal to (i) 104.25% of
the principal amount of its Old Notes being exchanged and (ii) the amount of PIK Interest that would have accrued with respect to such New Notes had they been issued to such holder on October 30, 2008 through and including the date of such
consent, offset by any interest received under such holders Old Notes since October 1, 2008.

The New Notes have not been and
will not be registered under the Securities Act of 1933, as amended, may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements, and will therefore be subject to substantial
restrictions on transfer.

The Companys senior lender, Wells Fargo Foothill, Inc., also subject to certain conditions, agreed to
forbear from exercising remedies available to it under its senior credit facility and hedge agreement with the Company until April 15, 2009.

The senior credit facility has also been amended to provide, among other things, for (i) a new maturity date, with respect to any advances under the revolving credit commitment, of the earlier of October 1, 2010 or sixty days
prior to the maturity date of the New Notes and (ii) an increase of 2% on the interest rate margin for both Prime and LIBOR based loans thereunder (as of today, there are nominal borrowings under the senior credit facility). The Intercreditor
Agreement was also modified to permit the restructuring of the Companys obligations under the Old Notes and to extend the standstill period, during which time the Trustee for the Old Notes and New Notes cannot enforce any rights with respect
to collateral from 90 to 180 days.

The future of the Company is dependent on its ability to obtain addition capital through debt or equity
offerings or the sale of oil and natural gas properties. Given the current instability in the financial and equity markets and current oil and natural gas pricing levels there is no assurance that the Company will be able to raise the capital
needed.

Results of Operations

Three Months Ended
September 30, 2008 compared to Three Months Ended September 30, 2007

We produced 61.8 thousand barrels of oil and
297.5 million cubic feet of natural gas during the third quarter of 2008, and received an average price of $117.80 per barrel and $11.59 per thousand cubic feet respectively. This resulted in total oil and gas sales revenue for the third
quarter of $10.7 million, before the effects of hedging. Oil and gas hedging revenue totaled $1.1 million during the third quarter, of which cash settlements paid to our counterparties under our commodity price hedging contracts totaled ($2.4)
million. Cash settlements paid to hedge counterparties totaled $3.59 per mcfe during the third quarter.

During the third quarter of 2007,
we produced 43.9 thousand barrels of oil and 7.2 million cubic feet of natural gas, and received $73.47 per barrel and $2.52 per thousand cubic feet respectively. This resulted in oil and gas sales revenue for that six month period of $3.2
million. Oil and gas hedging revenue totaled ($0.5) million during the third quarter of 2007, of which cash settlements paid to our hedge counterparties under our commodity hedging contracts totaled ($0.4) million. Cash settlements paid to hedge
counterparties totaled $1.38 per mcfe during this period.

Our production expenses totaled $2.9 million during the third quarter of 2008.
Of this total, $594 thousand million was for severance taxes, $2.0 million for lease operating expenses, $125 thousand for ad valorem taxes and $164 thousand for field office expenses. Our total production expenses equaled $4.40 per mcfe during the
third quarter, while our lease operating expenses equaled $2.95 per mcfe. Our corresponding production expenses during the third quarter of 2007 totaled $1.5 million of which $150 thousand was for severance taxes, $1.2 million was for lease
operating expense and $104 thousand was for field office expense. These production expenses equaled $5.72 per mcfe, with lease operating expenses equaling $4.56 per mcfe.



---

Our capital expenditures totaled $5.5 million during the third quarter of 2008, with drilling ($3.0
million), production and well equipment ($1.6 million) and recompletions ($982 thousand) making up this total. Capital expenditures during the third quarter of 2007 totaled $387 thousand, with recompletions ($190 thousand) and production and well
equipment ($197 thousand) making up this total.

Our general and administrative expenses were $1.4 million during the third quarter of
2008. The major components of this total included salaries and benefits of $554 thousand, consulting and professional fees of $456 thousand and office expenses of $335 thousand. Our G&A expense equated to $2.07 per mcfe . By comparison, our
general and administrative expenses totaled $1.7 million during the third quarter of 2007. The major components of this expense category were share-based compensation of $1.1 million, salaries and benefits of $190 thousand, consulting and
professional fees of $308 thousand and office expenses of $98 thousand. The third quarter 2007 G&A expense equated to $6.27 per mcfe.

Our interest expenses totaled $5.3 million during the third quarter of 2008, of which $4.0 million was comprised of accrued interest on our Senior Secured Notes ($3.6 million) and Convertible Notes ($354 thousand). Another $1.15 million
consisted of amortization of debt issuance costs and $158 thousand was for amortization of debt discounts on the two bond issues. Our interest expenses totaled $1.4 million during the third quarter of 2007. Included in this amount were $507 thousand
of amortization of debt issuance costs and $893 thousand of interest.

During the third quarter of 2008, we incurred expenses totaling $35.8
million as a result of the conversion of our Convertible Notes to common equity, as well as due to the restructuring of its Senior Secured Notes subsequent to our failure to repurchase such notes on October 6, 2008. Included in this $35.8
million of total expense was a $15.6 million make-whole premium required to be paid on the Convertible Notes, $8.7 million of remaining unamortized deferred loan costs on the Senior Secured Notes, $3.5 million of unamortized debt discount on the
Senior Secured Notes, $4.5 million of unamortized deferred loan costs on the Convertible Notes and $3.5 million of premiums paid under the change of control purchase offer and consent solicitation on the Senior Secured Notes.

Nine Months Ended September 30, 2008 compared to Nine Months Ended September 30, 2007

We produced 186.5 thousand barrels of oil and 966.3 million cubic feet of natural gas during the first nine months of 2008, and received an
average price of $112.37 per barrel and $11.16 per thousand cubic feet respectively. This resulted in total oil and gas sales revenue for the first nine months of $31.7 million, or $15.22 per mcfe, before the effects of hedging. Oil and gas hedging
revenue totaled $(9.4) million during the first nine months, of which cash settlements paid to our counterparties under our commodity price hedging contracts totaled ($6.7) million. Cash settlements paid to hedge counterparties totaled $3.20 per
mcfe during the first nine months of 2008.

During the first nine months of 2007, we produced 88.0 thousand barrels of oil and
14.0 million cubic feet of natural gas, and received $68.45 per barrel and $2.87 per thousand cubic feet respectively. This resulted in oil and gas sales revenue for that nine month period of $6.1 million. Oil and gas hedging revenue totaled
($0.5) million during the first nine months of 2007, of which cash settlements paid to our hedge counterparties under our commodity hedging contracts totaled ($0.4) million. Cash settlements paid to hedge counterparties totaled $0.69 per mcfe during
this period.

Our production expenses totaled $8.2 million during the first nine months of 2008. Of this total, $1.8 million was for
severance taxes, $5.3 million for lease operating expenses, $395 thousand for ad valorem taxes, $174 thousand for insurance and $493 thousand for field office expenses. Our total production expenses equaled $3.91 per mcfe during the first three
quarters, while our lease operating expenses equaled $2.55 per mcfe. Our corresponding production expenses during the first quarters of 2007 totaled $2.9 million of which $281 thousand was for severance taxes, $2.3 million was for lease operating
expense, $121 thousand was for ad valorem taxes and $169 thousand was for field office expense. These production expenses equaled $5.27 per mcfe, with lease operating expenses equaling $4.22 per mcfe for the nine month period.

Our capital expenditures totaled $14.8 million during the first nine months of 2008, with drilling ( $8.3 million), production and well equipment ( $4.1
million) and recompletions ($2.4 million) making up this total. Capital expenditures during the first nine months of 2007 totaled $747 thousand, with recompletions ($431 thousand) and production and well equipment ($314 thousand) making up most of
this total.

Our general and administrative expenses were $ $4.6 million during the first nine months of 2008. The major components of this
total included salaries and benefits of $2.5 million (including $1.4 million in stock-based compensation), consulting and professional fees of $1.1 million and office expenses of $807 thousand. Our G&A expense for the nine month period equated
to $2.19 per mcfe . By comparison, our general and administrative expenses totaled $2.6 million during the first nine months of 2007. The major components of this expense category were share-based compensation of $1.1 million, salaries and benefits
of $424 thousand, consulting and professional fees of $709 thousand and office expenses of $259 thousand. G&A expense equated to $4.71 per mcfe during the first nine months of 2007.



---

Our interest expenses totaled $17.5 million during the first three quarters of 2008, of which $14.8
million was comprised of interest on our Senior Secured Notes ($10.8 million) and Convertible Notes ($4.0 million). Another $2.3 million consisted of amortization of debt issuance costs (primarily for the two bond issues) and $476 thousand was for
amortization of debt discounts on the same two bond issues. Our interest expenses totaled $4.9 million during the first nine months of 2007. Included in this amount were $1.9 million of interest, $2.6 million in amortization of debt issuance costs
and $427 thousand in amortization of debt discounts.

During the third quarter of 2008, we incurred expenses totaling $35.8 million as a
result of the conversion of our Convertible Notes to common equity, as well as due to the restructuring of our Senior Secured Notes subsequent to our failure to repurchase such notes on October 6, 2008. Included in this $35.8 million of total
expense was a $15.6 million make-whole premium required to be paid on the Convertible Notes, $8.7 million of remaining unamortized deferred loan costs on the Senior Secured Notes, $3.5 million of unamortized debt discount on the Senior Secured
Notes, $4.5 million of unamortized deferred loan costs on the Convertible Notes and $3.5 million of premiums paid under the change of control purchase offer and consent solicitation on the Senior Secured Notes.



|Item 4T. | Controls and Procedures
|-------- | -----------------------

An evaluation of the
effectiveness of the design and operation of our disclosure controls and procedures as of the end of the three-month period covered by this quarterly report on Form 10-Q was carried out by us under the supervision and with the participation of our
Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, at September 30, 2008, our disclosure controls and procedures are effective to ensure that
the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and
Exchange Commission.

As previously disclosed in our annual report on Form 10-K for the year ended December 31, 2007, management
identified certain material weaknesses in internal control over financial reporting as of December 31, 2007. These included deficiencies in the Companys control environment and, in particular, the documentation and performance of certain
controls surrounding account balances, as well as deficiencies in segregation of duties. As noted in our annual report, we believed that the identified deficiencies stemmed principally from our rapid growth over a relatively short span during the
final quarters of our 2007 fiscal year and could be adequately addressed through organizational and process changes.

Based upon the
adoption and implementation by us of policies and procedures during the quarters ended March 31, 2008 and June 30, 2008, no material weaknesses in internal control over financial reporting existed as of the end of the quarter ended
September 30, 2008.

We note, however, that a system of controls, no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

There have been no changes in our internal controls over financial reporting during the fiscal quarter ended September 30, 2008 that have materially
affected, or are reasonably likely to materially affect, our internal controls over financial reporting.



---

PART II

OTHER INFORMATION



|Item 6. | Exhibits
|------- | --------



|            |  |                                                         
|----------- |  | --------------------------------------------------------
|Exhibit No. |  | Description                                             
|31.1        |  | Section 302 Certification of Principal Executive Officer
|            | 
|31.2        |  | Section 302 Certification of Principal Financial Officer
|            | 
|32.1        |  | Section 906 Certification of Chief Executive Officer    
|            | 
|32.2        |  | Section 906 Certification of Chief Financial Officer    



---

SIGNATURES

In accordance with the requirements of the Securities and Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                         |  |  |  |                          |  |                        
|------------------------ |  |  |  | ------------------------ |  | -----------------------
|Dated: November 14, 2008 |  |  |  | Baseline Oil & Gas Corp.
|                         |  |  | 
|                         |  |  |  | By:                      |  | /s/ Thomas R. Kaetzer  
|                         |  |  |  |                          |  | Thomas R. Kaetzer,     
|                         |  |  |  |                          |  | Chief Executive Officer