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 May 31, 2011

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

               For the transition period from _____ to _______

                       Commission File Number: 333-146561

                          SYNERGY RESOURCES CORPORATION
             (Exact Name of Registrant as Specified in its Charter)

       Colorado                                   20-2835920
---------------------------------            ----------------------
(State or other jurisdiction of              (I.R.S. Employer
 incorporation or organization)               Identification No.)

                20203 Highway 60, Platteville, Colorado Code80651
      ---------------------------------------------------------------------
               (Address of Principal Executive Offices) (Zip Code)

      Registrant's telephone number including area code:  (970) 737-1073

                                       N/A
           -----------------------------------------------------------
         Former name, former address, and former fiscal year, if changed
                                since last report

Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 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
definition of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. Yes [ ] No [ ]

Larger accelerated filer  [ ]        Accelerated filer           [ ]
Non-accelerated filer     [ ]      Smaller reporting company   [X]

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

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 35,568,117 shares outstanding
as of July 8, 2011.

                                       1
<PAGE>

                          SYNERGY RESOURCES CORPORATION

                                      Index

                                                                          Page
                                                                          ----
Part I - FINANCIAL INFORMATION

Item 1.  Financial Statements

         Balance Sheets as of May 31, 2011 (unaudited)
            and August 31, 2010                                             3

         Statements of Operations for the three and nine months ended
            May 31, 2011 and 2010 (unaudited)                               4

         Statements of Cash Flows for the nine months ended
            May 31, 2011 and 2010 (unaudited)                               5

         Notes to Financial Statements (unaudited)                          6

Item 2.  Management's Discussion and Analysis of Financial Condition
            and Results of Operations                                      23

Item 4.  Controls and Procedures                                           34

Part II - OTHER INFORMATION

Item 1.  Legal Proceedings                                                 34

Item 2.  Unregistered Sales of Equity Securities and Use of
            Proceeds                                                       34

Item 3.  Defaults Upon Senior Securities                                   34

Item 4.  Removed and Reserved                                              34

Item 5.  Other Information                                                 35

Item 6.  Exhibits                                                          36

SIGNATURES                                                                 37

                                       2
<PAGE>

                              SYNERGY RESOURCES CORPORATION
                                      BALANCE SHEETS

                                                    As of           As of
                                                 May 31, 2011   August 31, 2010
                                               ---------------  ---------------
                                                 (unaudited)
                                          ASSETS
Current assets:

  Cash and cash equivalents                      $11,096,665      $ 6,748,637
  Accounts receivable:
    Oil and gas sales                              2,400,999          377,675
    Joint interest billing                         2,660,148        1,930,810
    Related party receivable                          30,391          867,835
  Inventory                                          706,742          387,864
  Other current assets                                18,307           12,310
                                               ---------------  ---------------
     Total current assets                         16,913,252       10,325,131
                                               ---------------  ---------------
Property and equipment:
  Oil and gas properties, full cost method, net   38,582,870       12,692,194
  Other property and equipment, net                  230,671          150,789
                                               ---------------  ---------------
     Property and equipment, net                  38,813,541       12,842,983
                                               ---------------  ---------------
Debt issuance costs, net of amortization                   -        1,587,799
Other assets                                          90,000           86,000
                                               ---------------  ---------------
    Total assets                                 $55,816,793      $24,841,913
                                               ===============  ===============

     LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable:
    Trade                                        $ 3,641,713      $ 3,015,562
    Related party payable                                  -          554,669
  Accrued expenses                                 1,334,560          517,921
  Notes payable, related party                     5,200,000                -
                                               ---------------  ---------------
     Total current liabilities                    10,176,273        4,088,152
Asset retirement obligations                         521,081          254,648
Convertible promissory notes, net of debt
 discount                                                  -       12,190,945
Derivative conversion liability                            -        9,325,117
                                               ---------------  ---------------
     Total liabilities                            10,697,354       25,858,862
                                               ---------------  ---------------
Commitments and contingencies (See Note 8)
Shareholders' equity (deficit):
  Preferred stock - $0.01 par value,
    10,000,000 shares authorized:
    no shares issued and outstanding                       -                -
  Common stock - $0.001 par value,
    100,000,000 shares authorized:
    35,408,632 and 13,510,981  shares
    issued and outstanding as of
    May 31, 2011, and August 31, 2010,
    respectively                                      35,409           13,511
  Additional paid-in capital                      81,613,428       22,308,963
  Accumulated deficit                            (36,529,398)     (23,339,423)
                                                ---------------  ---------------
      Total shareholders' equity (deficit)        45,119,439       (1,016,949)
                                                ---------------  ---------------
      Total liabilities and shareholders'
       equity (deficit)                          $55,816,793      $24,841,913
                                                ===============  ===============

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

                                       3
<PAGE>

                                 SYNERGY RESOURCES CORPORATION
                                    STATEMENTS OF OPERATIONS
                                          (unaudited)


                           Three Months Ended May 31,  Nine Months Ended May 31,
                              2011           2010          2011         2010
                          ------------- -------------  -----------  -----------

Revenues:
  Oil and gas revenues    $ 2,921,910    $   607,253   $  6,399,193 $  995,764
  Service revenues            184,426              -        211,715          -
                          ------------- -------------  -----------  -----------
     Total revenues         3,106,336        607,253      6,610,908    995,764
                          ------------- -------------  -----------  -----------
Expenses:
  Lease operating
   expenses                   668,683       106,503      1,131,837    161,545
  Depreciation,
   depletion,
   and amortization           830,639       200,890      2,062,825    293,829
  General and
   administrative           1,059,742       350,954      2,171,721    986,364
                          ------------- -------------  -----------  -----------
    Total expenses          2,559,064       658,347      5,366,383  1,441,738
                          ------------- -------------  -----------  -----------
Operating income (loss)       547,272       (51,094)     1,244,525   (445,974)
                          ------------- -------------  -----------  -----------
Other income (expense):
  Change in fair
   value of
   derivative
   conversion liability        86,192    (2,764,888)   (10,229,229)(2,764,888)
  Interest expense, net      (950,860)     (834,381)    (4,246,945)(1,248,517)
  Interest income              25,784           551         41,675      4,237
                          ------------- -------------  -----------  -----------
    Total other
     (expense)               (838,884)   (3,598,718)   (14,434,499)(4,009,168)
                          ------------- -------------  -----------  -----------
Loss before income taxes     (291,612)   (3,649,812)   (13,189,974)(4,455,142)

Provision for income
 taxes                              -             -              -          -
                          ------------- -------------  -----------  -----------
     Net loss
                         $   (291,612)  $(3,649,812)  $(13,189,974)$(4,455,142)
                          ============= ============= ============ ============

Net loss per common share:
    Basic and Diluted           (0.01)        (0.30)        (0.58)       (0.37)
                          ============= ============= ============ ============
Weighted average shares
 outstanding:
    Basic and Diluted      32,813,298    11,998,000    22,713,785   11,998,000
                          ============= ============= ============ ============

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

                                       4
<PAGE>


                          SYNERGY RESOURCES CORPORATION
                              STATEMENTS OF CASH FLOWS
                                   (unaudited)

                                                 Nine Months Ended May 31,
                                                    2011          2010
                                               ------------- -------------

 Cash flows from operating activities:
   Net loss                                    $(13,189,974) $ (4,455,142)
                                               ------------- -------------
   Adjustments to reconcile net loss to
    net cash provided by (used in)
    operating activities:
     Depreciation, depletion, and
      amortization                                2,062,825       293,829
     Amortization of debt issuance cost           1,587,799       283,535
     Accretion of debt discount                   2,664,138       622,214
     Stock-based compensation                       563,518        17,790
     Change in fair value of derivative
      liability                                  10,229,229     2,764,888
   Changes in operating assets and
    liabilities:
     Accounts receivable                         (1,915,218)     (681,923)
     Inventory                                     (318,878)     (109,591)
     Accounts payable                             1,275,804       (64,008)
     Accrued expenses                               875,636       328,399
     Other                                           (9,997)       15,459
                                               ------------- -------------
   Total adjustments
                                                 17,014,856     3,470,592
                                               ------------- -------------
     Net cash provided by (used in)
      operating activities                        3,824,882      (984,550)
                                               ------------- -------------
Cash flows from investing activities:
  Acquisition of property and equipment         (21,163,392)   (5,717,527)
  Proceeds from sales of oil and gas
   properties                                     4,995,817             -
                                               ------------- -------------
  Net cash used in investing activities
                                                (16,167,575)   (5,717,527)
                                               ------------- -------------

Cash flows from financing activities:
  Cash proceeds from sale of stock               18,000,000             -
  Offering costs                                 (1,309,279)            -
  Cash proceeds from convertible
   promissory notes                                       -    18,000,000
  Debt issuance costs                                     -    (1,348,977)
  Principal repayments                                    -    (1,161,811)
                                               ------------- -------------
  Net cash provided by financing
   activities                                    16,690,721    15,489,212
                                               ------------- -------------
Net increase in cash and equivalents              4,348,028     8,787,135
Cash and equivalents at beginning of
 period                                           6,748,637     2,854,659
                                               ------------- -------------
Cash and equivalents at end of period          $ 11,096,665  $ 11,641,794
                                               ============= =============
Supplemental Cash Flow Information (See
 Note 11)

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

                                       5
<PAGE>


                          SYNERGY RESOURCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                  May 31, 2011
                                   (unaudited)

1.     Organization and Summary of Significant Accounting Policies

     Organization:  Synergy Resources  Corporation (the "Company") is engaged in
oil and gas acquisitions,  exploration,  development and production  activities,
primarily in the area known as the  Denver-Julesburg  ("D-J") Basin. The Company
has adopted August 31st as the end of its fiscal year.

     Interim Financial  Information:  The interim financial  statements included
herein have been prepared by the Company,  without audit,  pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC") as promulgated
in Item 210 of Regulation S-X. The Company prepares its financial  statements in
accordance   with   accounting    principles    generally    accepted   in   the
country-regionplaceUnited States of America ("US GAAP"). Certain information and
footnote  disclosures  normally  included in  financial  statements  prepared in
accordance  with US GAAP have been  condensed  or omitted  pursuant  to such SEC
rules and regulations.  The Company  believes that the disclosures  included are
adequate to make the  information  presented not misleading and recommends  that
these  financial  statements be read in conjunction  with the audited  financial
statements  and notes thereto  included in the  Company's  annual report on Form
10-K for the year ended August 31, 2010.

     In  management's  opinion,  the unaudited  financial  statements  contained
herein reflect all  adjustments,  consisting  solely of normal  recurring items,
which  are  necessary  for the  fair  presentation  of the  Company's  financial
position,  results of operations, and cash flows on a basis consistent with that
of its prior audited financial  statements.  However,  the results of operations
for interim periods may not be indicative of results to be expected for the full
fiscal year.

     Reclassifications:  Certain amounts previously  presented for prior periods
have  been   reclassified   to  conform  to  the   current   presentation.   The
reclassifications had no net effect on net loss,  shareholders' equity (deficit)
or cash flows.

     Use of Estimates:  The  preparation  of financial  statements in conformity
with US GAAP requires  management to make estimates and assumptions  that affect
the reported amount of assets and  liabilities,  including,  but not limited to,
oil and gas reserves, and disclosure of contingent assets and liabilities at the
date of the financial statements as well as the reported amounts of revenues and
expenses during the reporting period.  Management  routinely makes judgments and
estimates about the effects of matters that are inherently uncertain. Management
bases its estimates and judgments on historical  experience and on various other
factors that are believed to be reasonable under the circumstances,  the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources.  Estimates and
assumptions are revised  periodically and the effects of revisions are reflected
in the  financial  statements  in the period it is  determined  to be necessary.
Actual results could differ from these estimates.

     Cash and Cash Equivalents: The Company considers cash in banks, deposits in
transit,  and highly liquid debt instruments  purchased with original maturities
of three months or less to be cash and cash equivalents.

     Inventory:   Inventories  consist  primarily  of  tubular  goods  and  well
equipment to be used in future drilling  operations or repair operations and are
carried at the lower of cost or market.

     Oil and Gas Properties: The Company uses the full cost method of accounting
for  costs  related  to its oil  and  gas  properties.  Accordingly,  all  costs
associated  with  acquisition,  exploration,  and  development  of oil  and  gas
reserves  (including the costs of unsuccessful  efforts) are capitalized  into a

                                       6
<PAGE>

single full cost pool.  These costs include land acquisition  costs,  geological
and geophysical expense, carrying charges on non-producing properties,  costs of
drilling and overhead  charges  directly  related to acquisition and exploration
activities.  Under the full cost method,  no gain or loss is recognized upon the
sale or  abandonment of oil and gas properties  unless  non-recognition  of such
gain or loss would  significantly  alter the  relationship  between  capitalized
costs and proved oil and gas reserves.

     Capitalized  costs  of oil  and  gas  properties  are  depleted  using  the
units-of-production   method  based  upon  estimates  of  proved  reserves.  For
depletion purposes, the volume of petroleum reserves and production is converted
into a common unit of measure at the energy  equivalent  conversion  rate of six
thousand  cubic feet of natural gas to one barrel of crude oil.  Investments  in
unevaluated  properties and major  development  projects are not amortized until
proved  reserves  associated  with  the  projects  can be  determined  or  until
impairment occurs. If the results of an assessment  indicate that the properties
are impaired,  the amount of the impairment is added to the capitalized costs to
be amortized.

     Under the full cost method of accounting,  a ceiling test is performed each
quarter.  The full cost ceiling test is an  impairment  test  prescribed  by SEC
regulations.  The ceiling  test  determines a limit on the book value of oil and
gas properties.  The capitalized  costs of oil and gas properties,  adjusted for
accumulated depreciation,  depletion, and amortization, and the related deferred
income taxes, may not exceed the estimated future net cash flows from proved oil
and gas reserves,  plus the cost of unevaluated  properties not being amortized,
plus the lower of cost or estimated fair value of unevaluated  properties  being
amortized.  Prices are held constant for the  productive  life of each well. Net
cash flows are  discounted at 10%. If net  capitalized  costs exceed this limit,
the excess is  charged  to  expense  and  reflected  as  additional  accumulated
depreciation,  depletion and  amortization.  The  calculation of future net cash
flows assumes  continuation  of current  economic  conditions.  Once  impairment
expense  is  recognized,  it  cannot be  reversed  in  future  periods,  even if
increasing  prices raise the ceiling  amount.  No provision for  impairment  was
required for either the nine months ended May 31, 2011 or 2010.

     The oil and  natural  gas prices used to  calculate  the full cost  ceiling
limitation  are  based  upon  a  12-month  rolling  average,  calculated  as the
unweighted arithmetic average of the first day of the month price for each month
within the 12-month  period  prior to the end of the  reporting  period,  unless
prices are defined by contractual arrangements. Prices are adjusted for basis or
location differentials.

     Oil and Gas Reserves:  The  determination  of  depreciation,  depletion and
amortization  expense,  as well as the ceiling test  calculation  related to the
recorded value of the Company's oil and natural gas  properties,  will be highly
dependent on the estimates of the proved oil and natural gas  reserves.  Oil and
natural gas reserves include proved reserves that represent estimated quantities
of crude oil and natural gas which  geological and engineering  data demonstrate
with  reasonable  certainty  to  be  recoverable  in  future  years  from  known
reservoirs under existing economic and operating conditions.  There are numerous
uncertainties  inherent in  estimating  oil and natural gas  reserves  and their
values,  including  many  factors  beyond the  Company's  control.  Accordingly,
reserve estimates are often different from the quantities of oil and natural gas
ultimately  recovered and the  corresponding  lifting costs  associated with the
recovery of these reserves.

     Capitalized  Overhead:  A portion of the  Company's  overhead  expenses are
directly attributable to acquisition and development activities.  Under the full
cost method of accounting,  these  expenses,  which totaled $46,673 and $154,621
for the  three  and the nine  months  ended  May 31,  2011,  respectively,  were
capitalized into the full cost pool. No comparable costs were capitalized during
the three and nine month periods ended May 31, 2010.

                                       7
<PAGE>

     Capitalized Interest: The Company capitalizes interest on expenditures made
in connection with exploration and development  projects that are not subject to
current amortization.  Interest is capitalized during the period that activities
are in  progress  to bring  the  projects  to their  intended  use.  Capitalized
interest  totaled  $253,887  and $84,154 for the three months ended May 31, 2011
and 2010, respectively,  and $594,530 and $139,626 for the nine months ended May
31, 2011 and 2010, respectively.

     Debt Issuance  Costs:  Debt issuance  costs of $2,041,455  were incurred in
connection  with the convertible  promissory  notes issued during the year ended
August  31,  2010 (see Note 6).  Amortization  expense  is  recognized  over the
expected term of the debt and is adjusted for early  conversion and  redemption.
Amortization  expense of $422,528 and $183,398 was recorded for the three months
ended May 31, 2011 and 2010,  respectively,  and  $1,587,799  and  $283,535  was
recorded for the nine months ended May 31, 2011 and 2010, respectively.

     Fair Value Measurements:  Fair value is the price that would be received to
sell an asset or be paid to  transfer  a  liability  in an  orderly  transaction
between market  participants at the measurement  date (exit price).  The Company
uses market data or assumptions  that market  participants  would use in pricing
the asset or  liability,  including  assumptions  about risk.  These  inputs can
either be readily  observable,  market  corroborated or generally  unobservable.
Fair value balances are  classified  based on the  observability  of the various
inputs (see Note 7).

     Asset  Retirement  Obligations:  The  Company's  activities  are subject to
various laws and  regulations,  including legal and  contractual  obligations to
reclaim,  remediate,  or otherwise  restore  properties at the time the asset is
permanently  removed from  service.  The fair value of a liability for the asset
retirement  obligation  ("ARO") is initially  recorded  when it is incurred if a
reasonable  estimate of fair value can be made. This is typically when a well is
completed or an asset is placed in service.  When the ARO is initially recorded,
the Company  capitalizes the cost (asset retirement cost or "ARC") by increasing
the carrying value of the related asset. Over time, the liability  increases for
the change in its present value  (accretion of ARO),  while the net  capitalized
cost  decreases  over the useful  life of the asset.  The  capitalized  ARCs are
included  in the full cost  pool and  subject  to  depletion,  depreciation  and
amortization.   In  addition,   the  ARCs  are  included  in  the  ceiling  test
calculation.  Calculation  of an ARO requires  estimates  about  several  future
events,  including  the life of the  asset,  the costs to remove  the asset from
service,  and  inflation  factors.  The ARO is  initially  estimated  based upon
discounted  cash flows over the life of the asset and is  accreted to full value
over time using the Company's credit adjusted risk free interest rate. Estimates
are periodically reviewed and adjusted to reflect changes.

     Derivative  Conversion  Liability:  The Company  accounts  for the embedded
conversion  features in its convertible  promissory notes in accordance with the
guidance for derivative instruments, which requires a periodic valuation of fair
value  and a  corresponding  recognition  of  liabilities  associated  with such
derivatives. The recognition of derivative conversion liabilities related to the
issuance of  convertible  debt is applied first to the proceeds of such issuance
as a debt  discount  at the date of the  issuance.  Any  subsequent  increase or
decrease  in  the  fair  value  of  the  derivative  conversion  liabilities  is
recognized as a charge or credit to other income  (expense) in the statements of
operations.  As of May 31, 2011,  all of the holders of  convertible  promissory
notes had  elected to convert  the notes into  shares of common  stock,  thereby
eliminating the derivative conversion liability (see Note 6).

     Revenue Recognition:  Revenue is recognized for the sale of oil and natural
gas when production is sold to a purchaser and title has  transferred.  Revenues
from  production on properties in which the Company shares an economic  interest
with  other  owners  are  recognized  on the  basis of the  Company's  interest.
Provided that  reasonable  estimates can be made,  revenue and  receivables  are

                                       8
<PAGE>

accrued and differences  between the estimates and actual volumes and prices, if
any, are adjusted upon  settlement,  which typically occurs sixty to ninety days
after production.

     Major  Customers and Operating  Region:  The Company  operates  exclusively
within  the  country-regionplaceUnited  States of  America.  Except for cash and
equivalent  investments,  all of the Company's assets are employed in and all of
its revenues are derived from the oil and gas industry.

     The Company's oil and gas production is purchased by a few  customers.  The
table below  presents the  percentages of oil and gas revenue that was purchased
by major customers.

                         Three Months Ended May 31, Nine Months Ended May 31,
                          ------------------------  ------------------------
  Major Customers            2011         2010         2011         2010
  ---------------            ----         ----         ----         -----
  Company A                   77%          46%           77%         42%
  Company B                   21%          38%           20%         35%
  Company C                     *          16%             *         22%

  * less than 10%

     As there are other  purchasers  that are capable of and willing to purchase
the Company's oil and gas  production  and because the Company has the option to
change  purchasers  of its oil and gas if  conditions  so  warrant,  the Company
believes that its oil and gas  production can be sold in the market in the event
that it is not  sold  to the  Company's  existing  customers.  However,  in some
circumstances,  a change in customers may entail  significant  transition  costs
and/or shutting in or curtailing  production for weeks or even months during the
transition to a new customer.

     Stock Based Compensation: Stock based compensation is measured at the grant
date  based  upon the  estimated  fair  value of the  award and the  expense  is
recognized over the required employee service period, which generally equals the
vesting period of the grant.  The fair value of stock options is estimated using
the  Black-Scholes-Merton  option  pricing  model.  The fair value of restricted
stock  grants is  estimated  on the grant  date based upon the fair value of the
common stock.

     Earnings Per Share  Amounts:  Basic earnings per share includes no dilution
and is computed by dividing net income (or loss) by the weighted-average  number
of shares outstanding during the period.  Diluted earnings per share reflect the
potential  dilution  of  securities  that  could  share in the  earnings  of the
Company.  For the nine months ended May 31, 2010 and 2011,  diluted earnings per
share is equivalent to basic  earnings per share,  as all  potentially  dilutive
securities  have an  anti-dilutive  effect on earnings per share.  The following
potentially dilutive securities could dilute future earnings per share:

                                         Nine Months Ended May 31,
                                        ----------------------------
                                            2011           2010
                                        -------------  -------------
Convertible promissory notes                       -     11,250,000
Warrants(1)                               14,941,372     15,286,466
Employee stock options                     4,470,000      4,100,000
                                        -------------  -------------
      Total                               19,411,372     30,646,466
                                        =============  =============

                                       9
<PAGE>

     (1)  Also,  as of May 31,  2011 and  2010,  the  Company  had a  contingent
obligation to issue 63,466 potentially  dilutive  securities,  all of which were
excluded from the calculation  because the  contingency  conditions had not been
met.

     Income  Taxes:  Deferred  income taxes are recorded for timing  differences
between  items of income or expense  reported in the  financial  statements  and
those  reported  for income tax  purposes  using the  asset/liability  method of
accounting  for  income  taxes.  Deferred  income  taxes  and tax  benefits  are
recognized for the future tax consequences  attributable to differences  between
the financial  statement carrying amounts of existing assets and liabilities and
their respective tax bases and for tax loss and credit carry-forwards.  Deferred
tax assets and  liabilities  are measured  using  enacted tax rates  expected to
apply to taxable income in the years in which those  temporary  differences  are
expected to be recovered or settled. The Company provides for deferred taxes for
the  estimated  future tax effects  attributable  to temporary  differences  and
carry-forwards  when  realization  is  more  likely  than  not.  If the  Company
concludes  that it is more  likely  than not  that  some  portion  or all of the
deferred tax asset will not be  realized,  the balance of deferred tax assets is
reduced by a valuation  allowance.  From  inception  through May 31,  2011,  the
Company incurred substantial net operating losses, and provided a full valuation
allowance against deferred tax assets.

     The Company  follows the  provisions  of the ASC regarding  uncertainty  in
income taxes.  No significant  uncertain tax positions were identified as of any
date on or  before  May 31,  2011.  Given the  substantial  net  operating  loss
carry-forwards  at both  the  federal  and  state  levels,  neither  significant
interest expense nor penalties charged for any examining agents' tax adjustments
of income tax returns are anticipated as any such adjustments  would very likely
simply adjust the net operating loss carry-forwards.

     Recent Accounting Pronouncements:  The Company evaluates the pronouncements
of various  authoritative  accounting  organizations,  primarily  the  Financial
Accounting  Standards Board  ("FASB"),  the Emerging Issues Task Force ("EITF"),
and the SEC to  determine  the impact of new  pronouncements  on US GAAP and the
impact on the Company.

     In June 2011, the FASB issued ASU 2011-05 - Presentation  of  Comprehensive
Income ("ASU  2011-05"),  which  requires  entities to present  reclassification
adjustments  included in other comprehensive income on the face of the financial
statements and allows entities to present the total of comprehensive income, the
components of net income and the components of other comprehensive income either
in a single continuous  statement of comprehensive income or in two separate but
consecutive  statements.  It also  eliminates the option for entities to present
the components of other comprehensive income as part of the statement of changes
in  stockholders'  equity.  For public  companies,  ASU 2011-05 is effective for
fiscal years (and interim  periods within those years)  beginning after December
15, 2011, with earlier adoption permitted.  Adoption of this ASU is not expected
to have a  material  affect on the  Company's  financial  position,  results  of
operations, or cash flows.

     Effective  September  1,  2010,  the  Company  adopted  ASU No.  2010-11  -
Derivatives  and Hedging,  which was issued in March 2010 and clarifies that the
transfer  of  credit  risk  that  is only in the  form of  subordination  of one
financial  instrument to another is an embedded  derivative  feature that should
not be subject to potential  bifurcation  and separate  accounting.  Adoption of
this ASU had no material affect on the Company's financial position,  results of
operations, or cash flows.

     There were various other accounting standards updates recently issued, most
of which represented  technical corrections to the accounting literature or were

                                       10
<PAGE>

applicable  to specific  industries,  and are not  expected to a have a material
impact on the Company's financial position, results of operations or cash flows.

2.     Accounts Receivable

     Accounts receivable consist primarily of trade receivables from oil and gas
sales and amounts due from other working  interest owners which have been billed
for their proportionate share of well costs. For receivables from joint interest
owners,  the  Company  typically  has  the  right  to  withhold  future  revenue
disbursements to recover outstanding joint interest billings. As of May 31, 2011
and August 31, 2010,  major customers (i.e. those with balances greater than 10%
of total receivables) are shown in the following table:

           Accounts Receivable             As of May 31,    As of August 31,
             from Major Customers:             2011             2010
           -----------------------------  ----------------  ---------------
           Company A                            36%             27%
           Company B                            30%               *
           Company C                            21%               *

           * less than 10%

                                       11
<PAGE>

3.     Property and Equipment

     Capitalized  costs of property and equipment at May 31, 2011 and August 31,
2010, consisted of the following:

                                                As of                As of
                                             May 31, 2011       August 31, 2010
                                          -------------------  -----------------
Oil and gas properties, full cost method:
   Unevaluated costs, not subject to
    amortization:
      Lease acquisition and other costs   $      5,666,728     $       848,696
      Wells in progress                          2,796,165                    -
                                            ---------------      ---------------
         Subtotal, unevaluated costs             8,462,893              848,696
                                            ---------------      ---------------
   Evaluated costs:
      Producing and non-producing               33,203,817           12,992,594
      Less, accumulated depletion              (3,083,840)          (1,149,096)
                                            ---------------      ---------------
         Subtotal, evaluated costs              30,119,977          11,843,498
                                            ---------------      ---------------
             Oil and gas properties, net        38,582,870          12,692,194
                                            ---------------      ---------------
Other property and equipment:
    Vehicles                                       163,904               89,527
    Leasehold improvements                          32,917               32,329
    Office equipment                                81,176               36,821
     Less, accumulated depreciation               (47,326)               (7,888)
                                            ---------------      ---------------
       Other property and                         230,671              150,789
        equipment, net
                                            ---------------      ---------------
Total property and equipment, net         $     38,813,541     $     12,842,983
                                            ===============      ===============

     The  capitalized  costs of evaluated  oil and gas  properties  are depleted
using  the  unit-of-production  method  based  on  estimated  reserves  and  the
calculation  is  performed  quarterly.  Production  volumes  for the quarter are
compared  to  beginning  of quarter  estimated  total  reserves  to  calculate a
depletion rate. Depletion of oil and gas properties was $803,756 and $198,474 or
$18.70 and $13.05 per barrel of oil  equivalent,  for the three months ended May
31, 2011 and 2010,  respectively,  and  $1,999,311  and $291,191,  or $18.59 and
$12.99 per barrel of oil  equivalent,  for the three  months and the nine months
ended May 31, 2011 and 2010, respectively.

     Periodically,  the  Company  reviews  its  unevaluated  properties  and its
inventory  to  determine  if the  carrying  value of either  asset  exceeds  its
estimated  fair value.  The reviews for the three  months ended May 31, 2011 and
2010,  indicated that asset carrying values were less than estimated fair values
and no reclassification to the full cost pool was required.

     On a quarterly  basis, the Company performs the full cost ceiling test. The
ceiling  tests  performed for the three months and the nine months ended May 31,
2011 and 2010, did not reveal any impairment.

     On March 21, 2011, the Company  completed the sale of its interest in 3,502
unproved  gross  mineral  acres  (2,383  net  acres)  for net cash  proceeds  of

                                       12
<PAGE>

$4,995,817.  No gain was  recognized  on the sale and all of the  proceeds  were
credited to the full cost pool.  The sale reduced the  amortization  base of the
full cost pool by  approximately  12%,  which was determined to be less than the
"significant change" threshold required to recognize a gain on the sale.

     On May 24,  2011,  the Company  acquired  interests  in various oil and gas
assets from a related party for $19,898,181 (see Note 8).

     Depreciation  of other  property and equipment was $17,700 and $882 for the
three  months ended May 31, 2011 and 2010,  respectively  and $39,438 and $1,104
for the nine months ended May 31, 2011 and 2010, respectively.

4.     Interest Expense

     The components of interest  expense  recorded for the three and nine months
ended May 31, 2011 and 2010, consisted of:

                       Three Months Ended May 31,    Nine Months Ended May 31,
                       --------------------------  -----------------------------
                           2011          2010          2011           2010
                       ------------  ------------  ------------  -------------
Interest cost,         $     20,083  $  355,351    $    589,539    $   452,006
 convertible
 promissory notes
Interest cost,
 bank loan                        -       2,915               -         30,388
Accretion of debt
 discount (see
 Note 6)                    762,136     376,871       2,664,138        622,214
Amortization of
 debt issuance
 costs                      422,528     183,398       1,587,799        283,535
Less, interest
 capitalized               (253,887)    (84,154)       (594,530)      (139,626)
                       ------------  ------------  ------------  -------------
Interest expense,
 net                   $    950,860  $  834,381    $  4,246,945    $ 1,248,517
                       ============  ============  ============  =============

5.     Asset Retirement Obligations

     Upon completion or acquisition of wells, the Company recognizes obligations
for its oil and gas  operations for  anticipated  costs to remove and dispose of
surface  equipment,  plug and abandon wells, and restore sites to their original
uses.  The estimated  present value of such  obligations  are  determined  using
several  assumptions and judgments  concerning the ultimate  settlement amounts,
inflation  factors,  credit adjusted  discount  rates,  timing of settlement and
changes in regulations. Changes in estimates are reflected in the obligations as
they occur.

     On May 24, 2011, the Company acquired certain oil and gas properties from a
related  party (see Note 8). The Company  evaluated  the wells and estimated the
present  value of the future  costs to plug and abandon the wells.  Accordingly,
the Company recognized an additional asset retirement obligation of $165,694.

                                       13
<PAGE>

      The following table summarizes the change in asset retirement obligations
for the nine months ended May 31, 2011:

      Asset retirement obligations, August 31, 2010 $ 254,648
        Liabilities incurred                           76,663
        Liabilities    associated   with   acquired
         properties                                   165,694
        Liabilities settled                                 -
        Accretion                                      24,076
        Revisions in estimated liabilities                  -
                                                      --------
      Asset retirement obligations, May 31, 2011    $ 521,081
                                                      ========

6.     Convertible Promissory Notes and Derivative Conversion Liability

     During the fiscal year ended August 31, 2010,  the Company  received  gross
proceeds of  $18,000,000  from the sale of 180 Units at $100,000 per Unit.  Each
Unit  consisted of one  convertible  promissory  note  ("Note") in the principal
amount of $100,000 and 50,000  Series C warrants  (collectively  referenced as a
("Unit").  The Notes bore interest at 8% per year, payable quarterly,  and had a
stated  maturity date of December 31, 2012.  Each Series C warrant  entitles the
holder to purchase  one share of common  stock at a price of $6.00 per share and
expires on December 31, 2014.

     The Notes were considered  hybrid debt instruments  containing a detachable
warrant and a  conversion  feature  under which the proceeds of the offering are
allocated to the detachable  warrants and the conversion  feature based on their
fair values.  The Series C warrants were determined to be a component of equity,
and the fair value of the warrants was recorded as  additional  paid in capital.
Since the warrants  were  recorded as a component  of equity,  the fair value of
$1,760,048 was estimated at inception and was not re-measured in future periods.
The Notes  contained a conversion  feature,  at an initial  conversion  price of
$1.60 that was subject to adjustment under certain circumstances,  which allowed
the Note holders to convert the  principal  balance into a maximum of 11,250,000
common  shares,  plus  conversion  of accrued  and unpaid  interest  into common
shares,  also at $1.60 per share. The conversion feature was determined to be an
embedded  derivative  requiring the  conversion  option to be separated from the
host contract and measured at its fair value.  At issuance,  the estimated  fair
value of the  conversion  feature was  $3,455,809 and was recorded as derivative
conversion liability. The conversion option was re-measured and recorded at fair
value each reporting  period,  with changes in the fair value reflected in other
income (expense) in the statements of operations.

     Allocation  of  value  to  the  components   created  a  debt  discount  of
$5,215,857,  which was accreted  over the life of the Notes using the  effective
interest method.  The effective  interest rate on the Notes was 19%. The Company
recorded  accretion  expense of $762,136 and $2,664,138  during the three months
and nine months ended May 31, 2011,  respectively.  Accretion expense includes a
component for the conversion of Notes into common stock,  which was $762,136 and
$2,391,245   for  the  three   months  and  nine  months  ended  May  31,  2011,
respectively.

     In  connection  with the  sale of the  Units,  the  Company  paid  fees and
expenses of $1,348,977 and issued  1,125,000  Series D warrants to the placement
agent.  The Series D warrants have an exercise  price of $1.60 and an expiration
date of December  31,  2014.  The  warrants  were  valued at $692,478  using the
Black-Scholes-Merton  option pricing model. The Company  recorded  $2,041,455 of
debt  issuance  costs,  which is being  amortized  over the expected term of the
Notes.   Amortization   expense  is  adjusted  to  reflect  early   conversions.
Amortization  expense of $422,528 and $1,587,799  was recorded  during the three
months and nine months ended May 31, 2011, respectively.  During the nine months
ended May 31, 2011, holders of 345,094 warrants exercised their warrants.

                                       14
<PAGE>

     All of the  noteholders  elected to convert  their Notes into common  stock
prior to the Note maturity date. As of May 31, 2011, Notes with a face amount of
$18,000,000  had been converted into 11,250,000  shares of the Company's  common
stock.  At the time the Notes were  converted,  the estimated  fair value of the
derivative  conversion  liability  attributable  to the converted  notes totaled
$18,646,413,  which was  reclassified  from derivative  conversion  liability to
additional  paid  in  capital.   Similarly,   the   unamortized   debt  discount
attributable to the converted  notes totaled  $3,120,293.  The unamortized  debt
discount  of  $2,067,376  applicable  to the  conversion  option was  charged to
accretion  of debt  discount and the  unamortized  debt  discount of  $1,052,917
applicable  to the warrants was  reclassified  from debt  discount to additional
paid-in capital.

     The fair value of the  derivative  conversion  liability  was adjusted each
quarter  to  reflect  the  change  in value.  The  estimated  fair  value of the
derivative  conversion  liability as of May 31, 2011, was nil, and the change in
fair value of derivative  conversion  liability was $10,229,229  during the nine
months ended May 31, 2011.

7.     Fair Value Measurements

     Assets and  liabilities are measured at fair value on a recurring basis for
disclosure  or. A fair value  hierarchy was  established  that  prioritizes  the
inputs used to measure fair value.  The hierarchy gives the highest  priority to
unadjusted  quoted prices in active markets for identical  assets or liabilities
(Level 1 measurements)  and the lowest priority to unobservable  inputs (Level 3
measurements).

     Level 1 - Quoted  prices are  available  in active  markets  for  identical
assets or  liabilities  as of the reporting  date.  Active  markets are those in
which transactions for the asset or liability occur in sufficient  frequency and
volume to provide  pricing  information on an ongoing  basis.  Level 1 primarily
consists of financial  instruments such as exchange-traded  derivatives,  listed
securities and country-regionplaceUS government treasury securities.

     Level 2 - Pricing  inputs are other than  quoted  prices in active  markets
included in Level 1, which are either  directly or  indirectly  observable as of
the reporting date. Level 2 includes those financial instruments that are valued
using models or other valuation methodologies,  where substantially all of these
assumptions  are observable in the  marketplace  throughout the full term of the
instrument,  which can be  derived  from  observable  data or are  supported  by
observable levels at which transactions are executed in the marketplace.

     Level 3 - Pricing inputs include significant inputs that are generally less
observable  than  objective  sources.  These inputs may be used with  internally
developed methodologies that result in management's best estimate of fair value.
Level 3 includes  those  financial  instruments  that are valued using models or
other valuation methodologies,  where substantial assumptions are not observable
in the marketplace throughout the full term of the instrument, cannot be derived
from  observable  data  or are not  supported  by  observable  levels  at  which
transactions  are executed in the  marketplace.  At each balance sheet date, the
Company performs an analysis of all applicable instruments and includes in Level
3 all of those for which fair value is based on significant unobservable inputs.

     A substantial portion of the Company's financial  instruments  consisted of
cash  and  equivalents,  accounts  receivable,  accounts  payable,  and  accrued

                                       15
<PAGE>

liabilities. Due to the short original maturities and high liquidity of cash and
equivalents,  accounts  receivable,  accounts payable,  and accrued liabilities,
carrying amounts approximated fair values.

     As  permitted  under  fair  value  accounting  guidance,   the  outstanding
principal  balance  of the  Company's  convertible  promissory  notes  were  not
restated to fair value in the Company's financial  statements for each reporting
period. It is estimated that the fair value of the convertible  promissory notes
approximated  face value because of the short term to maturity and the Company's
option to prepay the debt at any time after January 1, 2011.

     During the fiscal year ended August 31, 2010, the Company issued Units that
included convertible promissory notes, as described in Note 6. These convertible
promissory notes contained an embedded  conversion  option which was required to
be separated and reported as a derivative conversion liability at fair value

     The Company utilized the Monte Carlo Simulation  ("MCS") model to value the
derivative conversion liability.  Inputs to this valuation technique include the
Company's  quoted stock price and published  interest rates and credit  spreads.
Assumptions used for valuations performed during the quarter ended May 31, 2011,
included: stock price ranging from $3.80 to $4.70 per share, an expected term of
1.8 years,  volatility of 45.7%, which was derived from the expected  volatility
of comparable companies,  dividend yield of 0%, and a discount rate of 6.7%. All
of the  significant  inputs were  observable,  either  directly  or  indirectly;
therefore, the Company's derivative conversion liability was included within the
Level 2 fair value hierarchy.

     The following table sets forth,  by level within the fair value  hierarchy,
the Company's financial assets and financial  liabilities as of May 31, 2011 and
August 31, 2010 that were measured at fair value on a recurring basis.

As of May 31, 2011          Total        Level 1       Level 2      Level 3
-----------------------  ------------  ------------  ------------  -----------
Derivative Conversion
Liability                 $        -    $        -   $         -    $       -

As of August 31, 2010       Total        Level 1       Level 2      Level 3
-----------------------  ------------  ------------  ------------  -----------
Derivative Conversion
Liability                 $9,325,117    $       -    $ 9,325,117    $       -

     The Company also measures all nonfinancial  assets and liabilities that are
not recognized or disclosed on a recurring  basis. As discussed in Note 5, asset
retirement  obligations  and costs  totaling  $521,081  and  $254,648  have been
accounted  for as  long-term  liabilities  and  included  in  the  oil  and  gas
properties,  full cost pool at May 31, 2011, and August 31, 2010,  respectively.
The Level 3 inputs used to measure the estimated  fair value of the  obligations
include  assumptions  and  judgments  about  the  ultimate  settlement  amounts,
inflation  factors,  credit adjusted discount rates,  timing of settlement,  and
changes in regulations.

8.     Related Party Transactions and Commitments

     Two of the Company's  executive  officers  control three entities that have
entered into  agreements to provide various goods,  services,  and facilities to

                                       16
<PAGE>

the Company.  The  entities  are  Petroleum  Management,  LLC ("PM"),  Petroleum
Exploration and Management, LLC ("PEM"), and HS Land & Cattle, LLC ("HSLC").

     Acquisition  of Oil and Gas Assets from PEM: On May 24,  2011,  the Company
acquired operating (working interest) oil and gas assets owned by PEM, including
interest in 88 oil and gas wells and mineral leases covering approximately 6,968
gross  acres.  All of the  properties  acquired  from  PEM  are  located  in the
Wattenberg Field of the D-J Basin.

     The nominal purchase price was $19,000,000, consisting of a cash payment of
$10,000,000,  the issuance of 1,381,818 restricted shares of common stock valued
at $3,800,000,  and a promissory note in the principal amount of $5,200,000. The
promissory  note bears interest at an annual rate of 5.25%, is due on January 2,
2012, and is secured by the properties  purchased by the Company. No liabilities
of PEM were assumed in the  transaction.  Prior to consummating the transaction,
the Company's  acquisition  committee,  consisting of  disinterested  directors,
reviewed  and  approved  the  transaction,  and the  Company  shareholders,  not
including Mr. Holloway and Mr. Scaff, approved the transaction.

     For accounting purposes,  the value of the transaction was determined to be
$19,898,191,  all of  which  were  allocated  to oil  and  gas  properties.  The
transaction  is  subject  to  customary  post-closing   adjustments  for  events
occurring between January 1, 2011 and May 24, 2011. No gain or loss was recorded
on the transaction.  The Company incurred  additional general and administrative
costs of approximately  $150,000  related to the transaction,  all of which were
charged to operating expenses during the nine months ended May 31, 2011.

     The  following  unaudited  pro forma  financial  information  presents  the
combined  results of the Company and the properties  acquired from PEM as though
the acquisition  had been  consummated as of September 1, 2009, the beginning of
the  Company's  fiscal  year,  for the two periods  indicated  below.  Since the
Company and PEM do not share a common  fiscal year,  the  pro-forma  information
presents  nine months of operating  results which ended on May 31, 2011 and 2010
for the Company and on March 31, 2011 and 2010 for PEM.

                                         2011                  2010
                                    ----------------      ----------------
Operating revenues                  $    9,345,171         $  2,631,514
Net loss                            $  (12,022,017)        $ (4,394,288)
Basic and Diluted loss per share    $        (0.53)        $      (0.37)

     The pro forma  information does not necessarily  reflect the actual results
of  operations  had the  acquisition  been  consummated  at the beginning of the
period indicated nor is it necessarily  indicative of future operating  results.
The pro  forma  information  does  not  give  effect  to any  potential  revenue
enhancements or operating efficiencies that could result from the acquisition.

     Other  Related Party  Transactions:  Effective  June 11, 2008,  the Company
entered  into an  Administrative  Services  Agreement  with PM. The Company paid
$10,000 per month for leasing  office  space and an  equipment  yard  located in
CityplacePlatteville,  StateColorado,  and paid  $10,000  per month  for  office
support services including secretarial service,  word processing,  communication
services,  office  equipment and supplies.  The Company paid $180,000 under this
agreement for the nine months ended May 31, 2010.  Effective  June 30, 2010, the
Company terminated the agreement.

                                       17
<PAGE>

     Effective  July 1, 2010,  the  Company  entered  into a lease with HSLC for
office space and an equipment yard located in Platteville,  Colorado.  The lease
requires  monthly  payments  of $10,000 and  terminates  on June 30,  2011.  The
Company  paid  $90,000  under this  agreement  for the nine months ended May 31,
2011.

     On October 1, 2010,  the Company  acquired  certain oil and gas  properties
located in the Wattenberg field, part of the  PlaceNameplaceD-J  PlaceTypeBasin,
from PM and PEM for $1,017,435.  The oil and gas properties  consist of interest
in 6  producing  oil and gas  wells  and 2 shut in oil wells as well as 15 drill
sites and miscellaneous  equipment. The Company acquired a 100% working interest
and 80% net revenue interest in the properties.

     In addition to the  transactions  described  above,  the Company  undertook
various  activities  with PM and PEM that are  related  to the  development  and
operation of oil and gas properties. The Company occasionally purchases services
and certain oil and gas equipment,  such as tubular goods and surface equipment,
from PM. The Company  reimburses  PM for the  original  cost of the services and
equipment.  Prior to the asset  acquisition  transaction  that closed on May 24,
2011,  PEM was a joint working  interest  owner of certain wells operated by the
Company.  PEM was charged for its pro-rata share of costs and expenses  incurred
on its behalf by the Company,  and  similarly  PEM was credited for its pro-rata
share of revenues  collected on its behalf.  The following table  summarizes the
transactions with PM and PEM during the nine months ended May 31, 2011:

             Balance due to PM, August 31, 2010                   $   538,698
             Purchases from PM                                          2,290
             Payments to PM                                          (540,988)
                                                                 -------------
             Balance due to PM, May 31, 2011                      $         -
                                                                 =============
             Joint  interest   billing  balance  due  from  PEM,
             August 31, 2010                                          867,835
             Joint interest costs billed to PEM                       376,339
             Amounts collected from PEM                            (1,213,783)
                                                                 -------------
             Joint interest billing due from PEM, May 31, 2011    $    30,391
                                                                 =============
             Balance due to PEM for revenues, August 31, 2010     $    15,971
             Revenues collected on behalf of PEM                      607,477
             Payments to PEM for revenues                            (623,448)
                                                                 -------------
             Balance due to PEM for revenues, May 31, 2011        $         -
                                                                 =============

9.     Shareholders' Equity

     Preferred Stock: The Company has authorized  10,000,000 shares of preferred
stock with a par value of $0.01 per share.  These shares may be issued in series
with such rights and preferences as may be determined by the Board of Directors.
Since inception, the Company has not issued any preferred shares.

     Common Stock: The Company has authorized 100,000,000 shares of common stock
with a par value of $0.001 per share.

     Issued and  Outstanding:  The total issued and outstanding  common stock at
May 31, 2011, is 35,408,632 common shares,  representing an increase from August
31, 2010, of 21,897,651 shares, as follows:

                                       18
<PAGE>

     On January 11, 2011, the Company  completed the sale of 9,000,000 shares of
common stock to private investors.  The shares were sold at a price of $2.00 per
share.  Net proceeds to the Company from the sale of the shares were $16,690,721
after  deductions  for the  placement  agents'  commissions  and expenses of the
offering.

     On May 24, 2011, the Company acquired certain assets from PEM (see Note 8).
As part of the consideration,  the Company issued 1,381,818 shares of restricted
common stock valued at $4,698,181.

     During the nine months ended May 31,  2011,  the Company  issued  1,125,699
shares of restricted common stock in consideration for the assignment of oil and
gas leases covering approximately 69,274 net mineral acres valued at $2,741,917,
based upon the fair value of stock at the time the lease was finalized.

     During the nine months ended May 31,  2011,  the Company  issued  9,942,500
common shares  pursuant to the  conversion  of notes in the principal  amount of
$15,908,000 at the contractual conversion price of $1.60 per share. In addition,
the Company  issued 36,876 common shares  pursuant to the  conversion of accrued
interest of $58,997.

     During the nine  months  ended May 31,  2011,  the Company  issued  190,000
restricted  common shares as compensation  for services.  The common shares were
valued at $593,600  based upon the quoted market price of the  Company's  common
stock on the effective dates of the grants. During the nine months ended May 31,
2011,   compensation   expense  of   $430,000   was   recorded  as  general  and
administrative  expense  and stock with a value of  $163,600  was  recorded as a
component of lease acquisition costs.

     During the nine months ended May 31, 2011, the Company issued common shares
pursuant to the exercise of Series D warrants.  As the Series D warrants contain
a cashless  exercise  provision,  warrant holders  exercised 345,094 warrants in
exchange for 220,758  shares of common stock,  and the Company  received no cash
proceeds in the transaction.

     There are various  warrants  outstanding to purchase  14,941,372  shares of
common stock.  The following table  summarizes  information  about the Company's
issued and outstanding common stock warrants as of May 31, 2011:

                                        Remaining
                                       Contractual
                          Number of     Life (in    Expiration
     Description           Shares         years)       Date     Strike Proceeds
 -------------------  ---------------  -----------  ---------   ----------------
 Series A at $6.00         4,098,000      1.6       12/31/2012   $    24,588,000
 Series B at $10.00        1,000,000      1.6       12/31/2012        10,000,000
 Series C at $6.00         9,000,000      3.6       12/31/2014        54,000,000
 Series D at $1.60           779,906      3.6       12/31/2014         1,247,850
 Placement Agent
 Warrants at $1.80            63,466      1.6       12/31/2012           114,239
                      ---------------                           ----------------
                          14,941,372      2.9                    $    89,950,089
                      ===============                           ================

                                       19
<PAGE>

     The following table  summarizes  activity for common stock warrants for the
nine month period ended May 31, 2011:

                                  Number of         Weighted Average
                                   Warrants          Exercise Price
                                -------------      -----------------
Outstanding, August 31, 2010       15,286,466        $      5.92
Granted                                     -                  -
Exercised                            (345,094)              1.60
                                -------------
Outstanding, May 31, 2011          14,941,372        $      6.02
                                =============

10.     Stock-Based Compensation

     The Company recognizes stock based  compensation  expenses for the grant of
stock  options and for  restricted  stock awards based upon the  estimated  fair
value of the  financial  instruments  at the date of the  grant  or  award.  The
expense is pro-rated  over the term of service  required  under the terms of the
instrument.  The following  table  summarizes  the expense  recorded  during the
interim periods of 2011 and 2010:

                                Three Months Ended      Nine Months Ended May
                                      May 31,                     31,
                               -----------------------  ------------------------
                                  2011         2010        2011         2010
                               -----------   ---------  -----------   ----------
Stock options                    $ 82,547     $ 6,962    $ 133,518     $ 17,790
Restricted stock grants           220,000           -      430,000            -
                               -----------   ---------  -----------   ----------
    Total stock based
     compensation               $ 302,547     $ 6,962    $ 563,518     $ 17,790
                               ===========   =========  ===========   ==========

     The estimated unrecognized compensation cost from unvested stock options as
of May 31, 2011,  was  approximately  $764,000,  and will be  recognized  as the
options vest. Substantially all of the options vest during 2011, 2010, and 2013;
and all options are fully vested by April 2016.

     During  the  nine  months  ended  May  31,  2011,  the  Company  recognized
compensation expense for 150,000 restricted common shares issued in exchange for
services by advisors and  employees.  The common  shares were valued at $430,000
based  upon  the  quoted  market  price  of the  Company's  common  stock on the
effective  dates of the  grants.  The entire  value was  recorded as general and
administrative expense during the nine months ended May 31, 2011.

     During  the  nine  months   ended  May  31,  2011,   the  Company   granted
non-qualified  options  to  purchase  250,000  shares  of  common  stock  to its
employees.  All of the options have a contract term of ten years and an exercise
price equal to the closing  price on the date of the grant.  These  options vest
over 3 to 5  years,  pursuant  to the  terms of each  grant.  The  options  were
determined to have a fair value of $605,591  using the  assumptions  outlined in
the table below.


                                       20
<PAGE>

     The assumptions used in valuing stock options issued during the nine months
ended May 31, 2011 were as follows:

           Expected term (in years)      6.00 - 6.50
           Stock fair value             $2.40 - $4.40
           Expected volatility        53.18-% - 66.026%
           Risk-free rate              1.615% - 2.625%
           Expected dividend yield          0.00%




      The following table summarizes activity for stock options for the period
from August 31, 2010 to May 31, 2011:

                                                 Weighted
                                                 Average
                                  Number of      Exercise
                                    Shares        Price
                                  -----------  -------------

   Outstanding, August 31, 2010    4,220,000    $      5.36
   Granted                           250,000    $      4.00
   Exercised                               -              -
                                  -----------
   Outstanding, May 31, 2011       4,470,000    $      5.28
                                  ===========

      The following table summarizes information about issued and outstanding
stock options as of May 31, 2011:

                               Remaining    Weighted
                               Contractual  Average                 Aggregate
     Exercise       Number        Life      Exercise     Number     Intrinsic
       Price       of Shares   (in years)    Price    Exercisable     Value
   --------------  ----------  -----------  --------- ----------    ----------
    $    1.00      2,000,000      2.0        $  1.00  2,000,000     $4,800,000
    $2.40 to $4.40   470,000      9.1        $  3.40     35,000     $  198,000
    $   10.00      2,000,000      2.0        $ 10.00  2,000,000              -
                   ----------                         ----------    ----------
                   4,470,000      2.8        $  5.28  4,035,000     $4,998,000
                   ==========                         ==========    ==========

                                       21
<PAGE>


11.     Supplemental Schedule of Information to the Statements of Cash Flows

     The following table supplements the cash flow information  presented in the
financial statements for the nine months ended May 31, 2011 and 2010:

                                               Nine Months Ended May 31,
                                             ------------------------------
                                                 2011            2010
                                             -------------   --------------
    Supplemental cash flow information:
        Interest paid                         $   746,651    $     255,936
        Income taxes paid                               -                -

    Non-cash investing and financing
     activities:
        Conversion of promissory  notes into
         common stock                         $15,908,000    $           -
        Reclassification of derivative
         liability to additional paid in
         capital                               18,646,413                -
        Properties  acquired in exchange for
         common stock                           7,603,698                -
        Properties  acquired in exchange for
         note payable                           5,200,000                -
        Accrued capital expenditures            2,242,117        1,526,113
        Asset retirement costs and
          obligations incurred                    242,357          182,771
        Placement agent warrants issued                 -          692,478

12.      Subsequent Events

     On June 8, 2011,  the Company  entered into a revolving line of credit with
Bank of Choice , which  allows the Company to borrow up to $7  million.  Amounts
borrowed  under  the  line of  credit  are  secured  by the  Company's  accounts
receivable,  equipment, inventory and fixtures, as well as 64 oil and gas wells.
Principal amounts  outstanding under the Credit Facility bear interest,  payable
monthly,  at the Wall Street  Journal  Prime Rate plus 2%,  subject to a minimum
interest rate of 5.5%.  The entire unpaid  outstanding  balance of principal and
interest is due on June 3, 2012.

     On June 23, 2011,  the Company  issued  159,485  shares of common stock for
mineral  interests  comprising  18,136 gross acres (15,862 net acres) in the D-J
Basin.

                                       22
<PAGE>

Item 2.  Management's Discussion and Analysis of Financial Condition and
Results of Operation

Introduction

     The   following   discussion   and  analysis  was  prepared  to  supplement
information  contained in the accompanying  financial statements and is intended
to provide certain details regarding our financial condition as of May 31, 2011,
and the results of our operations for the three months and nine months ended May
31, 2011 and 2010. It should be read in conjunction with the unaudited financial
statements  and notes  thereto  contained  in this report as well as the audited
financial  statements included in the Form 10-K for the fiscal year ended August
31, 2010.

Overview

     We are an independent oil and gas operator in StateColorado and are focused
on the acquisition, development, exploitation, exploration and production of oil
and natural gas  properties  primarily  located in the  Wattenberg  field in the
Denver-Julesburg  ("D-J")  Basin in northeast  placeStateColorado.  We commenced
active operations in September 2008 and have grown significantly during the last
two years.  As of August 31,  2009,  we had two  productive  wells (net wells of
0.6). As of August 31, 2010, we had  twenty-four  productive  wells and fourteen
wells in the process of completion (net wells of 19). As of May 31, 2011, we had
124 gross wells,  including 114 producing wells, 8 wells in progress, and 2 shut
in wells (net wells of 89).

     As of May 31, 2011, we had estimated  proved  reserves of 1,721,647 Bbls of
oil and 13,586,923 Mcf of gas,  including  reserves  acquired in the transaction
with PEM.

     We currently have  approximately  139,000 gross acres and 123,000 net acres
under lease, which include certain lease transactions which occurred  subsequent
to May 31, 2011.

     Our growth plans for 2011 and 2012 include additional drilling  activities,
acquisition  of existing  wells,  and  recompletion  of wells that  provide good
prospects  for  improved  hydraulic  stimulation  techniques.  As cash flow from
operations is not  sufficient to fund our growth plans,  we are required to seek
additional financing.  The completion of our recent financing for gross proceeds
of $18 million and the sale of mineral  interests  for $5.2 million will satisfy
most of our capital needs for fiscal year 2011.  However,  we expect that future
financing will be required, especially as we move forward into our 2012 drilling
program.  Ultimately,  implementation of our growth plans will be dependent upon
the amount of financing we are able to obtain.

Recent Developments

     On May 24, 2011, we acquired  interests in 88 oil and gas wells and oil and
gas leases covering  approximately 6,968 gross acres from Petroleum  Exploration
and  Management,  LLC  ("PEM"),  a company  owned by Ed Holloway  and William E.
Scaff,  Jr., two of our officers.  The total purchase price,  which consisted of
$10  million in cash,  1,381,818  restricted  shares of our  common  stock and a
promissory  note in the principal  amount of $5.2 million,  totaled $19 million,
and is subject to  customary  post closing  adjustments  for  transactions  that
occurred  between  January  1,  2011  and May 24,  2011.  All of the  properties
acquired from PEM are located in the Wattenberg Field of the D-J Basin.

     On March 21, 2011, we agreed to issue 1,125,699 shares of restricted common
stock for mineral interest  comprising  78,805 gross acres (69,274 net acres) in
the D-J Basin.

                                       23
<PAGE>

     On February 17, 2011, we acquired  5,724 acres in Larimer,  Park,  and Yuma
counties, Colorado for approximately $265,000.

     In December  2010,  we  acquired  four  producing  wells in an area that is
adjacent  to one of our  leases.  We paid cash  consideration  of  $400,000  and
assigned  the  lease  rights  on 340 net  acres in  northern  PlaceNameplaceWeld
PlaceTypeCounty to the seller.

     In a  transaction  which  closed on March  21,  2011,  we sold our  mineral
interest in 3,502 gross acres (2,383 net acres) for cash proceeds of $5,244,517.

     Effective  March 31,  2011,  all of the holders of  Convertible  Promissory
Notes not  previously  converted  elected to convert the principal  balance into
shares of common  stock.  As of March 31, 2011,  the entire  original  principal
balance of $18  million  has been  converted  into  11,250,000  shares of common
stock.

     On January 11,  2011,  we closed on the sale of 9 million  shares of common
stock to private investors.  The shares were sold at a price of $2.00 per share.
Net proceeds from the sale of the shares were approximately  $16.7 million after
deductions for the sales commissions and expenses.

     On June 8, 2011,  we entered  into a revolving  line of credit with Bank of
Choice,  which allows us to borrow up to $7 million.  Amounts borrowed under the
line of credit  are  secured  by certain of our assets as well as 64 oil and gas
wells in which we have a working interest.  Principal amounts  outstanding under
the Credit Facility bear interest,  payable monthly,  at the Wall Street Journal
Prime Rate plus 2%, subject to a minimum interest rate of 5.5%.

     On June 23, 2011, we issued  159,485 shares of common stock in exchange for
mineral interest in 18,136 gross acres (15,862 net acres).

RESULTS OF OPERATIONS

For the three months ended May 31, 2011,  compared to the three months ended May
31, 2010

     Material changes of certain items in our statements of operations  included
in our financial statements for the comparative periods are discussed below.

     For the  three  months  ended  May 31,  2011,  we  reported  a net  loss of
$291,612, or $0.01 per share, compared to a net loss of $3,649,812, or $0.30 per
share,  for the three months ended May 31, 2010. The comparison  between the two
years was primarily  influenced by increasing  revenues and expenses  associated
with the 36 wells  completed  during the 2010 drilling  program  which  provided
operating income of $547,272 in 2011 compared to an operating loss of $51,094 in
2010.  During both years,  we incurred  significant  non-cash  expenses  for the
change in value of the derivative  conversion  liability and the amortization of
loan fee and debt discount.

                                       24
<PAGE>

     Oil and Gas  Production  and  Revenues - For the three months ended May 31,
2011, we recorded total oil and gas revenues of $2,921,910  compared to $607,253
for the three months ended May 31, 2010, as summarized in the following table:

                                Three Months Ended May 31,
                                -------------------------
                                   2011           2010
                                -----------     ---------
        Production:
         Oil (Bbls)                  23,371         4,679
         Gas (Mcf)                  117,647        54,024

        Total production in
         BOE                         42,979        13,683
        Revenues:
         Oil                    $ 2,293,945     $ 342,594
         Gas                        627,965       264,659
                                -----------     ---------
        Total                   $ 2,921,910     $ 607,253
                                ===========     =========
        Average sales price:
         Oil (Bbls)             $     98.15     $   73.22
         Gas (Mcf)              $      5.34     $    4.90

     "Bbl"  refers  to one  stock  tank  barrel,  or 42  placecountry-regionU.S.
gallons  liquid  volume in reference to crude oil or other liquid  hydrocarbons.
"Mcf" refers to one thousand cubic feet. A BOE (i.e.  barrel of oil  equivalent)
combines Bbls of oil and Mcf of gas by converting each six Mcf of gas to one Bbl
of oil.

     Net oil and gas  production  for the three months  ended May 31, 2011,  was
42,979 BOE, or 467 BOE per day. The significant  increase in production from the
comparable  period in the prior year  reflects the  additional  wells that began
production  over the past twelve months.  The change in average sales price is a
function of worldwide commodity prices,  which have increased the realized sales
price of oil by 34% and increased the realized sales price of natural gas by 9%.

     We do not currently engage in any commodity hedging activities, although we
may do so in the future.

     Service  Revenue-  For the three  months  ended May 31,  2011,  we recorded
revenue  generated  from the  management  of wells  owned  by third  parties  of
$184,426.

                                       25
<PAGE>

      Lease Operating Expenses - As summarized in the following table, our lease
expenses include the direct operating costs of producing oil and natural gas and
taxes on production and properties:

                                           Three Months Ended May 31,
                                           ----------------------------
                                               2011           2010
                                           -------------   ------------

       Production costs                     $    86,521     $   30,480
       Severance and ad valorem taxes           290,663         76,023
       Workover costs                           291,499              -
                                           -------------   ------------
           Total lease operating expenses   $   668,683     $  106,503
                                           =============   ============
       Per BOE:
         Production costs                   $      2.01     $     2.23
         Severance and ad valorem taxes            6.76           5.56
         Workover costs                            6.78              -
                                           -------------   ------------
            Total per BOE                   $     15.55     $     7.79
                                           =============   ============

     Production costs tend to increase or decrease  primarily in relation to the
number of wells in production,  and, to a lesser  extent,  on fluctuation in oil
field service costs and changes in the  production  mix of crude oil and natural
gas.  Production  costs may vary  substantially  among  wells  depending  on the
methods of recovery  employed and other  factors,  such as workover  operations,
maintenance and repair, labor and utilities.  Taxes tend to increase or decrease
primarily  based on the value of oil and gas sold.  As a percent  of oil and gas
revenues, lease operating costs were 23% in the three months ended May 31, 2011,
and 18% in the respective period in 2010.

     Depreciation,   Depletion,  and  Amortization  ("DDA")  -  DDA  expense  is
summarized in the following table:

                               Three Months Ended May 31,
                               --------------------------
                                    2011         2010
                               -------------  -----------
Depletion                      $    803,756   $   198,474
Depreciation and
 amortization                        17,700           882
Accretion of asset
 retirement
 obligations                          9,183         1,534
                               -------------  -----------

        Total DDA              $    830,639    $  200,890
                               =============  ===========
Depletion per BOE              $      18.70    $    14.51

     The  determination of depreciation,  depletion and amortization  expense is
highly  dependent on the  estimates of the proved oil and natural gas  reserves.
The capitalized costs of evaluated oil and gas properties are depleted using the
units-of-production  method based on estimated reserves.  Production volumes for
the quarter are  compared to beginning of quarter  estimated  total  reserves to
calculate a depletion rate. For the three months ended May 31, 2011,  production
volumes of 42,979 BOE and  estimated  net proved  reserves of 1,366,340 BOE were
the basis of the depletion rate calculation.  For the three months ended May 31,
2010,  production  volumes of 13,683 BOE and  estimated  net proved  reserves of
261,342 BOE were the basis of the depletion rate calculation.

                                       26
<PAGE>

     General and  Administrative - The following table summarizes the components
of general and administration expenses:

                                       Three Months Ended May 31,
                                   ------------------------------------
                                         2011               2010
                                   -----------------   ----------------
Stock based compensation            $      292,547      $        6,962
Other general and
 administrative                            813,869             343,992
Capitalized general and
 administrative                            (46,674)                  -
                                   -----------------   ----------------
    Totals                          $     1,059,742     $      350,954
                                   =================   ================

     The  stock-based   compensation  recorded  in  general  and  administrative
expenses  related to the issuance of stock grants and stock options to officers,
directors,  consultants, and employees. The expense recorded for stock grants is
based on the market value of the common  stock on the date of grant.  When stock
options are issued we estimate  their fair value using the  Black-Scholes-Merton
option-pricing model. The estimated fair value is recorded as a non-cash expense
on a pro-rata basis over the vesting period.

     Other  general  and  administrative   expenses,   which  include  salaries,
benefits,   professional   fees,  and  other   corporate   overhead,   increased
approximately $460,000 during the current three-month period over the comparable
quarter in the prior year due to the growth in our business. The following items
contributed to the increase:  salaries and benefits  increased by $380,000 as we
increased the number of employees  from seven to ten and we incurred  additional
professional fees of approximately $150,000 related to the acquisition of assets
from PEM.  The  increased  expenses  in these  areas were  somewhat  offset by a
$30,000 decrease in administrative services purchased from a related party.

     Certain  general and  administrative  expenses are directly  related to the
acquisition  and  development  of oil  and  gas  properties.  Those  costs  were
reclassified from general and  administrative  expense into capitalized costs in
the full cost pool.

     Other Income  (Expense) - During the three  months  ended May 31, 2011,  we
recognized   $838,884  in  other  expense  compared  to  $3,598,718  during  the
comparable period in 2010. The significant change between the periods was driven
by the change in fair value of a derivative  conversion liability related to $18
million of convertible promissory notes.

     The notes  contained a conversion  feature which was considered an embedded
derivative  and  recorded  as a liability  at its  estimated  fair  value,  when
marked-to-market,  over time is reflected as a non-cash item in the statement of
operations.  By May 31,  2011,  all of the  notes  had been  converted,  thereby
eliminating the derivative conversion liability.

     In  addition,  the line item of interest  expense,  net,  contains  several
components related to the 8% convertible promissory notes. In addition to the 8%
coupon  rate,  we recorded  amortization  of debt issue  costs of  $422,528  and
accretion  of debt  discount of $762,136  during the three  months ended May 31,
2011.  During the  comparable  period ended May 31, 2010,  amortization  of debt
issue costs was $183,398 and accretion of debt discount was $376,871.

     Income Taxes - Our effective tax rate is currently zero. We have reported a
net loss every year since inception and, for tax purposes,  have a net operating
loss carry forward ("NOL") of approximately $10 million. The NOL is available to
offset future taxable income, if any. At such time, if ever, that we are able to
demonstrate  that it is more likely than not that we will be able to realize the

                                       27
<PAGE>

benefits of our tax assets,  we will  recognize  the  benefits in our  financial
statements. If operational results for the remainder of the fiscal year continue
to improve,  we may  recognize  the  benefits  of certain tax assets  during the
latter periods of the year.

For the nine months  ended May 31,  2011,  compared to the nine months ended May
31, 2010

     Material changes of certain items in our statements of operations  included
in our financial statements for the comparative periods are discussed below.

     For the  nine  months  ended  May  31,  2011,  we  reported  a net  loss of
$13,189,974,  or $0.58 per share, compared to a net loss of $4,455,142, or $0.37
per share,  for the nine months ended May 31, 2010. The  comparison  between the
two  years  was  primarily   influenced  by  increasing  revenues  and  expenses
associated  with the 36 wells completed  during the 2010 drilling  program which
provided operating income of $1,244,525 in 2011 compared to an operating loss of
$445,974 in 2010. During both years, we incurred  significant  non-cash expenses
for  the  change  in  value  of the  derivative  conversion  liability  and  the
amortization of loan fee and debt discount.

     Oil and Gas  Production  and  Revenues - For the nine months  ended May 31,
2011, we recorded total oil and gas revenues of $6,399,193  compared to $995,764
for the nine months ended May 31, 2010, as summarized in the following table:

                            Nine Months Ended May 31,
                            -------------------------
                               2011           2010
                            -----------    ----------

    Production:
     Oil (Bbls)                  59,749         8,327
     Gas (Mcf)                  297,668        75,340

    Total production in
     BOE                        109,360        20,884

    Revenues:
     Oil                    $ 5,079,629    $  587,190
     Gas                      1,319,564       408,574
                            -----------    ----------
    Total                   $ 6,399,193    $  995,764
                            ===========    ==========
    Average sales price:
     Oil (Bbls)             $     85.02    $    70.52
     Gas (Mcf)              $      4.43    $     5.42

     "Bbl"  refers  to one  stock  tank  barrel,  or 42  placecountry-regionU.S.
gallons  liquid  volume in reference to crude oil or other liquid  hydrocarbons.
"Mcf" refers to one thousand cubic feet. A BOE (i.e.  barrel of oil  equivalent)
combines Bbls of oil and Mcf of gas by converting each six Mcf of gas to one Bbl
of oil.

     Net oil and gas  production  for the nine months  ended May 31,  2011,  was
109,360 BOE, or 401 BOE per day. The significant increase in production from the
comparable  period in the prior year  reflects the  additional  wells that began
production  over the past twelve months.  The change in average sales price is a
function of worldwide commodity prices,  which have increased the realized sales
price of oil by 21% and  decreased  the  realized  sales price of natural gas by
18.%.

     We do not currently engage in any commodity hedging activities, although we
may do so in the future.

                                       28
<PAGE>

     Service  Revenue-  For the nine  months  ended May 31,  2011,  we  recorded
revenue  generated  from the  management  of wells  owned  by third  parties  of
$211,715.

     Lease Operating  Expenses - As summarized in the following table, our lease
expenses include the direct operating costs of producing oil and natural gas and
taxes on production and properties:

                                            Nine Months ended May 31,
                                           ----------------------------
                                               2011           2010
                                           -------------   ------------
       Production costs                     $   203,868     $   46,399
       Severance and ad valorem taxes           636,470        115,146
       Workover costs                           291,499              -
                                           -------------   ------------
           Total lease operating expenses   $ 1,131,837     $  161,545
                                           =============   ============
       Per BOE:

         Production costs                   $      1.86     $     2.22
         Severance and ad valorem taxes            5.82           5.51
         Workover costs                            2.67              -
                                           -------------   ------------
            Total per BOE                   $     10.35     $     7.73
                                           =============   ============

     Production costs tend to increase or decrease  primarily in relation to the
number of wells in production,  and, to a lesser  extent,  on fluctuation in oil
field service costs and changes in the  production  mix of crude oil and natural
gas.  Production  costs may vary  substantially  among  wells  depending  on the
methods of recovery  employed and other  factors,  such as workover  operations,
maintenance and repair, labor and utilities.  Taxes tend to increase or decrease
primarily  based on the value of oil and gas sold.  As a  percent  of  revenues,
lease operating costs were 18% in the nine months ended May 31, 2011, and 16% in
the respective period in 2010.

     Depreciation,   Depletion,  and  Amortization  ("DDA")  -  DDA  expense  is
summarized in the following table:

                                 Nine Months ended May 31,
                             -----------------------------------
                                   2011               2010
                             ---------------   -----------------
Depletion                     $   1,999,311    $        291,191
Depreciation and
amortization                         39,438               1,104
Accretion of asset
retirement obligations               24,076               1,534
                             ---------------   -----------------
        Total DDA             $   2,062,825    $        293,829
                             ===============   =================
Depletion per BOE             $       18.28    $          13.94

     The  determination of depreciation,  depletion and amortization  expense is
highly  dependent on the  estimates of the proved oil and natural gas  reserves.
The capitalized costs of evaluated oil and gas properties are depleted using the
units-of-production  method based on estimated reserves.  Production volumes for
the quarter are  compared to beginning of quarter  estimated  total  reserves to
calculate a depletion  rate. For the nine months ended May 31, 2011,  production
volumes of 109,360 BOE and estimated  net proved  reserves of 1,430,896 BOE were

                                       29
<PAGE>

the basis of the depletion rate  calculation.  For the nine months ended May 31,
2010,  production  volumes of 20,884 BOE and  estimated  net proved  reserves of
268,544 BOE were the basis of the depletion rate calculation.

     General and  Administrative - The following table summarizes the components
of general and administration expenses:

                                        Nine Months ended May 31,
                                   ------------------------------------
                                         2011               2010
                                   -----------------   ----------------
Stock based compensation            $       553,518     $       17,790
Other general and
administrative                            1,772,824            968,574
Capitalized general and
administrative                            (154,621)                  -
                                   -----------------   ----------------
    Totals                          $     2,171,721     $      986,364
                                   =================   ================

     The  stock-based   compensation  recorded  in  general  and  administrative
expenses  related to the issuance of stock grants and stock options to officers,
directors,  consultants, and employees. The expense recorded for stock grants is
based on the market value of the common  stock on the date of grant.  When stock
options are issued we estimate  their fair value using the  Black-Scholes-Merton
option-pricing model. The estimated fair value is recorded as a non-cash expense
on a pro-rata basis over the vesting period.

     Other  general  and  administrative   expenses,   which  include  salaries,
benefits,   professional   fees,  and  other   corporate   overhead,   increased
approximately  $794,000 during the current nine-month period over the comparable
period in the prior year due to the growth in our business.  The following items
contributed to the increase:  salaries and benefits  increased by $630,000 as we
increased the number of employees from three to ten, reservoir  engineering fees
increased by approximately $30,000, and we incurred additional professional fees
of  approximately  $150,000  related to the  acquisition of assets from PEM. The
increased  expenses in these areas were somewhat offset by a $90,000 decrease in
administrative services purchased from a related party.

     Certain  general and  administrative  expenses are directly  related to the
acquisition  and  development  of oil  and  gas  properties.  Those  costs  were
reclassified from general and  administrative  expense into capitalized costs in
the full cost pool.

     Other  Income  (Expense) - During the nine months  ended May 31,  2011,  we
recognized  $14,434,499  in other  expenses  compared to  $4,009,168  during the
comparable  period in 2010. The amounts  included in other income  (expense) are
primarily  related to components of the 8% convertible  promissory  notes..  The
notes,   contained  a  conversion  feature  which  was  considered  an  embedded
derivative  and  recorded  as a liability  at its  estimated  fair  value,  when
marked-to-market,  over time is reflected as a non-cash item in the statement of
operations.  The change in fair value  increased by $7,464,341,  from $2,764,888
during the nine months ended May 31, 2010, to $10,229,229 during the nine months
ended May 31, 2011

     In  addition,  the line item of interest  expense,  net,  contains  several
components related to the 8% convertible promissory notes. In addition to the 8%
coupon rate,  we recorded  amortization  of debt issue costs of  $1,587,799  and
accretion of debt  discount of  $2,664,138  during the nine months ended May 31,
2011.  During the  comparable  period ended May 31, 2010,  amortization  of debt
issue costs was $283,535 and accretion of debt discount was $622,214.

     Income Taxes - Our effective tax rate is currently zero. We have reported a
net loss every year since  inception  and for tax purposes  have a net operating

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<PAGE>

loss carry forward ("NOL") of approximately $10,000,000. The NOL is available to
offset future taxable income, if any. At such time, if ever, that we are able to
demonstrate  that it is more likely than not that we will be able to realize the
benefits of our tax assets,  we will  recognize  the  benefits in our  financial
statements. If operational results for the remainder of the fiscal year continue
to improve,  we may  recognize  the  benefits  of certain tax assets  during the
latter periods of the year.

LIQUIDITY AND CAPITAL RESOURCES

     On January  11,  2011,  we  completed  the sale of 9 million  shares of our
common stock in a private offering. The shares were sold at a price of $2.00 per
share.  Net  proceeds to us from the sale of the shares were  $16,690,721  after
deductions for sales commissions and expenses.

     On March 21, 2011, we closed on a transaction to sell our mineral  interest
in 3,502 gross acres (2,383 net acres) for cash proceeds of $5,244,517.

     On March 31, 2011, holders of our 8% convertible promissory notes completed
the  conversion of $18,000,000  in principal  into  11,250,000  shares of common
stock at the conversion price of $1.60 per share.

     On May 24, 2011, we acquired  certain assets from PEM for a cash payment of
$10,000,000,  issuance of 1,381,818  shares of restricted  common  stock,  and a
$5,200,000 promissory note that matures on January 2, 2012.

     Our sources and (uses) of funds for the nine months  ended May 31, 2011 and
2010, are shown below:

                                             Nine Months Ended May 31,
                                           ------------------------------
                                                2011             2010
                                           --------------    ------------
Cash provided by (or used in)
 operations                                $    3,824,882    $   (984,550)
Mineral property acquisitions                 (21,163,392)     (5,717,527)
Mineral property sales                          4,995,817               -
Cash proceeds from sale of stock or
 units                                         16,690,721      16,651,023
Debt principal payments                                 -      (1,161,811)
                                           --------------    -------------
Net increase in cash                       $    4,348,028    $  8,787,135
                                           ==============    =============

     Non-cash  expenses had a $17,107,509 and $3,982,256  impact on net loss for
the nine months  ended May 31, 2011 and 2010,  respectively.  Changes in working
capital  items  caused by the timing of  payments  and  receipts  of cash had an
impact of $92,656 and  $511,664 for the nine months ended May 31, 2011 and 2010,
respectively.

     Cash  payments  for the  acquisition  of oil and gas  properties,  drilling
costs, and other  development  activities for the nine months ended May 31, 2011
and 2010, were  $21,163,392 and $5,717,527,  respectively.  These amounts differ
from the  amounts  reported  as the  increase in  capitalized  costs  during the
period,  which  differences  reflect  non cash items plus the timing of when the
capital expenditure obligations are incurred and when the actual cash payment is
made. A reconciliation of the differences is summarized in the following table:

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<PAGE>

                                      Nine Months Ended May 31,
                                   -----------------------------
                                        2011             2010
                                   -------------     -----------

Cash payments                      $  21,163,392     $ 5,717,524
Accrued costs, beginning of
 period                               (3,446,439)              -
Accrued costs, end of period           2,242,117       1,526,113
Properties acquired in exchange
 for common stock                      7,603,698               -
Properties acquired in exchange
 for note payable                      5,200,000               -
Proceeds from sale of properties      (4,995,817)              -
Asset retirement obligation              242,357         184,305
Other                                    (64,568)              -
                                   -------------     -----------
Increase in capitalized costs      $  27,944,740     $ 7,427,942
                                   =============     ===========

     Under full cost  accounting  requirements,  the  proceeds  from the sale of
mineral  interests are  generally  credited to the full cost pool and no gain or
loss in recognized,  unless the transaction  would have a significant  impact on
proved reserves or the future rate of depreciation,  depletion, and amortization
(DDA). The sale completed during the quarter ended May 31, 2011, was noteworthy,
but did not reach the level of  significance  required to recognize a gain.  Our
accounting  method reduced the amortization  base used in the DDA calculation by
approximately 12% and it is estimated that future  amortization  expense will be
reduced by approximately $2.29 per BOE.

     In addition to the transactions described in "Recent Developments", capital
expenditures for the nine months ended May 31, 2011, included the acquisition of
8 existing wells, 15 drill sites, and associated  equipment for a purchase price
of $1,017,435, completion and rework activities on wells previously drilled, and
drilling additional 14 wells in Weld County, Colorado.

     Our operating cash  requirements  are expected to approximate  $250,000 per
month,  which amount includes salaries and other corporate  overhead of $150,000
and lease  operating  expenses of $100,000.  During the current  fiscal year, we
began to generate  meaningful cash flow from operations,  and we expect that the
revenue from wells recently placed into production will further improve our cash
flow.

     Our primary  need for cash in fiscal  2011 will be to fund our  acquisition
and drilling program. Our capital expenditure estimate  approximates $27 million
subject  to   significant   adjustment   for   drilling   success,   acquisition
opportunities,  operating cash flow, and available capital  resources.  Although
our recent sale of securities  for gross proceeds of $18 million plus our recent
sale of mineral  interests  for cash  proceeds of $5.2  million  plus our recent
acquisition  of mineral  interests  in exchange  for shares of common stock will
provide  substantially all of the capital resources required to fund our capital
expenditure  plans,  we may seek  additional  funding  to expand our plans or to
provide  resources  for our 2012  drilling  program.  We have not  completed our
capital budget for 2012. On a tentative  basis,  we expect to budget between $35
million and $50 million on the acquisition of mineral interests and drilling new
wells.

     We plan to generate profits by drilling or acquiring  productive oil or gas
wells.  However,  we may need to raise some of the funds  required  to drill new
wells through the sale of our securities,  from loans from third parties or from
third parties  willing to pay our share of drilling and completing the wells. We

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<PAGE>

may not be successful  in raising the capital  needed to drill or acquire oil or
gas wells.  Any wells  which may be drilled by us may not  produce oil or gas in
commercial quantities.

TREND AND OUTLOOK

     The factors that will most  significantly  affect our results of operations
include (i) activities on properties that we operate,  (ii) the marketability of
our  production,   (iii)  our  ability  to  satisfy  our   substantial   capital
requirements,  (iv)  completion of  acquisitions  of additional  properties  and
reserves, (v) competition from larger companies and (vi) prices for oil and gas.
Our revenues will also be  significantly  impacted by our ability to maintain or
increase oil or gas production through exploration and development activities.

     It is  expected  that our  principal  source  of cash flow will be from the
production  and sale of oil and gas reserves  which are depleting  assets.  Cash
flow  from the sale of oil and gas  production  depends  upon  the  quantity  of
production and the price obtained for the production. An increase in prices will
permit  us to  finance  our  operations  to a  greater  extent  with  internally
generated  funds,  may allow us to obtain  equity  financing  more  easily or on
better terms, and lessens the difficulty of obtaining financing.  However, price
increases heighten the competition for oil and gas prospects, increase the costs
of  exploration  and  development,  and,  because of potential  price  declines,
increase the risks associated with the purchase of producing  properties  during
times that prices are at higher levels.

     A decline in oil and gas prices (i) will reduce our cash flow which in turn
will reduce the funds  available  for  exploring  for and  replacing oil and gas
reserves,  (ii) will  increase  the  difficulty  of  obtaining  equity  and debt
financing and worsen the terms on which such  financing  may be obtained,  (iii)
will reduce the number of oil and gas prospects which have  reasonable  economic
terms,  (iv) may cause us to permit  leases  to expire  based  upon the value of
potential oil and gas reserves in relation to the costs of exploration,  (v) may
result  in  marginally   productive  oil  and  gas  wells  being   abandoned  as
non-commercial,  and (vi) may increase the  difficulty  of obtaining  financing.
However,  price declines  reduce the competition for oil and gas properties and,
correspondingly, reduce the prices paid for leases and prospects.

     Other  than  the  foregoing,  we do not  know  of  any  trends,  events  or
uncertainties  that will have had or are reasonably  expected to have a material
impact on our sales, revenues or expenses.

CRITICAL ACCOUNTING POLICIES

     There have been no material  changes in our  critical  accounting  policies
since August 31, 2010, and a detailed discussion of the nature of our accounting
practices can be found in the section titled "Critical  Accounting  Policies" in
Part II, Item 7 of our Annual  Report on Form 10-K for the year ended August 31,
2010.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     This report contains "forward-looking statements" within the meaning of the
Private  Securities  Litigation Reform Act of 1995. These statements are subject
to risks and  uncertainties  and are based on the  beliefs  and  assumptions  of
management and information  currently available to management.  The use of words
such as "believes", "expects",  "anticipates",  "intends", "plans", "estimates",
"should",   "likely"  or  similar   expressions,   indicates  a  forward-looking
statement.

                                       33
<PAGE>

     The  identification  in this  report of factors  that may affect our future
performance  and the  accuracy  of  forward-looking  statements  is  meant to be
illustrative and by no means exhaustive.  All forward-looking  statements should
be evaluated with the understanding of their inherent uncertainty.

     Factors that could cause our actual results to differ materially from those
expressed or implied by forward-looking  statements include, but are not limited
to:

          o    The success of our exploration and development efforts;
          o    The price of oil and gas;
          o    The worldwide economic situation;
          o    Any change in interest rates or inflation;
          o    The  willingness  and  ability of third  parties  to honor  their
               contractual commitments;
          o    Our ability to raise additional capital, as it may be affected by
               current conditions in the stock market and competition in the oil
               and gas industry for risk capital;
          o    Our  capital  costs,  as they may be  affected  by delays or cost
               overruns;
          o    Our costs of production;
          o    Environmental and other regulations,  as the same presently exist
               or may later be amended;
          o    Our  ability  to  identify,  finance  and  integrate  any  future
               acquisitions; and
          o    The volatility of our stock price.


                                     PART II

Item 1.  Legal Proceedings.

     None.

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

During the three months ended May 31, 2011, the following  unregistered sales of
equity securities were affected by the Company:

1.    During the three months ended May 31, 2011, holders of convertible
      promissory notes in the principal amount of $6,096,325, plus accrued
      interest of $55,882, elected to convert their notes into 3,845,132 shares
      of the Company's common stock. The Company relied upon the exemption
      provided by Section 3(a)(9) of the Securities Act of 1933 in connection
      with the issuance of these shares.

2.    During the three months ended May 31, 2011,  the Company agreed to issue
      an  aggregate  of  1,125,699  shares  of  restricted   common  stock  as
      consideration  for several mineral  interests.  These  interests,  which
      include an  aggregate  of 78,815  gross acres  (69,274  net acres),  are
      located in the D-J Basin and were acquired  through  leases with several
      private  parties.  The  Company  relied upon the  exemption  provided by
      Section  4(2)  of the  Securities  Act of 1933 in  connection  with  the
      issuance of these shares.

3.    On May 24, 2011, the Company issued 1,381,818 shares of common stock
      pursuant to the purchase of certain oil and gas properties from Petroleum
      Exploration and Management, LLC. These shares were valued at $3,800,000 in
      accordance with the terms of the purchase and sale agreement and represent
      partial consideration for the transaction The Company relied upon the
      exemption provided by Section 4(2) of the Securities Act of 1933 in
      connection with the issuance of these shares.

                                       34
<PAGE>

Item 3.  Default Upon Senior Securities.

     None.

Item 4.  Removed and Reserved

Item 5.  Other Information

     On May 23, 2011,  the Company  held a Special  Meeting of  Shareholders  in
CityplacePlatteville,  StateColorado.  Of the 33,495,519  shares of common stock
issued and outstanding as of the record date,  23,316,861 shares of common stock
(approximately 70%) were present or represented by proxy at the Special Meeting.
The Company's shareholders approved a proposal to acquire oil and gas properties
from  Petroleum  Exploration  and  Management  LLC ("PEM"),  the adoption of the
Company's 2011  Incentive  Stock Option Plan, the adoption of the Company's 2011
Non-Qualified  Stock Option Plan, the adoption of the Company's 2011 Stock Bonus
Plan and an amendment of the Company's Articles of Incorporation. The results of
voting on the aforementioned matters were as follows:

     1.   Approval of the  acquisition of oil and gas properties  from Petroleum
          Exploration and Management, LLC:

                           FOR               AGAINST              ABSTAIN
                    ------------------  -------------------  ------------------
                       18,730,523            154,947             4,315,260

     2.   Approval of the adoption of the Company's 2011 Incentive  Stock Option
          Plan,  which provides that up to 2,000,000  shares of common stock may
          be  issued  upon the  exercise  of  options  granted  pursuant  to the
          Incentive Stock Option Plan:

                           FOR               AGAINST              ABSTAIN
                    ------------------  -------------------  ------------------
                       18,020,015           4,070,711            1,110,004

     3.   Approval of the adoption of the  Company's  2011  Non-Qualified  Stock
          Option Plan,  which  provides  that up to  2,000,000  shares of common
          stock may be issued upon the exercise of options  granted  pursuant to
          the Non-Qualified Stock Option Plan:

                           FOR               AGAINST              ABSTAIN
                    ------------------  -------------------  ------------------
                       16,902,243           5,197,404            1,101,083

     4.   Approval of the adoption of the Company's 2011 Stock Bonus Plan, which
          provides that up to 2,000,000  shares of common stock may be issued to
          persons granted Stock Bonuses pursuant to the Stock Bonus Plan:

                           FOR               AGAINST              ABSTAIN
                    ------------------  -------------------  ------------------
                       16,615,144           5,405,140            1,180,446

     5.   Approval of the amendment of the Company's  Articles of  Incorporation
          to allow  shareholders  owning less than all of the  Company's  common
          stock to take action without meeting  consistent with Colorado Revised
          Statute 7-107-104.

                           FOR               AGAINST              ABSTAIN
                    ------------------  -------------------  ------------------
                       21,915,238            684,122              601,370

                                       35
<PAGE>


Item 6.  Exhibits

a.  Exhibits

      31.1        Certification  pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002 for Ed Holloway.

      31.2        Certification  pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002 for Frank L. Jennings.

      32          Certification  pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002 for Ed Holloway and Frank L. Jennings.

                                       36
<PAGE>

                                   SIGNATURES

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




                                      SYNERGY RESOURCES CORPORATION

Date:  July 14, 2011
                                      By: /s/ Ed Holloway
                                          -----------------------------------
                                          Ed Holloway, President and
                                          Principal Executive Officer



Date:  July 14, 2011
                                      By: /s/ Frank L. Jennings
                                          -----------------------------------
                                          Frank L. Jennings, Principal
                                          Financial and Accounting Officer

                                       37
<PAGE>