**UNITED      STATES **

**SECURITIES      AND EXCHANGE COMMISSION **

**Washington,      D.C. 20549 **

**FORM      10-QSB **

**[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES**

**EXCHANGE      ACT OF 1934.**

** **

**OR**

**[       ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES**

**EXCHANGE      ACT OF 1934 **

**Commission      File Number 000-27862 **

**EVOLUTION      PETROLEUM CORPORATION**

| **Nevada**                                       |   | **41-1781991**                                      |
|--------------------------------------------------|--------|-----------------------------------------------------|
| (State                or other jurisdiction      |   | (I.R.S.                employer identification no.) |
| of                incorporation or organization) |   |                                                |

**820      Gessner, Suite 1340, Houston, Texas 77024 **

**(713)      935-0122**

----

**EVOLUTION      PETROLEUM CORPORATION**

**TABLE      OF CONTENTS**

| **PART                I. FINANCIAL                INFORMATION**                                                                                                              | PageNumber |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ITEM                  1. FINANCIAL                  STATEMENTS                                                                                                               |       |
|                                                                                                                                                                         |       |   |   |
| Condensed                    Consolidated Balance Sheets: September 30, 2006 (unaudited) and                    June 30,                    2006                             | 3          |
| Condensed                    Consolidated Statements of Operations (unaudited): For the three                    months                    ended September 30, 2006 and 2005 | 4          |
| Condensed                    Consolidated Statements of Cash Flows (unaudited): For the three                    months                    ended September 30, 2006 and 2005 | 5          |
| Notes                    to Condensed Consolidated Financial Statements                    (unaudited)                                                                       | 6          |
|                                                                                                                                                                         |       |   |   |
| ITEM                  2. MANAGEMENT’S                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF                  OPERATIONS                           | 11         |
|                                                                                                                                                                         |       |   |   |
|                                                                                                                                                                         |       |   |   |
| ITEM                  3. CONTROLS                  AND PROCEDURES                                                                                                            | 15         |
|                                                                                                                                                                         |       |   |   |
|                                                                                                                                                                         |       |   |   |
| **PART                  II. OTHER INFORMATION**                                                                                                                              |       |
|                                                                                                                                                                         |       |   |   |
|                                                                                                                                                                         |       |   |   |
| ITEM                  1. LITIGATION                                                                                                                                          |       | 16 |
|                                                                                                                                                                         |       |   |   |
| ITEM                  6. EXHIBITS                                                                                                                                            |       | 16 |
|                                                                                                                                                                         |       |   |   |
| SIGNATURES                                                                                                                                                                   |       |   | 17 |

----

**PART      I - FINANCIAL INFORMATION**

**ITEM      1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

| **Evolution                Petroleum Corporation and Subsidiaries**     |
|-------------------------------------------------------------------------|
| **Condensed                Consolidated Balance                Sheets** |

|                                                                                                        |   | **September                  30,****2006** |       | **June                  30,****2006** |   |
|-------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|---------------------------------------|--------|
|                                                                                                        |   | **(unaudited)**                            |       |                                  |   |
| **Assets**                                                                                                  |   |                                       |       |                                  |   |
| **Current                Assets:**                                                                          |   |                                       |       |                                  |   |
| Cash                                                                                                        |   | $                                          | 5,977,209  |                                  | $      | 9,893,547 |   |
| Accounts                receivable, trade                                                                   |   |                                       | 350,367    |                                  |   | 132,371 |   |
| Inventories                                                                                                 |   |                                       | 103,932    |                                  |   | 76,917 |   |
| Prepaid                expenses                                                                             |   |                                       | 117,283    |                                  |   | 157,629 |   |
| Retainers                and deposits                                                                       |   |                                       | 60,595     |                                  |   | 60,895 |   |
|                                                                                                        |   |                                       |       |                                  |   |   |   |
| Total                current assets                                                                         |   |                                       | 6,609,386  |                                  |   | 10,321,359 |   |
|                                                                                                        |   |                                       |       |                                  |   |   |   |
| Cash                in qualified intermediary account for "like-kind"                exchanges              |   |                                       | 34,983,588 |                                  |   | 34,662,368 |   |
|                                                                                                        |   |                                       |       |                                  |   |   |   |
| Oil                & Gas properties - full cost                                                         |   |                                       | 3,939,765  |                                  |   | 3,878,551 |   |
| Oil                & Gas properties - not amortized                                                     |   |                                       | 11,556     |                                  |   | 52,098 |   |
| Less:                accumulated depletion                                                                  |   |                                       | (432,172   | )                                     |   | (371,624 | ) |
|                                                                                                        |   |                                       |       |                                  |   |   |   |
| Net                oil & gas properties                                                                 |   |                                       | 3,519,149  |                                  |   | 3,559,025 |   |
|                                                                                                        |   |                                       |       |                                  |   |   |   |
| Furniture,                fixtures and equipment, at cost                                                   |   |                                       | 20,041     |                                  |   | 16,561 |   |
| Less:                accumulated depreciation                                                               |   |                                       | (9,320     | )                                     |   | (7,998 | ) |
|                                                                                                        |   |                                       |       |                                  |   |   |   |
| Net                furniture, fixtures, and equipment                                                       |   |                                       | 10,721     |                                  |   | 8,563 |   |
|                                                                                                        |   |                                       |       |                                  |   |   |   |
| Restricted                deposits                                                                          |   |                                       | 326,835    |                                  |   | 326,835 |   |
| Other                assets                                                                                 |   |                                       | 78,235     |                                  |   | 79,808 |   |
|                                                                                                        |   |                                       |       |                                  |   |   |   |
| **Total                assets**                                                                             |   | $                                          | 45,527,914 |                                  | $      | 48,957,958 |   |
|                                                                                                        |   |                                       |       |                                  |   |   |   |
|                                                                                                        |   |                                       |       |                                  |   |   |   |
| **Liabilities                and Stockholders' Equity**                                                     |   |                                       |       |                                  |   |   |   |
| **Current                liabilities:**                                                                     |   |                                       |       |                                  |   |   |   |
| Accounts                payable                                                                             |   | $                                          | 241,849    |                                  | $      | 310,272 |   |
| Accrued                liabilities                                                                          |   |                                       | 99,840     |                                  |   | 473,782 |   |
| Income                taxes payable                                                                         |   |                                       | -          |                                  |   | 2,978,650 |   |
| Royalties                payable                                                                            |   |                                       | 11,092     |                                  |   | 47,054 |   |
|                                                                                                        |   |                                       |       |                                  |   |   |   |
| Total                current liabilities                                                                    |   |                                       | 352,781    |                                  |   | 3,809,758 |   |
|                                                                                                        |   |                                       |       |                                  |   |   |   |
| **Long                term liabilities:**                                                                   |   |                                       |       |                                  |   |   |   |
| Deferred                income taxes payable                                                                |   |                                       | 13,101,350 |                                  |   | 13,101,350 |   |
| Asset                retirement obligations                                                                 |   |                                       | 127,798    |                                  |   | 123,679 |   |
|                                                                                                        |   |                                       |       |                                  |   |   |   |
| Total                liabilities                                                                            |   |                                       | 13,581,929 |                                  |   | 17,034,787 |   |
|                                                                                                        |   |                                       |       |                                  |   |   |   |
| Common                Stock, totaling 351,333 shares subject to demand registration rights                  |   |                                       | 790,500    |                                  |   | 790,500 |   |
|                                                                                                        |   |                                       |       |                                  |   |   |   |
| **Stockholders'                equity:**                                                                    |   |                                       |       |                                  |   |   |   |
| Common                Stock, par value $0.001 per share; 100,000,000 shares authorized,                     |   |                                       |       |                                  |   |   |   |
| 26,300,664                and 26,300,664, issued and outstanding as of September 30, 2006 and               |   |                                       |       |                                  |   |   |   |
| June                30, 2006, respectively, net of 351,333 shares of common stock subject                to |   |                                       |       |                                  |   |   |   |
| demand                registration rights                                                                   |   |                                       | 26,300     |                                  |   | 26,300 |   |
| Additional                paid-in capital                                                                   |   |                                       | 10,267,532 |                                  |   | 10,274,555 |   |
| Deferred                stock based compensation                                                            |   |                                       | 224,706    |                                  |   | (265,167 | ) |
| Retained                earnings                                                                            |   |                                       | 20,636,947 |                                  |   | 21,096,983 |   |
|                                                                                                        |   |                                       |       |                                  |   |   |   |
| Total                stockholders' equity                                                                   |   |                                       | 31,155,485 |                                  |   | 31,132,671 |   |
|                                                                                                        |   |                                       |       |                                  |   |   |   |
| **Total                liabilities and stockholders' equity**                                               |   | $                                          | 45,527,914 |                                  | $      | 48,957,958 |   |
|                                                                                                        |   |                                       |       |                                  |   |   |   |
| See                accompanying notes to condensed consolidated financial                statements.        |   |

----

| **Evolution                Petroleum Corporation and Subsidiaries** |   |
|---------------------------------------------------------------------|--------|
| **Condensed                Consolidated Statements of Operations**  |   |
| **(unaudited)**                                                     |   |

|                                                                                                                                                                                                                              |   | **Three                Months****Ended****September                30, ** |       | **Three                Months****Ended****September                  30, ** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                              |   | **2006**                                                                       |       | **2005**                                                                         |   |
| **Revenues:**                                                                                                                                                                                                                     |   |                                                                           |       |                                                                             |   |
| Oil                sales                                                                                                                                                                                                          |   | $                                                                              | 469,024    |                                                                             | $      | 486,395 |   |
| Gas                sales                                                                                                                                                                                                          |   |                                                                           |  -    |                                                                             |   | 57,933 |   |
| Price                risk management activities                                                                                                                                                                                   |   |                                                                           | (14        | )                                                                                |   | (1,444 | ) |
|                                                                                                                                                                                                                              |   |                                                                           |       |                                                                             |   |   |   |
| Total                revenues                                                                                                                                                                                                     |   |                                                                           | 469,010    |                                                                             |   | 542,884 |   |
|                                                                                                                                                                                                                              |   |                                                                           |       |                                                                             |   |   |   |
| **Operating                Costs:**                                                                                                                                                                                               |   |                                                                           |       |                                                                             |   |   |   |
| Production                expenses                                                                                                                                                                                                |   |                                                                           | 324,119    |                                                                             |   | 464,190 |   |
| Production                taxes                                                                                                                                                                                                   |   |                                                                           | 34,660     |                                                                             |   | 14,484 |   |
| Depreciation,                depletion and amortization                                                                                                                                                                           |   |                                                                           | 61,871     |                                                                             |   | 77,250 |   |
| General                and administrative (includes $489,873 and                $113,074 of non-cash stock based compensation for the three months                ended                September 30, 2006 and 2005, respectively) |   |                                                                           | 1,039,192  |                                                                             |   | 584,278 |   |
|                                                                                                                                                                                                                              |   |                                                                           |            |                                                                             |   |   |   |
| Total                operating costs                                                                                                                                                                                              |   |                                                                           | 1,459,842  |                                                                             |   | 1,140,202 |   |
|                                                                                                                                                                                                                              |   |                                                                           |       |                                                                             |   |   |   |
| **Loss                from operations**                                                                                                                                                                                           |   |                                                                           | (990,832   | )                                                                                |   | (597,318 | ) |
|                                                                                                                                                                                                                              |   |                                                                           |       |                                                                             |   |   |   |
| **Other                income and expenses:**                                                                                                                                                                                     |   |                                                                           |       |                                                                             |   |   |   |
| Interest                income                                                                                                                                                                                                    |   |                                                                           | 530,796    |                                                                             |   | 18,937 |   |
| Interest                expense                                                                                                                                                                                                   |   |                                                                           | -          |                                                                             |   | (221,678 | ) |
|                                                                                                                                                                                                                              |   |                                                                           |       |                                                                             |   |   |   |
| Total                other income and expenses                                                                                                                                                                                    |   |                                                                           | 530,796    |                                                                             |   | (202,741 | ) |
|                                                                                                                                                                                                                              |   |                                                                           |       |                                                                             |   |   |   |
| **Net                loss**                                                                                                                                                                                                       |   |                                                                           | (460,036   | )                                                                                |   | (800,059 | ) |
|                                                                                                                                                                                                                              |   |                                                                           |       |                                                                             |   |   |   |
|                                                                                                                                                                                                                              |   |                                                                           |       |                                                                             |   |   |   |
| **Loss                per common share**                                                                                                                                                                                          |   |                                                                           |       |                                                                             |   |   |   |
| Basic                and Diluted                                                                                                                                                                                                  |   | $                                                                              | (0.02      | )                                                                                | $      | (0.03 | ) |
|                                                                                                                                                                                                                              |   |                                                                           |       |                                                                             |   |   |   |
|                                                                                                                                                                                                                              |   |                                                                           |       |                                                                             |   |   |   |
| **Weighted                average number of common shares**                                                                                                                                                                       |   |                                                                           |       |                                                                             |   |   |   |
| Basic                and Diluted                                                                                                                                                                                                  |   |                                                                           | 26,651,999 |                                                                             |   | 24,777,056 |   |

----

**Evolution      Petroleum Corporation and Subsidiaries **

**Condensed      Consolidated Statements of Cash Flows **

**(unaudited)**

|                                                                                                 |   | **Three                Months**        |       | **Three                Months**        |   |
|------------------------------------------------------------------------------------------------------|--------|----------------------------------------|------------|----------------------------------------|--------|
|                                                                                                 |   | **Ended                September 30,** |       | **Ended                September 30,** |   |
|                                                                                                 |   | **2006**                               |       | **2005**                               |   |
| **Cash                flows from operating activities:**                                             |   |                                   |       |                                   |   |
| **Net                loss**                                                                          |   | $                                      | (460,036   | )                                      | $      | (800,059 | ) |
| **Adjustments                to reconcile net loss to net cash**                                     |   |                                   |       |                                   |   |   |   |
| **used                by operating activities:**                                                     |   |                                   |       |                                   |   |   |   |
|  Depletion                                                                                      |   |                                   | 60,548     |                                   |   | 75,905 |   |
|  Depreciation                                                                                   |   |                                   | 1,322      |                                   |   | 1,345 |   |
|  Non-cash                stock based compensation expense                                       |   |                                   | 489,873    |                                   |   | 113,074 |   |
|  Accretion                of asset retirement obligations                                       |   |                                   | 4,119      |                                   |   | 6,901 |   |
|  Accretion                of debt discount and non-cash loan costs                              |   |                                   | -          |                                   |   | 80,315 |   |
| Changes                in assets and liabilities:                                                    |   |                                   |       |                                   |   |   |   |
|  Accounts                receivable                                                             |   |                                   | (217,996   | )                                      |   | 118,799 |   |
|  Inventories                                                                                    |   |                                   | (27,015    | )                                      |   | (266,719 | ) |
|  Accounts                payable                                                                |   |                                   | (68,423    | )                                      |   | 118,889 |   |
|  Royalties                payable                                                               |   |                                   | (35,962    | )                                      |   | (6,375 | ) |
|  Accrued                liabilities                                                             |   |                                   | (352,592   | )                                      |   | (37,938 | ) |
|  Income                taxes payable                                                            |   |                                   | (3,000,000 | )                                      |   | - |   |
|  Prepaid                expenses                                                                |   |                                   | 40,346     |                                   |   | 42,087 |   |
|  Net                cash used by operating activities                                           |   |                                   | (3,565,816 | )                                      |   | (553,776 | ) |
| **Cash                flows from investing activities:**                                             |   |                                   |       |                                   |   |   |   |
|  Development                of oil and gas properties                                           |   |                                   | (74,996    | )                                      |   | (260,301 | ) |
|  Acquisitions                of oil and gas properties                                          |   |                                   | (101,054   | )                                      |   |  - |   |
|  Proceeds                from asset sale, net                                                   |   |                                   | 155,378    |                                   |   | - |   |
|  Capital                expenditures for furniture, fixtures and equipment                      |   |                                   | (3,480     | )                                      |   | (2,571 | ) |
|  Cash                in qualified intermediary account for "like-kind"                exchanges |   |                                   | (321,220   | )                                      |   | - |   |
|  Retainer                and deposits                                                           |   |                                   | 300        |                                   |   | (1,056 | ) |
|  Other                assets                                                                    |   |                                   | 1,573      |                                   |   | 2,976 |   |
|  Net                cash used in investing activities                                           |   |                                   | (343,499   | )                                      |   | (260,952 | ) |
| **Cash                flow from financing activities:**                                              |   |                                   |       |                                   |   |   |   |
|  Payments                on notes payable                                                       |   |                                   | -          |                                   |   | (6,754 | ) |
|  Proceeds                from issuance of common stock                                          |   |                                   | -          |                                   |   | 231 |   |
|  Equity                and transaction costs                                                    |   |                                   | (7,023     | )                                      |   | - |   |
|  Net                cash used by financing activities                                           |   |                                   | (7,023     | )                                      |   | (6,523 | ) |
| Net                decrease in cash and cash equivalents                                             |   |                                   | (3,916,338 | )                                      |   | (821,251 | ) |
| Cash                and cash equivalents, beginning of period                                        |   |                                   | 9,893,547  |                                   |   | 2,548,688 |   |
| Cash                and cash equivalents, end of period                                              |   | $                                      | 5,977,209  |                                   | $      | 1,727,437 |   |
|                                                                                                 |   |                                   |       |                                   |   |   |   |
| Supplemental                disclosure of cash flow information:                                     |   |                                   |       |                                   |   |   |   |
|  Interest                paid                                                                   |   | $                                      | -          |                                   | $      | 141,365 |   |
|  Income                taxes paid                                                               |   | $                                      | 3,000,000  |                                   | $      | - |   |

----

**EVOLUTION      PETROLEUM CORPORATION AND SUBSIDIARIES**

**NOTES      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

**1.      Organization and Basis of Preparation**

**2.      Recent Accounting Pronouncements**

**3. **
**Acquisitions      and Sales of Properties**

**QI**

**4.      Loss per Share **

----

|                                                                                              |   | **Three                Months****Ended****September                30,** |       |
|---------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|------------|
|                                                                                              |   | **2006**                                                                 |       | **2005** |   |
| Numerator:                                                                                        |   |                                                                     |       |   |   |
|                                                                                              |   |                                                                     |       |   |   |
| Net                loss applicable to common stockholders                                         |   | $                                                                        | (460,036   | ) | $ | (800,059 | ) |
| Plus                income impact of assumed conversions:                                         |   |                                                                     |       |   |   |   |   |
| Preferred                stock dividends                                                          |   |                                                                     | N/A        |   |   | N/A |   |
| Interest                on convertible subordinated notes                                         |   |                                                                     | N/A        |   |   | N/A |   |
| Net                loss applicable to common stockholders plus assumed                conversions |   | $                                                                        | (460,036   | ) | $ | (800,059 | ) |
|                                                                                              |   |                                                                     |       |   |   |   |   |
| Denominator:                                                                                      |   |                                                                     | 26,651,999 |   |   | 24,777,056 |   |
|                                                                                              |   |                                                                     |       |   |   |   |   |
| Affect                of potentially dilutive common shares:                                      |   |                                                                     |       |   |   |   |   |
| Warrants                                                                                          |   |                                                                     | N/A        |   |   | N/A |   |
| Employee                and director stock options                                                |   |                                                                     | N/A        |   |   | N/A |   |
| Convertible                preferred stock                                                        |   |                                                                     | N/A        |   |   | N/A |   |
| Convertible                subordinated notes                                                     |   |                                                                     | N/A        |   |   | N/A |   |
| Redeemable                preferred stock                                                         |   |                                                                     | N/A        |   |   | N/A |   |
| Denominator                for dilutive earnings per share - weighted average shares              |   |                                                                     | 26,651,999 |   |   | 24,777,056 |   |
|                                                                                              |   |                                                                     |       |   |   |   |   |
| Loss                per common share:                                                             |   |                                                                     |       |   |   |   |   |
| Basic                and diluted                                                                  |   | $                                                                        | (0.02      | ) | $ | (0.03 | ) |

**5.      Contingent Liabilities**

----

**6.      Stock-Based Compensation**

***Adoption      of SFAS 123(R)***

*Share-Based      Payment”*
*Share-Based      Payment*

***Pro-Forma      Stock Compensation Expense for the Three Month Period Ended September 30,      2005***

|                                                                                                                                                                       |   | **Three                Months****Ended****September                30,****2005** |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------|------------|
| Net                loss available to common shareholders, as reported                                                                                                      |   | $                                                                                | (800,059   | ) |
| Add:                Total stock based employee compensation benefit reported in net loss,                net                of related tax effects                         |   |                                                                             | 42,884     |   |
| Deduct:                Total stock based employee compensation benefit determined under                fair                value of all awards, net of related tax effects |   |                                                                             | (256,357   | ) |
| Pro                forma net loss                                                                                                                                          |   | $                                                                                | (1,013,532 | ) |
|                                                                                                                                                                       |   |                                                                             |       |   |
| Per                share data:                                                                                                                                             |   |                                                                             |       |   |
| basic                      and diluted, as reported                                                                                                                        |   | $                                                                                | (0.03      | ) |
| basic                and diluted, pro forma                                                                                                                                |   | $                                                                                | (0.04      | ) |

***Stock      Options and Warrants as of the Three Month Period Ended September 30,      2006***

----

|                                                              |   | **Number                of Options and Warrants** |      | **Weighted                Average Grant Price** |   | **Aggregate                Intrinsic Value (1)** |   | **Weighted                Average Remaining Contractual Term (in years)** |      |
|-------------------------------------------------------------------|--------|---------------------------------------------------|-----------|-------------------------------------------------|--------|--------------------------------------------------|--------|---------------------------------------------------------------------------|-----------|
| Options/warrants                outstanding at July 1, 2005       |   |                                              | 2,487,500 |                                            | $      | 1.38                                             |   |                                                                      |      |   |   |   |   |
| Granted                                                           |   |                                              | 1,311,000 |                                            | $      | 1.70                                             |   |                                                                      |      |   |   |   |   |
| Exercised                                                         |   |                                              | 0         |                                            |   | **-**                                            |   |                                                                      |      |   |   |   |   |
| Canceled,                forfeited, or expired                    |   |                                              | 0         |                                            |   | **-**                                            |   |                                                                      |      |   |   |   |   |
| Options/warrants                outstanding at June 30, 2006      |   |                                              | 3,798,500 |                                            | $      | 1.49                                             |   |                                                                      |      |   |   |   |   |
| Granted                                                           |   |                                              | 0         |                                            |   | **-**                                            |   |                                                                      |      |   |   |   |   |
| Exercised                                                         |   |                                              | 0         |                                            |   | **-**                                            |   |                                                                      |      |   |   |   |   |
| Canceled,                forfeited, or expired                    |   |                                              | 0         |                                            |   | **-**                                            |   |                                                                      |      |   |   |   |   |
| Options/warrants                outstanding at September 30, 2006 |   |                                              | 3,798,500 |                                            | $      | 1.49                                             |   | $                                                                         | 5,213,065 |   |   | 8.6 |   |
|                                                              |   |                                              |      |                                            |   |                                             |   |                                                                      |      |   |   |   |   |
| Options/warrants                exercisable at September 30, 2006 |   |                                              | 1,746,625 |                                            | $      | 1.33                                             |   | $                                                                         | 2,727,084 |   |   | 8.4 |   |

| **Non-vested                Stock Options and Warrants** |   | **Number                of Options and Warrants** |      | **Weighted                Grant-Date Fair Value** |   |
|----------------------------------------------------------|--------|---------------------------------------------------|-----------|---------------------------------------------------|--------|
| Non-vested                at July 1, 2006                |   |                                              | 2,335,532 |                                              | $      | 1.66 |   |
| Granted                                                  |   |                                              | 0         |                                              |   |   |   |
| Vested                                                   |   |                                              | (283,657  | )                                                 |   |   |   |
| Canceled,                forfeited, or expired           |   |                                              | 0         |                                              |   |   |   |
| Non-vested                at September 30, 2006          |   |                                              | 2,051,875 |                                              | $      | 1.69 |   |

----

**7.      Commodity Hedging and Price Risk Management Activities**

| (i)   | 2,100                Bbls of oil to be delivered monthly from March 2005 through February                2006                to Plains Oil Marketing LLC, at $48.35 per barrel, plus or minus                changes                in basis between: (a) the arithmetic daily average of the prompt                month                “Light Sweet Crude Oil” contract reported by the New York Mercantile                Exchange, and (b) Louisiana field posted price. This is accounted                for as a                normal delivery sales contract. This contract was extended for the                months                of March 2006 through May 2006 for 70 Bbls of oil per day at a fixed                price                of $52.55 per barrel of oil, and extended again for the months of                June                2006 through August 2006 for 90 Bbls of oil per day at a fixed price                $63.45 per barrel of oil. Lastly, on January 27, 2006 we extended                our                crude oil contracts with Plains Oil Marketing, LLC for an additional                six                months, covering the periods September 2006 through February 2007.                The                contract requires us to deliver 90 Bbls of oil per day, in exchange                for a                fixed price of $69.30 per Bbl, plus or minus NYMEX to posted field                price                basis risk. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (ii)   | 100                Mcfd of natural gas at a fixed price of $6.21, delivered through                our Delhi                Field sales tap into Gulf South’s pipeline, for the account of Texla for                deliveries from March 2005 to May 2006. This is accounted for as                a normal                delivery sales contract. |
|------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (iii)   | Purchase                of a non-physical Put contract at $38.00 per barrel for 2,000 Bbls                of                crude oil production from March 2006 through February 2007. This                is                accounted for as a “mark-to-market” derivative investment. For the three                months ended September 30, 2006, $14 was expensed to reflect the                changes                in the market value of the Put from June 30, 2006 to September 30,                2006. |
|-------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**8.      Related Party Transactions **

**9.      Asset Retirement Obligations**

*Accounting      for Asset Retirement Obligations*

| Asset                retirement obligation at June 30, 2006      |   | $      | 123,679 |   |
|------------------------------------------------------------------|--------|--------|---------|--------|
| Liabilities                incurred                              |   |   | -       |   |
| Liabilities                settled                               |   |   | -       |   |
| Accretion                expense                                 |   |   | 4,119   |   |
| Asset                retirement obligation at September 30, 2006 |   | $      | 127,798 |   |
|                                                             |   |   |    |   |

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**ITEM      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF      OPERATIONS**

*This      Form 10-QSB and the information referenced herein contain forward-looking      statements. The words “plan,” “expect,” “project,” “estimate,” “assume,”“believe,” “anticipate,” “intend,” “budget,” “forecast,” “predict” and other      similar expressions are intended to identify forward-looking statements. These      statements appear in a number of places and include statements regarding our      plans, beliefs or current expectations, including the plans, beliefs and      expectations of our officers and directors. We use the terms, “EPM,” “Company,”“we,” “us” and “our” to refer to Evolution Petroleum      Corporation.*
*When      considering any forward-looking statement, you should keep in mind the risk      factors that could cause our actual results to differ materially from those      contained in any forward-looking statement. Important factors that could cause      actual results to differ materially from those in the forward-looking statements      herein include the timing and extent of changes in commodity prices for oil      and      gas, operating risks and other risk factors as described in our 2006 Annual      Report on Form 10-KSB as filed with the Securities and Exchange Commission.      Furthermore, the assumptions that support our forward-looking statements are      based upon information that is currently available and is subject to change.      We      specifically disclaim all responsibility to publicly update any information      contained in a forward-looking statement or any forward-looking statement in      its      entirety and therefore disclaim any resulting liability for potentially related      damages. All forward-looking statements attributable to Evolution Petroleum      Corporation are expressly qualified in their entirety by this cautionary      statement.*

**Overview**

|  | I | Enhanced                oil recovery (EOR) projects in mature oil                reservoirs; |
|--|---|----------------------------------------------------------------------------------------------|

|  | II | Redevelopment                of mature oil and gas fields using modern and/or proprietary technology;                and |
|--|----|--------------------------------------------------------------------------------------------------------------------------|

|  | III | Development                of low permeability resource plays using modern stimulation and completion                technologies, including horizontal                drilling. |
|--|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Reduced                exposure to the risk of whether resources are                present; |
|--------------------|----------------------------------------------------------------------------------------------|

| ·   | Reduced                capital expenditures per net BOE for infrastructure, such as roads,                water                handling facilities and pipelines; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Large                inventory of development opportunities, which provides a more predictable                future stream of drilling activity and production, as well as potentially                reducing risks from short-term oil and gas price                volatility; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Reduced                operational risks and costs associated with lower pressures and lower                temperatures; and |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------|

| ·   | Control                of operations, development timing and technology                selection. |
|--------------------|---------------------------------------------------------------------------------------------------|

**“Delhi      Farmout”**

| ·   | We                received $50 million in cash at                closing. |
|--------------------|---------------------------------------------------------------------------|

----

| ·   | We                conveyed 100% of the working interests in the Delhi Holt Bryant Unit                to                Denbury Resources, retaining a 25% back-in working interest after                a $200                million simple payout, excluding capital                expenditures. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | We                retained separate override and mineral royalty interests equal to                7.4% on                all future production from the Delhi Holt Bryant                Unit. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | We                retained a 25% working interest in certain other depths in the Delhi                Field. |
|--------------------|--------------------------------------------------------------------------------------------------------------|

| ·   | We                received a commitment by Denbury Resources to install a CO2 enhanced                oil                recovery project, at Denbury’s sole capital cost and expense, subject to                financial penalties of up to $36 million for Denbury’s failure to expend                $100 million over six and one-half years, with yearly cumulative                benchmarks beginning with the period ending December 31, 2007. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Initiative                II opportunities related to our Tullos                Field. |
|--------------------|----------------------------------------------------------------------------------------|

| ·   | Initiative                III coal bed methane opportunities related to our Delhi                Field. |
|--------------------|---------------------------------------------------------------------------------------------------------|

| **·  ** | A                number of additional projects spanning these Initiatives. |
|------------------------|----------------------------------------------------------------------------|

**Critical      Accounting Policies**

**Results      of Operations**

***Summary***

----

***Three      months ended September 30, 2006 compared to three months ended September 30,      2005***

|                                                         |   | **Three                Months Ended** |    |     |   |         |   |
|--------------------------------------------------------------|--------|---------------------------------------|---------|----------|--------|--------------|--------|
|                                                         |   | **September                30,**      |    |     |   |         |   |
|                                                         |   | **2006**                              |    | **2005** |   | **Variance** |   | **%                change** |   |
| **Sales                Volumes, net to EPM:**                |   |                                  |    |     |   |         |   |   |   |
| Oil                (Bbl)                                     |   |                                  | 7,694   |     |   | 8,966        |   |   | (1,272 | ) |   | -14 | % |
| Gas                (Mcf)                                     |   |                                  | 0       |     |   | 9,852        |   |   | (9,852 | ) |   | -100 | % |
| Oil                and Gas (Boe)                             |   |                                  | 7,694   |     |   | 10,608       |   |   | (2,914 | ) |   | -27 | % |
|                                                         |   |                                  |    |     |   |         |   |   |  |   |   |   |   |
| **Revenue                data (a):**                         |   |                                  |    |     |   |         |   |   |  |   |   |   |   |
| Oil                revenue                                   |   | $                                     | 469,010 |     | $      | 484,951      |   | $ | (15,941 | ) |   | -3 | % |
| Gas                revenue                                   |   |                                  | 0       |     |   | 57,933       |   |   | (57,933 | ) |   | -100 | % |
| Total                oil and gas revenues                    |   | $                                     | 469,010 |     | $      | 542,884      |   | $ | (73,874 | ) |   | -14 | % |
|                                                         |   |                                  |    |     |   |         |   |   |   |   |   |   |   |
| **Average                prices (a):**                       |   |                                  |    |     |   |         |   |   |   |   |   |   |   |
| Oil                (per Bbl)                                 |   | $                                     | 60.95   |     | $      | 54.09        |   | $ | 6.86 |   |   | 13 | % |
| Gas                (per Mcf)                                 |   |                                  | 0       |     |   | 5.88         |   |   | (5.88 | ) |   | -100 | % |
| Oil                and Gas (per Boe)                         |   | $                                     | 60.95   |     | $      | 51.18        |   | $ | 9.77 |   |   | 19 | % |
|                                                         |   |                                  |    |     |   |         |   |   |   |   |   |   |   |
| **Expenses                (per Boe)**                        |   |                                  |    |     |   |         |   |   |   |   |   |   |   |
| Lease                operating expenses and production taxes |   | $                                     | 46.63   |     | $      | 45.12        |   | $ | 1.51 |   |   | 3 | % |
| Depletion                expense on oil and gas properties   |   | $                                     | 7.87    |     | $      | 7.16         |   | $ | 0.71 |   |   | 10 | % |
|                                                         |   |                                  |    |     |   |         |   |   |   |   |   |   |   |

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**Liquidity      and Capital Resources**

**“QI”**

----

**ITEM      3. CONTROLS AND PROCEDURES**

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**PART      II - OTHER INFORMATION**

**ITEMS      2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED**

**ITEM      1. LITIGATION **

**TEM      6. EXHIBITS **

| A.   | Exhibits |
|----------------|----------|

|  | 31.1 | Certification                of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)                under the Securities Exchange Act of 1934, as                amended. |
|--|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 31.2 | Certification                of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)                under the Securities Exchange Act of 1934, as                amended. |
|--|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 32.1 | Certification                of Chief Executive Officer pursuant Rule 13a-14(b) or Rule 15d-14(b)                under                the Securities Exchange Act of 1934, as amended and 18 U.S.C. Section                1350. |
|--|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 32.2 | Certification                of Chief Financial Officer pursuant Rule 13a-14(b) or Rule 15d-14(b)                under                the Securities Exchange Act of 1934, as amended and 18 U.S.C. Section                1350. |
|--|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**SIGNATURES**

**EVOLUTION      PETROLEUM CORPORATION **

|                                            |                                                                                                            |
|-------------------------------------------------|-----------------------------------------------------------------------------------------------------------------|
|                                       |                                                                                                       |    |
| Date: November              13, 2006  | By:                                                                                                   | /s/ STERLING              H. MCDONALD |
|                                            | Sterling H. McDonaldChief Financial Officer Principal                  Financial and Accounting Officer* * |
|                                            |                                                                                                            |

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