UNITED STATES


SECURITIES AND EXCHANGE
COMMISSION


WASHINGTON, D.C.
20549





FORM
10-KSB/A
 Amendment
No. 1


(Mark
One)





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





For the
fiscal year ended December 31, 2006





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





For the
transition period from __________ to ___________





Commission
file number 000-28813





NEW CENTURY ENERGY
CORP.


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





COLORADO
            
            93-1192725(State
      or other jurisdiction of
            
            (IRS
      Employer Identification No.)incorporation
      or organization)





5851 San Felipe, Suite 775,
Houston Texas 77057


(Address
of principal executive offices)





(713)
266-4344


(Registrant's
telephone number)





Securities
registered under Section 12(b) of the Exchange Act:





NONE





Securities
registered under Section 12(g) of the Exchange Act:





COMMON
STOCK, $.001 PAR VALUE PER SHARE





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











Check
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 [ ]





Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]





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





The
issuer's revenues for the most recent fiscal year ended December 31, 2006 were
$14,927,202.





The
aggregate market value of the issuer's voting and non-voting common equity held
by non-affiliates computed by reference to the average bid and ask price of such
common equity as of April 4, 2007, was approximately $1,479,700.





As of
March 30, 2007, the issuer had 56,010,612 shares of common stock, $0.001 par
value per share outstanding ("Common Stock"),





Documents
Incorporated by Reference:





NONE





Transitional
Small Business Disclosure Format:





Yes
[   ] No [X]





This
Amended Report on Form 10-KSB/A is being filed by the Registrant to add
additional disclosures as to the Company’s proved developed reserves as of
December 31, 2006 and 2005, under the “Overview” section of “Description of the
Company’s Business Focus”; to update the Registrant’s tables of “Oil and Gas
Acreage, Productive Wells, and Drilling Activity Disclosure of Oil and Gas
Operations” to reconcile its previous disclosures to the “net share” of such
production and to include the net quantity of oil and gas production for the
three years ended December 31, 2006; to update “Drilling Activity”, to include
the results of the Registrant’s drilling activity for the past three years; to
add a new risk factor entitled “3D Seismic Interpretation Does Not Guarantee
That Hydrocarbons Are Present Or If Present Will Produce In Economic
Quantities”; and to update Note 19 of the audited consolidated financial
statements included below to make such footnote consistent with the disclosures
elsewhere in the document.  All of the other sections of this
Amended  Report  on  Form  10-KSB  remain  the  same  as
originally filed by the Registrant  on  April 12, 2007, and
investors should review the Registrant's most recent filings for updated
information on the operations and financial condition
of  the  Registrant,  including  but  not  limited  to  the  Registrant's  legal
proceedings,  results of operations, plan of operations, and the "Risk
Factors" disclosure provided  below.





NEW
CENTURY ENERGY CORP.


FORM
10-KSB/A


YEAR
ENDED DECEMBER 31, 2006


INDEX





PART
    IItem
      1.
            Description
      of Business
            4Item
      2.
            Description
      of Property
            27Item
      3.
            Legal
      Proceedings
            37Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            37PART
      IIItem
      5.
            Market
      for Common Equity and Related Stockholder Matters
            38Item
      6.
            Management's
      Discussion and Analysis or Plan of Operation
            39Item
      7.
            Financial
      Statements
            74
      -- 110Item
      8.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            111Item
      8A.
            Controls
      and Procedures
            113Item
      8B.
            Other
      Information
            114PART
      IIIItem
      9.
            Directors,
      Executive Officers, Promoters and Control Persons; Compliance with Section
      16(a) of the Exchange Act
            115Item
      10.
            Executive
      Compensation
            118Item
      11.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            122Item
      12.
            Certain
      Relationships and Related Transactions
            124Item
      13.
            Exhibits
      and Reports on Form 8-K
            125Item
      14.
            Principal
      Accountant Fees and Services
            133








PART I





ITEM 1. DESCRIPTION OF
BUSINESS





SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS





CERTAIN
STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-KSB/A (THIS "FORM 10-KSB"),
INCLUDING STATEMENTS UNDER "ITEM 1. DESCRIPTION OF BUSINESS," AND "ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS", CONSTITUTE "FORWARD LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1934, AS AMENDED, AND
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (COLLECTIVELY, THE "REFORM
ACT"). CERTAIN, BUT NOT NECESSARILY ALL, OF SUCH FORWARD-LOOKING STATEMENTS CAN
BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES",
"EXPECTS", "MAY", "SHOULD", OR "ANTICIPATES", OR THE NEGATIVE THEREOF OR OTHER
VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY THAT
INVOLVE RISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN
AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF NEW CENTURY ENERGY CORP. ("NEW CENTURY",
THE "COMPANY", "WE", "US" OR "OUR") TO BE MATERIALLY DIFFERENT FROM ANY FUTURE
RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-KSB, UNLESS ANOTHER DATE
IS STATED, ARE TO DECEMBER 31, 2006.





Information
regarding certain technical oil and gas exploration terms which are used
throughout this Form 10-KSB can be found in the "Glossary of Oil and Gas Terms,"
incorporated by reference into this Form 10-KSB as exhibit 99.1.





HISTORY





New
Century Energy Corp. (the "Company"), was incorporated in Colorado on April 18,
1997 as "Perfection Development Corporation." On September 29, 1998, the Company
entered into an agreement pursuant to which it would acquire all of the
outstanding capital stock of Vertica Software, Inc., a California corporation
("Vertica California"). On December 31, 1998, Vertica California merged with and
into the Company. The Company was the surviving corporation in the merger and
the separate corporate existence of Vertica California ceased.


-4-





Concurrently
with the merger, the Company changed its name from Perfection Development
Corporation to Vertica Software, Inc. ("Vertica").  On February 1, 2002,
the Company's charter was automatically revoked by the Colorado Secretary of
State for failure to file a periodic report. Because of the Colorado statute at
that time, once a charter was revoked it could not be renewed and the Company
was forced to file new Articles of Incorporation with the Colorado Secretary of
State, which it did on December 22, 2003, as Vertica Software, Inc. The Company
filed a Statement of Merger with the Colorado Secretary of State to merge its
former Colorado filings as Perfection Development Corporation/Vertica Software,
Inc., with its current filings as New Century Energy Corp.





On
January 28, 2004, the Company filed Articles of Amendment to the Company's
Articles of Incorporation to authorize 5,000 shares of Series A Convertible
Preferred Stock. On June 30, 2004, the Company filed Articles of Amendment to
the Company's Articles of Incorporation to amend the Series A Convertible
Preferred Stock ("Series A") designation and to authorize 2,000,000 shares of
Series B Convertible Preferred Stock ("Series B"). Each share of Series A
Preferred Stock is able to vote an amount equal to 300 shares of common stock.
All shares of preferred stock rank prior to all other stock of the Company, as
to payments of dividends and to distributions of assets upon liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary.
Each share of Series B Preferred Stock is able to vote an amount equal to 2,958
shares of common stock. Each share of Series A Preferred Stock can be converted
into 300 shares of the Company's common stock at the option of the holder,
provided that there are a sufficient number of shares authorized but unissued
and unreserved. Each share of Series B Preferred Stock can be converted into
98.6 shares of the Company's common stock at the option of the holder, provided
that there are a sufficient number of shares authorized but unissued and
unreserved. As of the date of the filing of this report there are no shares of
Series A Preferred Stock outstanding and no shares of Series B Preferred Stock
outstanding.





On
September 30, 2004, the Company acquired 100% of the issued and outstanding
common stock of Century Resources, Inc., a Delaware Corporation ("Century"),
which was originally established for the acquisition, development, production,
exploration for, and the sale of oil and natural gas in Texas, in exchange for
37,500,000 newly issued post 1:100 reverse split (described below) shares of the
Company's common stock, pursuant to an Agreement and Plan of Reorganization
whereby Century became a wholly-owned subsidiary of the Company (the
"Exchange"). Also on September 30, 2004, the Company affected a 1:100 reverse
stock split. Unless otherwise stated, all share amounts in this report on Form
10-KSB are provided in post reverse split shares.





In
connection with the Exchange, the Company agreed to transfer all rights to the
existing installation of hardware and software used to develop intellectual
property, all trademarks, copyrights and marketing materials developed for sales
and distribution of such products relating to Internet/Intranet software
products and services and an Internet web site for the hazardous material to the
Company's wholly owned subsidiary, ERC Solutions, Inc., a Delaware corporation
("ERC"), and changed its business focus to oil and gas exploration and


-5-


production.
On October 26, 2004, in connection with its new business focus, the Company
filed Articles of Amendment with the Colorado Secretary of State, to change its
name to "New Century Energy Corp." which name change became effective on
November 1, 2004.





In
November 2004, the Company filed a Certificate of Correction to the Company's
previously filed Articles of Amendment, to correct the number of shares the
Company is authorized to issue. As a result of this correction, we had total
authorized shares of 120,000,000, of which 100,000,000 were shares of Common
Stock, par value $0.001 per share, and 20,000,000 were shares of Preferred
Stock, par value $0.001 per share ("Preferred Stock"), prior to the filing of
the June 2006 amendment to our Articles of Incorporation described
below.





On June
12, 2006, at a special meeting of shareholders, shareholders holding a majority
of our voting shares voted to approve the filing of Articles of Amendment to our
Articles of Incorporation to increase our authorized shares of common stock to
200,000,000 shares of common stock, par value $0.001 per share, and to
reauthorize 20,000,000 shares of Preferred Stock, par value $0.001 per share. We
filed the Articles of Amendment on June 12, 2006, which Articles of Amendment
became effective on June 12, 2006.





DESCRIPTION OF THE COMPANY'S BUSINESS
FOCUS





Overview:





New
Century Energy Corp. is an independent oil and gas exploration and production
company, with daily net production to its working interest of approximately 2.3
million cubic feet of gas per day (Mcfgpd) and 620 barrels of oil per day
(Bopd). The Company's proved reserves as of December 31, 2006 are 7.1 billion
cubic feet (Bcf) of natural gas and 858,423 barrels of crude oil. The Company's
major areas of operations are located in the United States primarily in
Matagorda, Wharton and McMullen counties in Texas. During 2006, the Company's
proved oil reserves increased by over 700% due to the acquisition of new proved
oil reserves in the Mustang Creek Field in McMullen County, Texas and the
drilling of one new producing oil well.
 
 The
Company’s proved developed reserves as of December 31, 2006 were as
follows:
 
 OIL:   790,800
barrels of oil, or 92% of the Company’s total proved oil reserves of 858,423
barrels.
  GAS:  2,131
MMcf of gas, or 29% of the Company’s total proved gas reserves of 7,187
MMcf.
 
 The
revised table below reconciles the Company’s proved developed reserves of oil
and gas for the years ended December 31, 2006 and 2005:
 
 2006
              
              2005Oil
              
              Gas
              
              Oil
              
              Gas(Bbls)
                (Revised)
              
              (MMcf)
              
              (Bbls)
              
              (MMcf)Proved
      developed and undeveloped reservesBeginning
      of year
              
              
              121,067
              
              8,062
              
              113,000
              
              1,116Revisions
      of previous estimatesa
              
              
              (45,852
              )
              (1,022
              )
              23,309
              
              182Purchases
      of minerals in placeb
              
              
              952,399
              
              1,215
              
              -
              
              5,447Production
              
              
              (190,846
              )
              (1,068
              )
              (15,242
              )
              (643
              )Extensions
      and discoveriesc
              
              
              21,655
              
              -
              
              -
              
              1,960End
      of the year
              
              
              858,423
              
              7,187
              
              121,067
              
              8,062Proved
      developed reservesBeginning
      of year
              
              
              121,067
              
              4,517
              
              98,858
              
              151End
      of  the yeard
              
              
              790,800
              
              2,131
              
              121,067
              
              4,517
 a The
downward revision of  previous estimates by 45,852 net barrels is a
result of two revisions.  First, there was a downward revision of
112,324 net barrels resulting from the unsuccessful drilling of a PUD location,
the Kassner #3 well.  When the Company acquired the Mustang Creek
Field oil reserves in 2006, we attributed proved undeveloped reserves to this
location and, as a result of the unsuccessful well, it is necessary to subtract
these net barrels from our proved reserve base.  Second, there were
upward revisions in the reserve estimates for several of our wells from our
January 1, 2006 reserve report to our December 31, 2006 reserve report which
accounted for the remaining 66,472 net barrel increase in previous
estimates.
  b The
significant increase in purchases of minerals in place is attributable to the
acquisition of the Mustang Creek Assets in April and June of
2006.  The downward revision by 29,950 net barrels from the original
10KSB filing to 952,399 net barrels, results from an adjustment to the effective
date of our acquisition reserve report from December 1, 2005 to January 1, 2006
and new production information available after August 4, 2006.  The
original report included reserves from December 2005, which we have determined
was included in error.
  -6-
 c In 2006,
we drilled one productive exploratory well, the Rabke Maspero Unit Well
#2.  Drilling of this well was finalized on December 14, 2006 and the
well was logged on December 14, 2006.   Due to local flooding,
testing and completion of this new well did not take place until February of
2007.  Testing of this well was conducted on February 28, 2007 and
confirmed initial oil production of 72 Bopd.
 The
reserve report prepared by R.A. Lenser dated April 3, 2007 with an effective
date of December 31, 2006 (the “Lenser Report”) attributed 21,655 net barrels of
oil to the Companyin this new
well.
 
 The
reserve table in Note 19 to our audited Consolidated Financial Statements in our
original 10KSB filing for the year ended December 31, 2006, which is amended by
this amended report, did not include reserves added due to the drilling of the
Rabke Maspero Unit #2 well in the amount of 21,655 net barrels, and this amended
table correctly includes the Rabke Maspero Unit #2 well, as an upward addition
to proved reserves.
 
 d This
amended table includes a significant upward revision to the Company’s end of
year total for proved developed oil from the previously reported 117,959 net
barrels, increasing to 790,800 net barrels.  The reason for this
increase is due to the fact that the original 10KSB filing for the period ending
December 31, 2006, only included net reserves attributed to the parent company,
New Century Energy Corp., and did not correctly include the net reserves
attributed to our wholly owned consolidated subsidiary, Gulf Coast Oil
Corporation. The table has been amended to present the combined proved developed
reserves on a consolidated basis.
 
 The
Company's estimates of proved reserves and proved undeveloped reserves at
December 31, 2006 and 2005, and changes in proved reserves during the last two
years are contained in the Supplemental Information on Oil and Gas Exploration
and Production Activities in the Company's 2006 Consolidated Financial
Statements of this Form 10-KSB. Proved reserve estimates were made by R.A.
Lenser and Associates, an independent petroleum evaluation and consulting firm,
and were prepared in accordance with generally accepted petroleum engineering
and evaluation principles in conformity with SEC definitions and
guidelines.
 
 The
Company earns revenues and income and generates operating cash flows primarily
from the sale of natural gas and crude oil at market prices of those products at
the time of sale. An
important element in understanding the Company's future operating performance
are trends and uncertainties in natural gas and crude oil prices that may have a
material impact on future cash flows. Trends in energy supply and demand are
affected by many factors that are difficult to predict, such as energy prices,
U.S. economic growth, advances in technology, changes in weather patterns, and
future public policy decisions. The Energy Information Administration “EIA” of
the U.S. Government in its Annual Energy Outlook 2007 reports, states, “real
world crude oil prices, are projected to decline gradually from their 2006
average of more than $69 per barrel to just under $50 per barrel by 2014 as new
supplies enter the market.” In the EIA’s current projections regarding oil, OPEC
increases production at a rate that keeps average prices in the $50 to $60 per
barrel through 2030. Regarding natural gas, the EIA’s current projection calls
for the average U.S. wellhead price for natural gas “to decline gradually from
the current level, as increased drilling brings on new supplies and new import
sources become available. The average price falls to just under $5 per thousand
cubic feet in 2015, then raises gradually to about $6 per thousand cubic feet in
2030.” (EIA “Annual Energy Outlook 2007”)
 
 With the
uncertainties in product prices, and possible changes in sales volumes that may
increase or decrease as a result of future operations, these factors can impact
cash flow from operating activities in the short and long term. If there are
significant changes in crude oil or natural gas prices in 2007 and 2008 beyond
those projected by the EIA, this factor may have a material impact on future
revenues, income and operating cash flows for the Company.
 
 The
discussion found below describes our activities and operations in more
detail.




BUSINESS
STRATEGY FOR 2007 & 2008





As part
of our corporate strategy, we expect to remain focused in the following
operational and project areas:





1.
            remain
      focused in the Texas Gulf Coast onshore
region;


-7-





2.
            acquire
      properties and proven reserves where we believe additional value can be
      created through a combination of exploitation, development, exploration
      drilling and expanding marketing
opportunities;





3.
            acquire
      properties that give us a majority working interest and operational
      control or where we believe we can ultimately obtain
  it;





4.
            maximize
      the value of our properties by increasing production and reserves while
      reducing cost through the use of 3D seismic and attribute analysis
      technologies;





5.
            maintain
      a highly experienced team of operations and exploration consultants using
      state of the art technology;
and


6.
            develop
      drilling prospects and acquire acreage positions over new drilling areas,
      for future drilling by the Company or farmout to qualified industry
      partners. In connection with this strategy, new projects are being
      evaluated in Texas.





2005 AND
2006 FUNDING AND


RELATED
ACQUISITION AGREEMENTS





JUNE 2005
LAURUS FUNDING TRANSACTIONS





On June
30, 2005, we entered into a Securities Purchase Agreement with Laurus Master
Fund, Ltd., a Cayman Islands company ("Laurus" and the "Closing"), whereby we
sold a Secured Convertible Term Note in the principal amount of fifteen million
dollars ($15,000,000)(the "Note" or "Convertible Note"), which is convertible
into an aggregate of 24,193,548 shares of our common stock at a conversion price
of $0.62 per share; issued Laurus a warrant to purchase up to 7,258,065 shares
of common stock at $0.80 per share (the "Warrant"); issued an option to Laurus
to purchase up to 10,222,784 shares of our common stock (representing 20% of our
outstanding common stock on a fully-diluted basis [prior to the issuance of
shares in connection with the Purchase and Sale Agreement]), for $0.001 per
share (as amended)(the "Option"). We also granted Laurus registration rights to
the shares issuable in connection with the Convertible Note and exercisable in
connection with the Warrant and Option pursuant to a Registration Rights
Agreement.





In
connection with the Closing, we agreed to pay Laurus Capital Management, L.L.C.,
the manager of Laurus, a fee equal to 3.50% of the aggregate principal amount of
the Note, totaling $525,000, and agreed to pay Energy Capital Solutions, LP
$599,000, and granted Energy Capital Solutions, LP 900,000 warrants exercisable
at $0.80 per share, with piggyback registration rights in connection with a
finders agreement.





SUBSIDIARY
GUARANTY AGREEMENT AND COLLATERAL ASSIGNMENT AGREEMENT





Century
Resources, Inc., our wholly owned subsidiary, entered into a Subsidiary Guaranty
Agreement at the Closing with Laurus on June 30, 2005, whereby it agreed to
guaranty the prompt payment of all amounts, when due, owed to Laurus under the
Note and in connection with the Closing. We also entered into a Collateral
Assignment Agreement at the Closing, whereby we agreed to assign and to grant a
security interest to Laurus in all of our rights and benefits under the Purchase
and Sale Agreement. Additionally, at the time of the Closing, we entered into a
Master Security Agreement with Laurus, whereby we agreed to grant Laurus a
continuing security interest in all of our assets, including without limitation,
cash, cash equivalents, accounts receivable, deposit accounts, inventory,
equipment, goods, fixtures and other tangible and intangible assets, which we
now own or at any time in the future may acquire right, title or interest
to.


-8-




SECURED CONVERTIBLE NOTE





In
connection with the Securities Purchase Agreement, we issued Laurus a three (3)
year Secured Convertible Note in the amount of $15,000,000, which was
subsequently replaced by an Amended and Restated Secured Convertible Term Note
and a Second Amended and Restated Note (the "Convertible Term Note" or the
"Note") which bears interest at the prime rate (as published by the Wall Street
Journal) plus 2% (currently 10.25%, with the prime rate at 8.25% as of March 30,
2007, the "Contract Rate") per year, and which at no time unless adjusted as
described below, shall bear interest at less than 7% per year, which unpaid
principal and unpaid accrued interest, if any, is due and payable on June 30,
2008 (the "Maturity Date"). The interest on the Note is payable monthly, in
arrears, commencing on September 1, 2005. Additionally, if the Registration
Statement covering the shares which the Note and Warrant are convertible into
has been declared effective and our common stock has traded at least 25% above
the "Fixed Conversion Rate," initially $0.62, which is subject to adjustment as
described below, for the five trading days immediately preceding the date a
monthly interest payment is due, then the Contract Rate is reduced by 1% for
each incremental 25% increase in the market price of our common stock above the
then applicable Fixed Conversion Rate (for example, if our common stock has
traded at $0.93 for the five trading days preceding the due date of a monthly
interest payment, which amount is 50% above the current Fixed Conversion Rate
($0.62), the Contract Rate will be reduced by an aggregate of two percentage
points, one percentage point for each 25% increase that our common stock traded
above the Fixed Conversion Rate); however, in no event shall the Contract Rate
at any time be less than 0%.





Additionally,
we agreed to make payments of the principal amount owing under the Note, as
amended, to Laurus on July 1, 2006, and on the first business day of each month
thereafter, including the Maturity Date in the amount of $250,000 from July 1,
2006 to December 31, 2006, $100,000 from January 1, 2007 until December 31,
2007, and $250,000 from January 1, 2008 until June 30, 2008, together with any
accrued and unpaid interest on such portion of the unpaid portion of the Note
(together with any other amounts to be paid, including the Contract Rate, the
"Monthly Amount") and to pay Laurus an amount equal to the outstanding principal
amount of the Note and any accrued and unpaid interest on the Maturity
Date.





Laurus
must convert all or a portion of the Monthly Amount into shares of our common
stock if: (i) the average closing price of our common stock for the five trading
days immediately proceeding such payment is greater than or equal to 110% of the
Fixed Conversion Price; and (ii) the amount of such conversion does not exceed
twenty-five percent of the aggregate dollar trading volume of the common stock
for the period of twenty-two trading days immediately preceding such payment
date; however if (i) is met and (ii) is not, Laurus may convert such amount of
the Monthly Amount into shares of our common stock that meet (i), above,
assuming that such conversion does not cause Laurus to hold more than 9.99% of
our then issued and outstanding stock, as described and subject to the
conditions listed below. Additionally, no amount of the Monthly Amount may be
converted into shares of our common stock unless there is an effective
Registration Statement covering such shares to be converted or an exemption from
registration exists under Rule 144 for such shares, and there is no event of
default (as defined below). If (i) above is not met, the Monthly Amount must be
payable in cash and we must pay an amount of cash to Laurus equal to 102% of the
Monthly Amount.


-9-





We may
prepay the Note in cash by giving Laurus a notice of repayment, seven (7) days
before such intent to prepay, and by paying Laurus an amount equal to 125% of
the outstanding principal amount of the Note during the first year the Note is
outstanding, 120% of the outstanding principal amount of the Note during the
second year the Note is outstanding, and 115% of the outstanding principal
amount of the Note during the period of time between the second anniversary of
the Note until the Maturity Date.





The Note
includes a provision whereby Laurus is not entitled to convert any amount of
shares which would cause Laurus to become the beneficial owner of more than
9.99% of our outstanding common stock, which limitation automatically becomes
null and void upon the occurrence and continuance of an event of default, or
upon 75 days prior notice to us. In the event that we change our common stock
into the same or a different number of securities by reclassification or
otherwise, Laurus shall have the right to purchase an adjusted number of
securities and kind of securities that would have been issuable as a result of
such change with respect to the common stock (i) immediately prior to or (ii)
immediately after, such reclassification, or other change at the sole election
of Laurus.





The Fixed
Conversion Price of the Note shall be adjusted automatically in the event that
we issue any additional shares of common stock as a dividend or any preferred
stock; subdivide our outstanding shares of common stock; or effect a reverse
stock split, by multiplying the exercise price (currently $0.62) by the number
of our shares outstanding prior to such event and dividing that number by the
number of our shares outstanding after such event. Additionally, if at any time
prior to the full conversion or full repayment of the principal amount of the
Note, we issue any shares, options, warrants, or other obligations, to anyone
other than to Laurus (other than in connection with a company employee incentive
stock plan, or to vendors for goods sold and services rendered (not to exceed
1,000,000 shares and not eligible to be sold by the holders of such shares until
three years from June 30, 2005)), for consideration per share less than the
Fixed Conversion Price, the Fixed Conversion Price shall immediately reset to
such lower price.





Events of
default under the Note include our failure to pay amounts due under the Note;
breach of any covenants under the Note, if not cured within 15 days; breach of
any warranties found in the Note or any other Related Agreement; the occurrence
of any default under any agreement, which causes any contingent obligation to
become due prior to its stated maturity or to become payable; any change or
occurrence likely to have a material adverse effect on the business, assets,
liabilities, financial condition, our operations or prospects; our bankruptcy; a
judgment against us in excess of $100,000, which has not been vacated,
discharged or stayed, within thirty (30) days of the date of entry; our
insolvency; a change in control of us; an indictment or other proceedings
against us or any executive officer; if we breach any provision of the
Securities Purchase Agreement, or any other Related Agreement; if the SEC puts a
stop trade order or otherwise suspends our common stock from trading for a
period of five (5) consecutive days or
five (5) days during a period of ten (10) consecutive days; or our failure to
deliver the common stock to Laurus pursuant to and in the form required by the
Note.


-10-


If an
event of default were to occur under the Note, Laurus may at its option, demand
repayment in full of all obligations and liabilities owed to it by us under the
Note, Securities Purchase Agreement and any Related Agreement and may require us
to immediately pay 130% of the principal amount outstanding under the Note, plus
any accrued and unpaid interest.





COMMON
STOCK PURCHASE WARRANT





We
granted Laurus a seven year common stock Purchase Warrant ("Warrant") to
purchase 7,258,065 shares of our common stock at an exercise price of $0.80 per
share. The Warrant became immediately exercisable when granted. The Warrant
allows Laurus to purchase the shares until 5:00 p.m., June 30, 2012. The Warrant
states that Laurus may not exercise the Warrant, if such exercise would cause
Laurus to hold more than 9.99% of our outstanding common stock, subject to the
same limitation as in the Note, as described above.





We also
granted Energy Capital Solutions, LP (“ECS”), 900,000 warrants immediately
exercisable at $0.80 per share, under a separate warrant agreement, with
piggyback registration rights pursuant to a finder's agreement in connection
with the Closing. The Warrant allows Energy Capital Solutions, LP to purchase
the shares until 5:00 p.m. CST, June 30, 2008.





On March
29, 2007, we entered into the First Amendment to common stock Warrant (the
“Agreement”) with ECS. In consideration for ECS agreeing that the shares of
common stock which the Warrant was exercisable did not have to be registered on
the same Registration Statement as the Laurus stock was registered, we agreed to
extend the expiration date of the Warrant from June 30, 2008 to June 30,
2009.





OPTION
AGREEMENT





At the
Closing, and in connection with the Securities Purchase Agreement, we granted
Laurus an option which vested immediately to purchase up to 10,222,784 shares of
our common stock at an aggregate exercise price of approximately $10,222.78
(with a per share exercise price of $0.001). Laurus agreed under the Option not
to sell any shares of common stock issuable upon exercise of the Option until:
(a) payment in full of all of our obligations and liabilities to Laurus under
the Securities Purchase Agreement, and (b) the exercise of the Warrant by
Laurus; provided; however that Laurus may sell all or any portion of the common
stock issuable upon the Option following an event of default (as defined in the
Note, and described under the section titled "Secured Convertible Note," above),
or with 75 days notice to us of their intent to convert and hold more than 9.99%
of our outstanding common stock, subject to Laurus' pledge under the December
Option, not to exercise any part of the December Option, until (a) the payment
in full of all obligations of the Company to Laurus


-11-


under the
Convertible Note and (b) the exercise of the Warrant, unless an event of default
occurs and is continuing. On the day of the Closing, June 30, 2005, Laurus
exercised a portion of the Option and received 3,675,000 shares of our common
stock for an aggregate of $3,675, leaving an option to purchase 6,547,784 shares
of our common stock for $6,547.78.





Under the
Option, if we effect a reorganization, consolidation, merger or dissolution,
Laurus has the right to receive the amount of stock or other property (including
cash) which Laurus would have been entitled, if Laurus had exercised the Option
in full immediately prior to the reorganization, consolidation, merger or
dissolution, and the Option shall continue to be binding upon such issuer and/or
the person acquiring substantially all of our properties and/or assets.
Additionally, under the Option, in the event that we issue additional shares of
common stock as a dividend or other distribution on common stock or preferred
stock, subdivide our outstanding shares of common stock, or combine our
outstanding shares of common stock into a smaller number of shares of common
stock, the number of shares that Laurus shall receive in connection with the
exercise of the Option shall be increased or decreased by multiplying the number
of shares of common stock that would be issuable prior to such event by the
amount of our issued and outstanding common stock outstanding after such event
and dividing that number by the issued and outstanding shares of common stock
issued and outstanding immediately prior to such event. Laurus is not able to
exercise the Option, if such exercise shall cause it to hold in excess of 9.99%
of our issued and outstanding common stock, subject to the same limitation as in
the Note and Warrant, as described above.





REGISTRATION
RIGHTS AGREEMENT





We gave
Laurus registration rights to the shares issuable to Laurus in connection with
the Note, Warrant and Option, pursuant to a Registration Rights Agreement. The
Registration Rights Agreement provided for us to file a Registration Statement
with the Securities and Exchange Commission within 30 days of the Closing;
however, we were able to obtain a one week extension from Laurus, and as a
result, the filing of our original Registration Statement past the 30 day
deadline did not cause an event of default to occur. Additionally, under the
Registration Rights Agreement, we agreed to give our best efforts to obtain
effectiveness of our Registration Statement within 120 days of the Closing. We
along with Laurus eventually decided to withdraw our original Registration
Statement and as a result, the 120 day period to obtain effectiveness was
amended pursuant to the Amendment Agreements, described below. As a result of
the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth
Amendment, Sixth Amendment and Seventh Amendment agreements with Laurus,
described below, the date by which we were required to obtain effectiveness of
our Registration Statement by, under the Registration Rights Agreement, was
amended to April 16, 2007.





On
January 17, 2007, we filed a Registration Statement with the Securities and
Exchange Commission to register 6,108,501 shares of common stock. The shares
represented a portion of the shares of common stock underlying the Laurus
Warrant to purchase shares of our common stock at an exercise price of $0.80 per
share as well as 250,000 shares of common stock currently held by Core Concepts,
LLC. On February 12, 2007, the Registration
Statement was declared effective by the Securities and Exchange Commission.


-12-





New
Century Energy Corp. is not in default and will not be in default under its
current contractual obligations to register shares of its common stock pursuant
to the Registration Rights Agreement, as amended. In addition, New Century
Energy Corp. will not incur liquidated damages in connection with any
registration obligations at this time. It is acknowledged and agreed by
Laurus, that in the event that Laurus sells all securities which have been
registered on the registration statement, Laurus may require New Century Energy
Corp. to file an additional registration statement (or statements) to register
additional shares of common stock in the event that Laurus cannot rely on Rule
144(k) for the sale of shares issuable upon conversion of its Convertible Note,
issuable upon exercise of its Warrant or Options. New Century Energy Corp.
may incur significant penalties in the future, if it is unable to file
additional Registration Statement(s), if required in the future, and/or if it is
unable to gain effectiveness of such Registration Statement(s).





FIRST
AMENDMENT TO THE NOTE, WARRANT AND OPTION





Effective
as of January 10, 2007, we entered into the "First Amendment to the Note,
Warrant and Option," with Laurus (the "First Amendment"), which First Amendment
was consented and agreed to by Century with an effective date of June 30, 2005,
whereby we modified the terms of the Note, Warrant and Option (as described and
defined below) to adjust the limitation on the amount of our outstanding shares
which Laurus is able to hold at any one time from 4.99% of our issued an
outstanding stock (under the original provisions of the Note, Warrant and
Option) to 9.99% of our issued and outstanding stock, to change the exercise
price of the Option from an aggregate of $1.00 for 10,222,784 shares of our
common stock (under the Options original terms) to $0.001 per share, and to
clarify that Laurus is not able to sell any shares held in connection with the
Option until both (a) payment in full of all of the obligations and liabilities
of us to Laurus under the Securities Purchase Agreement and the Note have been
paid in full and (b) the exercise of the Warrant by Laurus (unless an event of
default occurs and continues to occur as described in greater detail above). The
discussions of the Note, Warrant and Option found throughout this Form 10-KSB
take into account the changes to the Note, Warrant and Option, which were made
in connection with the First Amendment.





NOVEMBER
2005 PURCHASE AND SALE AGREEMENT AND JANUARY 2006 CLOSING





On
November 1, 2005, we entered into a Purchase and Sale Agreement ("November 2005
Purchase and Sale Agreement") with Mr. Gerald W. Green, the "Seller." Pursuant
to the November 2005 Purchase and Sale Agreement, we agreed to purchase certain
interests in and to certain oil and gas leases which are located within and
adjacent to the Lindholm-Hanson Gas Unit in the Wishbone Field in McMullen
County, Texas, located 80 miles south of San Antonio, Texas (the "Unit"), for
$1,890,000. The interests purchased total a 1.75%
working interest and a 1.3125% net revenue interest in the leases (the "November
2005 Interest").


-13-





The
effective date of the sale of the Seller's November 2005 Interest was October 1,
2005. The closing date for the purchase was November 22, 2005, but was
subsequently extended to January 3, 2006, through an Amendment to Purchase and
Sale Agreement dated November 2, 2005. The November 2005 Purchase and Sale
Amendment also provided that we would equally share the net revenue of the
November 2005 Interest with the Seller for the month of October 2005; provided
that we would wire Seller a deposit in the amount of 10% of the purchase price
of the November 2005 Interest at the time of closing; that we will be
responsible for all Approval for Expenditures ("AFE") on the new proposed
Lindholm-Hanson #9 well, which is planned to spud (begin drilling) within thirty
days of the date of the amendment; that any monies paid by Seller in connection
with the #9 well prior to October 1, 2005, will be repaid to Seller by us; that
we will be responsible for all AFE charges from the date of the November 2005
Purchase and Sale Amendment for the workover on the #4 well; and that Seller
shall be refunded for all unused and prepaid expenses with U.S. Enercorp, Ltd.
for drilling the #11 and Fee #1 wells.





Additionally,
under the November 2005 Purchase and Sale Agreement, we agreed to assume all
duties and obligations of the Seller, express and implied, with respect to the
purchased November 2005 Interest, including those arising under any lease,
contract, agreement, document, permit, applicable law, statute or rule,
regulation, or order of any governmental authority and defend, indemnify and
hold Seller harmless from and pay or reimburse Seller for any and all claims in
connection with the duties and obligations of Seller in connection with the
ownership of the November 2005 Interest, before or after the effective date,
except (a) to the extent any such claim has been asserted against Seller prior
to the effective date, (b) as set forth in the November 2005 Purchase and Sale
Agreement, or (c) any claim that is expressly assumed by Seller.





We also
agreed to defend, indemnify and hold Seller harmless from and pay or reimburse
Seller for any and all claims for damage to the environment, environmental
cleanup, remediation or compliance, or for any other relief, arising directly or
indirectly from or incident to the use, occupation, operation, maintenance or
abandonment of any of the November 2005 Interest, or condition of the November
2005 Interest, whether latent or patent, including without limitation,
contamination of the property or premises with Naturally Occurring Radioactive
Materials ("NORM"), whether such claim was caused by Seller's negligence or
strict liability, whether in law or equity, excluding Seller, Seller's agents,
employees or contractors gross negligence or willful misconduct.





The
November 2005 Purchase and Sale Agreement called for certain assets to be
excluded from the sale of the leases including:





A)
            All
      minute books, tax returns, partnership documents of Seller and their
      business records not related to the purchased
  interests;


-14-


B)
            All
      records that were (i) proprietary in nature, (ii) covered by the
      attorney-client privilege or work product doctrine, (iii) not readily
      severable from Seller's general records, or (iv) required by applicable
      law to be retained by Seller;





C)
            All
      rights and claims arising, occurring, or existing in Seller prior to the
      effective date including, but not limited to, any and all contract rights,
      claims penalties, receivables, revenues, recoupment rights, rights of
      reimbursement, audit rights, recovery rights (excepting gas imbalances),
      accounting adjustments, mispayments, erroneous payments or other claims of
      any nature relating solely to any time period prior to the effective date;
      and





D)
            Any
      claims, rights and interests of Seller or any of Seller's affiliates in
      and to any refunds of taxes or fees of any nature whatsoever which relate
      solely to and arise out of the period prior to effective
    date.





All
production of oil, gas and other minerals from the November 2005 Interest prior
to the effective date and all proceeds from the sale of such production remained
the property of the Seller under the November 2005 Purchase and Sale Agreement.
All such production upon and after the effective date and all proceeds from the
sale thereof (other than one-half the net revenue interest from the November
2005 Interest granted to Seller pursuant to the November 2005 Purchase and Sale
Amendment) will be our property. We assumed all rights and/or liabilities of
Seller arising from any gas imbalances affecting the November 2005 Interest as
of the effective date and thereafter.





On
January 3, 2006, we closed the November 2005 Purchase and Sale Agreement. At the
closing and in accordance with the provisions of the November 2005 Purchase and
Sale Agreement, the Seller paid us the proceeds actually received by the Seller
and attributable to production during the period between the effective date and
the closing. At the time of closing, we reimbursed the Seller approximately
$154,750 for drilling and development costs assumed by us and attributable to
the ownership and operation of the purchased leases which were paid by Seller
and incurred at or after the effective date.





THIRD
AMENDMENT AGREEMENT WITH LAURUS





On
December 30, 2005, we entered into a Third Amendment Agreement ("Third
Amendment") to extend the date we were required to file a Registration Statement
covering the securities issuable to Laurus, and obtain effectiveness of such
Registration Statement, an Amended and Restated Secured Convertible Term Note
("Restated Note," described in greater detail below) and an Option (the
"December Option"). The December Option, provides Laurus the right to purchase
up to 5,061,392 shares of our common stock at $0.001 per share, representing ten
percent (10%) of our fully diluted issued and outstanding shares of common stock
prior to the date of the June 2005 SPA (June 30, 2005). Laurus agreed under the
December Option not to exercise any rights under the December Option until: (a)
payment in full of all of the obligations and liabilities of the Company to
Laurus under the June 2005 SPA and Restated Note have been paid in full and (b)
the exercise of the Warrant by Laurus, provided however that Laurus may sell all
or any portion of the common stock issuable upon the December Option following
an event of default (as defined in the Amended Note).


-15-




In
connection with the Third Amendment, we also entered into the Restated Note,
which replaced and superseded the Convertible Note, and which had an effective
date of June 30, 2005, the date of the original Convertible Note. The Restated
Note also included a provision which provided that the events of default set
forth in the Restated Note are subject to the express waiver of certain events
of default by Laurus in favor of the Company as provided in the Amendment and
the Second Amendment entered into with Laurus on November 3, 2005 and December
14, 2005. The Restated Note provided that such events of default expressly
waived pursuant to the First Amendment and the Second Amendment shall remain
waived in accordance with the express terms of the First Amendment and the
Second and shall not be deemed to constitute events of default for purposes of
the Restated Note, the June 2005 SPA or related agreements, the September 2005
SPA and/or related agreements.





Additionally,
under the Restated Note, Laurus agreed to amend the date on which we were
required to begin making payments of principal under the original Convertible
Note from January 1, 2006, until July 1, 2006, in consideration for us entering
into the Restated Note, the December Option and the Third
Amendment.





The
payments of principal under the Restated Note are due monthly at the rate of
$250,000 per month, until June 30, 2008, the maturity date of the Restated Note
(the "Maturity Date"). On the Maturity Date, the $9,000,000 remaining
outstanding under the Restated Note (assuming Laurus does not convert any
principal amount of the Restated Note into shares of our common stock), plus any
accrued and unpaid interest will be due and payable.





On
January 3, 2006, we closed a Purchase and Sale Agreement entered into on
November 1, 2005 ("Agreement") with Mr. Gerald W. Green, the "Seller." Pursuant
to the Agreement, we agreed to purchase certain interests in and to certain oil
and gas leases which are located within and adjacent to the Lindholm-Hanson Gas
Unit in the Wishbone Field in McMullen County, Texas, located 80 miles south of
San Antonio, Texas (the "Unit"), for $1,890,000. We previously paid the Seller a
ten percent (10%) deposit under the Agreement, representing $189,000 and paid
the Seller the remaining ninety percent (90%) of the purchase price,
representing $1,701,000 on January 3, 2006. The interests purchased total a
1.75% working interest and a 1.3125% net revenue interest in the leases (the
"Interest"). As a result of the closing of the Interest, our total ownership of
interests within the Lindholm-Hanson Gas Unit totals a 15.20% working interest
and a 12.2140% net revenue interest and our total ownership of the Lindholm fee
#1 well, which is outside of the Unit includes a 12.10% working interest and an
8.9820% net revenue interest. The Agreement is described in greater detail in
our Report on Form 8-K filed with the Commission on November 7,
2005.


-16-


AMENDED
AND RESTATED SECURED TERM NOTE





On or
about March 30, 2006, with an effective date of September 19, 2005, we entered
into the Amended and Restated Secured Term Note (the "Amended Term Note") with
Laurus. Pursuant to the Amended Term Note, the maturity date of the September
2005 Secured Term Note ("Term Note") with Laurus was extended to January 2, 2007
(which has subsequently been extended to July 2, 2007, pursuant to the Second
Restated Term Note). Additionally, a section was added to the Amended Term Note
which provided for the Amended Term Note to be repaid by way of a production
payment on certain of our oil and gas property (described below). The interest
rate of the Term Note, which rate was not changed by the Amended Term Note, is
twenty percent (20%) per year, based on a 360 day year, payable monthly in
arrears.





The
Amended Term Note provides for the payment of amortizing payments ("Amortizing
Payments") of principal and interest due under the Amended Term Note equal to
eighty percent (80%) of the gross proceeds paid to us in respect of oil, gas
and/or other hydrocarbon production arising from our 7.25% working interest in
the Wishbone Field in the Lindholm-Hanson Gas Unit, located in McMullen County,
Texas, purchased by us pursuant to the Purchase and Sale Agreement dated
September 2, 2005 (the "September Interests" and the "Production Payments").
Pursuant to the Amended Term Note, each such Amortizing Payment shall be made by
us to Laurus not later than five (5) days following the date on which we receive
the Production Payment, commencing with all Production Payments received by us
after March 1, 2006, with respect to the production month of January 2006 and
each month thereafter. Our payment of the Amortizing Payments to Laurus will be
in lieu of the monthly payments of interest accruing under the Term Note, which
we had previously been making since November 1, 2005. The Second Restated Term
Note, described below, added a provision, whereby we would be obligated to pay
Laurus an amount each month equal to the greater of (a) the amount owing to
Laurus in connection with the monthly Amortizing Payment and (b) the total
amount of interest due under the Term Note.





APRIL
2006 GULF COAST TRANSACTIONS





On April
26, 2006, our then newly formed wholly owned subsidiary, Gulf Coast Oil
Corporation, a Delaware corporation ("Gulf Coast"), entered into a Securities
Purchase Agreement with Laurus Master Fund, Ltd. (the "Purchase Agreement" and
"Laurus"), whereby Gulf Coast sold Laurus a Secured Term Note in the amount of
$40,000,000 (the "Gulf Coast Note") and a common stock Purchase Warrant to
purchase up to 49% of the shares of common stock of Gulf Coast (the "Gulf Coast
Warrant") at $0.001 per share. In connection with the Purchase Agreement, Gulf
Coast also entered into a Guaranty with Laurus (the "Gulf Coast Guaranty"); a
Mortgage Deed of Trust, Security Agreement, Financing Statement and Assignment
of Production; a Master Security Agreement; a Collateral Assignment; and a
letter agreement relating to a Shareholders Agreement to be entered into between
Laurus and Gulf Coast following Laurus' exercise of the Gulf Coast Warrant. In
connection with Gulf Coast's entry into the Securities Purchase Agreement, we
and Century Resources, Inc., our wholly owned Delaware subsidiary ("Century")
entered into a Guaranty with Laurus (the "New Century Guaranty"); we and Century
entered into an Amended and Restated Mortgage, Deed of Trust, Security
Agreement, Financing Statement and Assignment of Production in favor of Laurus;
and we entered into a Stock Pledge Agreement with Laurus.


-17-




GULF
COAST NOTE





In
connection with the Purchase Agreement, Gulf Coast issued Laurus a three (3)
year Secured Term Note in the amount of $40,000,000 (the "Gulf Coast Note")
which bears interest at the prime rate (as published by the Wall Street Journal)
plus 2% (currently 10.25%, with the prime rate at 8.25% as of March 30, 2007)
per year, and which at no time shall bear interest at less than 8% per year,
which unpaid principal and unpaid accrued interest, if any, shall be due and
payable on October 28, 2009 (the "Maturity Date"). The interest on the Gulf
Coast Note is payable monthly, in arrears, commencing on July 1, 2006.
Additionally, amortizing payments of the principal amount due under the Gulf
Coast Note are due July 1, 2006, and each succeeding month thereafter including
the Maturity Date (each an "Amortization Amount"). As long as no Event of
Default, as defined below, has occurred under the Gulf Coast Note, interest on
the Gulf Coast Note shall only be payable as a component of the Amortization
Amount, unless such Amortization Amount is less than $150,000 for any month, as
described below.





The Gulf
Coast Note was replaced by the Amended and Restated Secured Term Note in
connection with Gulf Coast's entry into the June 2006 Purchase Agreement with
Laurus (described in greater detail below) (collectively the "Gulf Coast Note").
The amendment to the Gulf Coast Note, amended the monthly Amortization Amount
which was to be paid under the Gulf Coast Note, from 80% of the gross proceeds
paid to Gulf Coast in connection with all of Gulf Coast's oil, gas and/or other
hydrocarbon production, to .875 times 80% of such production, to allow for the
remaining 12.5% of 80% of Gulf Coast's production to be paid to Laurus in
connection with Amortization Amounts due on the June 2006 Gulf Coast Note, as
described and defined below. The amendment also provided that any event of
default or failure to pay the June 2006 Gulf Coast Note, would be treated as an
event of Default under the Gulf Coast Note. All references to the Gulf Coast
Note contained in this filing have been revised to reflect the changes affected
by the Amended and Restated Secured Term Note.





Each
monthly Amortization Amount will be equal to the product of (a) .875 and (b)
eighty percent (80%) of the gross proceeds paid to Gulf Coast in respect of all
oil, gas and/or other hydrocarbon production in which Gulf Coast has an interest
less (i) the reasonable ordinary day to day expenses associated with Gulf
Coast's operation of the leases, wells and equipment, including fuel, materials,
labor, maintenance, routine production equipment replacement, repairs, routine
workover costs to maintain production from an existing completed well, royalty,
severance tax and ad valorem tax, in each case using accounting practices and
procedures ordinary and customary in the oil and gas industry and (ii) Gulf
Coast's reasonable estimate of its federal tax (including federal income tax)
liability (after taking into account all applicable deductions, depletion and
credits), all of which, in each case, shall be


-18-


subject
to Laurus' approval, which approval shall be provided in the exercise of Laurus'
reasonable discretion based on such supporting documentation from Gulf Coast as
Laurus shall request (the "Net Revenue"). Provided, however, that each
Amortization Amount shall be equal to one hundred (100%) of Net Revenue, upon
the occurrence and during the continuance of an Event of Default under the Gulf
Coast Note as described below.





In the
event the Amortization Amount payable to Laurus during any month is less than
$150,000, then Gulf Coast is required to make a cash payment to Laurus in an
amount equal to the difference between $150,000 and the then applicable
Amortization Amount.





Gulf
Coast used $33,000,000 of the funds received through the sale of the Gulf Coast
Note to purchase the Manti property as described below; $1,400,000, representing
3.5% of the Gulf Coast Note, to Laurus Capital Management, LLC ("LCM"), as a
management fee, as well as an additional $24,705 in due diligence and
documentation fees to LCM; $75,295 to Laurus' attorneys for legal and escrow
agent fees; with the remaining $5,500,000 to be used by Gulf Coast for future
drilling expenses.





GULF
COAST WARRANT





The Gulf
Coast Warrant provides Laurus the right to purchase up to 961 shares of Gulf
Coast's common stock, representing 49% of Gulf Coast's then issued and
outstanding common stock at an exercise price of $0.001 per share, which
warrants are exercisable by Laurus after all amounts owed to Laurus by Gulf
Coast have been repaid in full. Pursuant to the Gulf Coast Warrant, we agreed to
provide Laurus with registration rights to the shares issuable in connection
with the Gulf Coast Warrant, if Gulf Coast ever affects an initial public
offering of its securities and/or if its securities become publicly
traded.





GUARANTIES





In
connection with the Purchase Agreement, Gulf Coast entered into a Guaranty,
whereby it agreed to guaranty all of our obligations and liabilities owed to
Laurus in connection with the June 30, 2005 and September 19, 2005, Securities
Purchase Agreements (the "2005 Purchase Agreements"), and any obligations and/or
liabilities owed to Laurus pursuant to any agreements entered into in connection
with the 2005 Purchase Agreements.





Additionally,
in connection with the Purchase Agreement, we and Century, entered into a
Guaranty, whereby we agreed to guaranty all of Gulf Coast's obligations and
liabilities owed to Laurus in connection with the Purchase Agreement, and any
obligations and/or liabilities owed to Laurus pursuant to any agreements entered
into in connection with the Purchase Agreement (the "New Century/Century
Resources Guaranty").





As a
result of the Gulf Coast Guaranty and the New Century/Century Resources
Guaranty, Gulf Coast, Century and we will remain liable for the obligations of
the other parties until all indebtedness is repaid to Laurus by Gulf Coast, New
Century and Century,
under the various secured term notes and related agreements entered into and/or
made by Gulf Coast, New Century and/or Century in favor of
Laurus.


-19-





Pursuant
to a Reaffirmation, Ratification and Amendment Agreement, simultaneously with
Gulf Coast's receipt of accrued production revenue paid to Gulf Coast at the
closing of the Asset Purchase Agreement, for the period from December 1, 2005,
the effective date of the Asset Purchase Agreement, to May 1, 2006, we made a
mandatory prepayment against the outstanding balance of our September 2005 Note
in an amount equal to eighty percent (80%) of the net accrued production revenue
or $2,565,386. We paid this amount to Laurus on May 1, 2006 as partial payment
of the $9,500,000 September 30, 2005, Secured Term Note, as amended, which
Secured Term Note had an approximate remaining balance of $7,034,614 as of May
1, 2006, not including any accrued or unpaid interest, and a remaining balance
of $6,447,157 as of June 30, 2006.





Pursuant
to a Reaffirmation, Ratification and Amendment Agreement, simultaneously with
Gulf Coast's receipt of accrued production revenue paid to Gulf Coast at the
closing of the Asset Purchase Agreement, for the period from December 1, 2005,
the effective date of the Asset Purchase Agreement, to May 1, 2006, we made a
mandatory prepayment against the outstanding balance of our September 2005 Note
in an amount equal to eighty percent (80%) of the net accrued production revenue
or $2,565,386. We paid this amount to Laurus on May 1, 2006 as partial payment
of the $9,500,000 September 30, 2005, Secured Term Note, as amended, which
Secured Term Note had an approximate remaining balance of $7,034,614 as of May
1, 2006, not including any accrued or unpaid interest, and a remaining balance
of $ 6,351,391 as of April 4, 2007 .





APRIL
2006 GULF COAST ACQUISITION





On April
28, 2006, Gulf Coast entered into an Asset Purchase Agreement ("Asset Purchase
Agreement") and closed the purchase of certain undivided interests in producing
properties as well as undeveloped oil and gas mineral leases totaling 9,167
acres and other related assets and contracts in McMullen County, Texas (the
"Manti Property"), from Manti Resources, Inc., a Texas corporation, Manti
Operating Company, a Texas corporation and Manti Mustang Creek, Ltd., a Texas
limited partnership (collectively "Manti"). The purchase price of the Manti
Property was $33,000,000, which amount was paid from funds received from Gulf
Coast's sale of the Gulf Coast Note to Laurus. The effective date of the Asset
Purchase Agreement, for the purpose of the receipt of proceeds from the sale of
hydrocarbon reserves was December 1, 2005.





JUNE 2006
GULF COAST TRANSACTIONS





On June
30, 2006, Gulf Coast entered into a Securities Purchase Agreement with Laurus
(the "June 2006 Purchase Agreement"), whereby Gulf Coast sold Laurus a Secured
Term Note in the amount of $5,000,000 (the "June 2006 Gulf Coast Note" and
collectively with the Gulf Coast Note, the "Gulf Coast Notes"). In connection
with the June 2006 Purchase Agreement, Gulf Coast also entered into an Amended
and Restated Mortgage, a Collateral Assignment; an Amended and Restated Secured
Term Note, and a Reaffirmation and Ratification Agreement. In connection with
Gulf Coast's entry into the June 2006 Purchase Agreement, we and Century entered
into a Reaffirmation and Ratification Agreement with Laurus (the "New Century
Reaffirmation Agreement").


-20-





We also
entered into a Reaffirmation and Ratification Agreement (the "New Century
Reaffirmation Agreement"), whereby Gulf Coast agreed to make a mandatory
prepayment of the outstanding balance on the June 2006 Gulf Coast Note in an
amount equal to $224,440.14 on July 5, 2006, which represented 80% of the
accrued revenue Gulf Coast received in connection with the June 2006 Asset
Purchase Agreement from December 1, 2005, the effective date of the June 2006
Asset Purchase Agreement, until the date the payment was made.





JUNE 2006
GULF COAST NOTE





In
connection with the June 2006 Purchase Agreement, Gulf Coast issued Laurus a
forty (40) month Secured Term Note in the amount of $5,000,000 (the "June 2006
Gulf Coast Note"), which accrued interest at the rate of 17.5% per year, and
which unpaid principal and unpaid accrued interest, if any, was due and payable
on October 30, 2009 (the "Maturity Date"). The interest on the June 2006 Gulf
Coast Note was payable monthly, in arrears, commencing on July 1, 2006.
Additionally, amortizing payments of the principal amount due under the June
2006 Gulf Coast Note was due July 1, 2006, and each succeeding month thereafter
including the Maturity Date (each an "Amortization Amount").





Each
monthly Amortization Amount was equal to the product of (i) one-eighth (.125)
times (ii) eighty percent (80%) of the gross proceeds paid to Gulf Coast in
respect of all oil, gas and/or other hydrocarbon production in which Gulf Coast
has an interest less (i) the reasonable ordinary day to day expenses associated
with Gulf Coast's operation of the leases, wells and equipment, including fuel,
materials, labor, maintenance, routine production equipment replacement,
repairs, routine workover costs to maintain production from an existing
completed well, royalty, severance tax and ad valorem tax, in each case using
accounting practices and procedures ordinary and customary in the oil and gas
industry and (ii) Gulf Coast's reasonable estimate of its federal tax (including
federal income tax) liability (after taking into account all applicable
deductions, depletion and credits), all of which, in each case, shall be subject
to Laurus' approval, which approval shall be provided in the exercise of Laurus'
reasonable discretion based on such supporting documentation from Gulf Coast as
Laurus shall request (the "Net Revenue").





Gulf
Coast used $4,450,000 of the funds received through the sale of the Gulf Coast
Note to purchase the remaining 1/8th of certain undivided interests in producing
properties as well as undeveloped oil and gas mineral leases totaling 9,167
acres and other related assets and contracts in McMullen County, Texas, of which
Gulf Coast purchased 7/8th of on April 28, 2006; $175,000, representing 3.5% of
the June 2006 Gulf Coast Note, to Laurus Capital Management, LLC ("LCM"), as a
management fee, as well as an additional $30,000 in due diligence and
documentation fees to LCM; $33,125 to Laurus' attorneys
for legal and escrow agent fees; with the remaining $311,874 to be used by Gulf
Coast for future drilling expenses.


-21-





The June
2006 Gulf Coast Note was repaid in full in connection with funds received from
Laurus in connection with the sale of the December 2006 Note as described in
greater detail below.





JUNE 2006
GULF COAST ACQUISITION





On June
30, 2006, Gulf Coast entered into an Asset Purchase Agreement (the "June 2006
Asset Purchase Agreement") and closed the purchase of all of the working
interest owned by J&P Family Properties, Ltd. and Lara Energy, Inc. (the
"June 2006 Sellers") in producing properties as well as undeveloped oil and gas
mineral leases totaling 9,167 acres and other related assets and contracts in
McMullen County, Texas (the "June 2006 Assets"), of which Gulf Coast purchased
7/8th of on April 28, 2006. The purchase price of the June 2006 Assets was
$4,450,000, which amount was paid to the June 2006 Sellers from funds received
from Gulf Coast's sale of the June 2006 Gulf Coast Note to Laurus as described
above. The effective date of the June 2006 Asset Purchase Agreement, for the
purposes of the receipt of proceeds from the sale of hydrocarbon reserves was
December 1, 2005. As a result of the June 2006 Asset Purchase Agreement, Gulf
Coast holds a 100% working interest in the producing properties and undeveloped
oil and gas mineral leases totaling 9,167 acres in McMullen County, Texas, other
than one well on such property, in which Gulf Coast holds only a 75%
interest.





SEVENTH
AMENDMENT AGREEMENT WITH LAURUS





On or
about October 12, 2006, with an effective date of October 15, 2006, we entered
into a Seventh Amendment Agreement with Laurus (the "Seventh Amendment"), which
amended the terms of our Registration Rights Agreement with Laurus. The Seventh
Amendment extended the date we are required to have our Form SB-2 filing
effective with the Securities and Exchange Commission pursuant to the
Registration Rights Agreement to April 16, 2007. From May 2, 2006 to October 12,
2006, the date we entered into the Seventh Amendment Agreement, we entered into
a total of four Amendment Agreements with Laurus, the Fourth Amendment
Agreement, Fifth Amendment Agreement and Sixth Amendment Agreement, which
extended the date we were required to file our registration statement and obtain
effectiveness of such registration statement pursuant to the Registration Rights
Agreement.





EIGHTH
AMENDMENT AGREEMENT





On or
about December 5, 2006, we entered into the Eighth Amendment Agreement (the
"Eighth Amendment") with Laurus, whereby we amended the terms of the Warrant and
Options to add a cashless conversion feature, whereby Laurus may exercise the
Warrant and Options and receive an amount of shares of common stock equal to the
number of shares exercised multiplied by the exercise price of the security
divided by the Fair Market Value of our common stock (as defined in the Warrant
and Options).


-22-





Laurus
also agreed that we would no longer be bound by the Registration Rights
Agreement, and therefore no longer be required to register the shares of common
stock issuable to Laurus in connection with the conversion of the Note or
exercise of the Options.





Laurus
agreed pursuant to the Eighth Amendment that it would not be able to affect a
cashless exercise of the Warrant shares until December 4, 2007. Additionally,
Laurus agreed that it would not be able to affect a cashless exercise of the
Option shares, until the earlier of (i) the date the shares of common stock
exercisable in connection with the Warrant are registered pursuant to an
effective registration statement and (ii) December 4, 2007. Laurus also agreed
that if a registration statement covering all of the shares of common stock
issuable in connection with the exercise of the Warrant has been declared
effective and remains effective, Laurus would be required to pay cash to
exercise the Warrant, and the cashless exercise would not be available to
Laurus.





On or
about January 10, 2007, we entered into an Agreement to Rescind the Eighth
Amendment Agreement (the "Rescinding Agreement"), whereby we and Laurus agreed
to rescind the Eighth Amendment Agreement in its entirety, and that all of the
provisions of the Registration Rights Agreement, Options and Warrant which were
revised by the Eighth Amendment would be restored, and the Registration Rights
Agreement, Options and Warrant would have the same terms and conditions as they
had immediately prior to the parties entry into the Eighth Amendment
Agreement.





DECEMBER
2006 SECURED NOTE FINANCING





On
December 28, 2006, we entered into a Securities Purchase Agreement (the
"December 2006 Purchase Agreement") with Laurus, pursuant to which we sold
Laurus a Secured Term Note in the aggregate principal amount of $16,210,000 (the
"December 2006 Note").





The
December 2006 Note bears interest at the prime rate plus 2% per annum until paid
(which is subject to a floor of 8% per annum), which currently has an interest
rate of 10.25% per annum, with the prime rate as of March 27, 2007 of 8.25% per
annum. Interest due under the December 2006 Note is payable monthly in arrears
beginning on February 1, 2007. The maturity date of the December 2006 Note is
January 4, 2010. Amortizing payments are due pursuant to the December 2006 Note
beginning on July 1, 2007, and the first business day of each month thereafter
equal to $200,000. We have the right to prepay the December 2006 Note at any
time without any prepayment penalty. If an Event of Default occurs under the
December 2006 Note (as defined and described in the December 2006 Note), the
December 2006 Note bears interest at the applicable interest rate then in affect
plus an additional 2% per annum, and Laurus can declare 130% of the then entire
outstanding amount of the December 2006 Note due and payable.





In
connection with the sale of the December 2006 Note, we agreed to pay Laurus
Capital Management, L.L.C., the manager of Laurus, a closing payment equal to
$210,000. We also
reimbursed Laurus' for certain due diligence and document fees equal to $30,000.
The use of proceeds for the December 2006 Note is described in greater detail
below.


-23-





In
connection with the December 2006 Purchase Agreement, we, Century and Gulf
Coast, entered into a Reaffirmation and Ratification Agreement with Laurus,
whereby we agreed to ratify and confirm the terms of the June 30, 2005 closing
documents and related documents, the September 19, 2005 closing documents and
relating documents, the April 2006 closing documents and related documents, the
June 2006 closing documents and related agreements and the December 2006 closing
agreements and related agreements with Laurus, including the Second Restated
Convertible Term Note (as defined below), the Restated Term Note (as defined
below), the December 2006 Note, the $40,000,000 April 2006 Amended and Restated
Secured Term Note, and the $5,000,000 June 2006 Secured Term Note owed to Laurus
by Gulf Coast (collectively the "Closing Documents"); the events of default
under the Closing Documents and the fact that an event of default by us or our
subsidiaries under one of the Closing Documents would trigger an event of
default under every Closing Document; the grants of security interests to Laurus
in connection with Closing Documents; and we, Century and Gulf Coast agreed to
release Laurus, and Laurus' employees, agents, representatives, consultants,
attorneys, fiduciaries, officers, directors, partners, predecessors, successors
and assigns, from any and all actions and causes of action, judgments,
executions, suits, debts, claims, demands, liabilities, obligations, damages and
expenses of any and every character, known or unknown, direct and/or indirect,
at law or in equity, for or because of any matter or things done, omitted or
suffered to be done by any of the above, prior to and including the date of
execution of the Reaffirmation and Ratification Agreement and the Closing
Documents.





Gulf
Coast also entered into an Amended Guaranty with Laurus in connection with the
December 2006 Purchase Agreement, whereby Gulf Coast agreed to individually
guaranty the prompt payment by us of the amounts due under the Closing
Documents. We, Gulf Coast and Century also entered into a Master Security
Agreement in favor of Laurus, whereby we, Century and Gulf Coast granted Laurus
a continuing blanket security interest in all of Gulf Coast's, Century's and our
assets, including all of Gulf Coast's, Century's and our cash and cash
equivalents, all rights to oil and gas leases and contracts currently owned, and
any other oil and gas interests or contracts obtained by Gulf Coast, Century and
us in the future, all property, hydrocarbons, operating equipment and well data,
to secure the repayment of the Closing Documents and all other obligations and
liabilities owing to Laurus.





The
$16,210,000 received pursuant to the December 2006 Note was disbursed as
follows:





o
            $1,000,000
      to us to be used as our management determines is in the best interest of
      the Company;





o
            $10,000,000
      to Laurus for repayment of the amount owing under the $5,000,000 June 2006
      Gulf Coast Secured Term Note, with the
remaining


-24-


balance
to be applied to the principal of the April 2006 $40,000,000 Amended and
Restated Secured Term Note;





o
            $210,000
      to Laurus Capital Management, L.L.C. for management
  fees;





o
            $30,000
      to Laurus for due diligence and document
fees;





o
            $3,000
      to Loeb & Loeb LLP, as an escrow fee;
and





o
            $4,967,000
      to our restricted bank account with Laurus at North Fork Bank, which
      amount is to be held by the bank as security for our obligations under the
      Closing Documents, with $1,500,000 payable to us every ninety days until
      the entire amount of the $4,967,000 is received by us, which amount shall
      be disbursed to us in Laurus' sole
discretion.





In
connection with the closing of the December 2006 Purchase Agreement, we and
Laurus entered into a Second Amended and Restated Secured Term Note (the "Second
Restated Term Note"), which amended the terms of our $9,500,000 Secured Term
Note with Laurus, as amended and restated (the "Restated Convertible Note"), and
a Second Amended and Restated Secured Convertible Term Note (the "Second
Restated Convertible Note"), which amended the terms of our $15,000,000 Secured
Convertible Term Note with Laurus, as amended and restated (the "Term
Note").





The
Second Restated Term Note revised the amortization payments required under the
original Amended and Restated Secured Convertible Term Note (the "Restated
Convertible Note"). Under the Restated Convertible Note, we were obligated to
make monthly amortization payments under the Restated Convertible Note of
$250,000 per month until the Restated Convertible Note was due and payable on
June 30, 2008. The Second Restated Convertible Note revised the amortization
payments we are required to make such that, beginning January 1, 2007, though
December 31, 2007, we are required to make monthly amortization payments of
$100,000, and beginning January 1, 2008, through June 30, 2008, we are required
to make monthly amortization payments of $250,000 per month.





The
Second Restated Term Note amended the maturity date of the Restated Term Note
from January 2, 2007, until July 2, 2007, and revised the amortization language
of the Restated Term Note, to provide for the monthly amortization amount due
under the note to equal the greater of (i) eighty percent (80%) of the gross
proceeds paid to us in respect of oil, gas and/or other hydrocarbon production
arising from our 7.15% working interest in the Wishbone Field in the
Lindholm-Hanson Gas Unit located in McMullen County, Texas, and (ii) the monthly
interest payment, equal to 20% per annum, payable monthly in
arrears.




-25-




RESEARCH AND DEVELOPMENT




We
currently own licenses to 3-D seismic surveys and data over the South Sargent
Field, Prado Field, the San Miguel Creek Field, and Mustang Creek Field which we
plan to continue reprocessing and interpretation efforts on.





EMPLOYEES





We have
six (6) contract employees, four (4) of whom are employed in field operations.
We also have four (4) full time employees who work for us, our Chief Executive
Officer, Edward R. DeStefano (who also serves as President, Chief Financial
Officer, Treasurer, Secretary and Director), and our controller, an accountant
and an administrative assistant.





COMPETITION





We face
competition from numerous other oil and gas exploration and development
companies, which have greater resources than we do and may be better able to
find and extract commercial quantities of oil and gas and may be able to offer
their oil and gas products at prices lower than we can.





PATENTS,
TRADEMARKS AND LICENSES





As an oil
and gas operator in Texas, we are required to have a Texas Railroad Commission
Operator number, which number is 141835. Additionally, we are required to, and
have certain bonds in connection with our oil and gas exploration activities. We
may also be required to obtain other permits from government agencies depending
on the location of future exploration plans. We do not currently hold any
patents or trademarks.





GOVERNMENT
REGULATION





Various
federal, state and local laws regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment,
directly impact our oil and gas exploration, development and production
operations, and consequently may impact our operations and costs. These
regulations include, among others, (i) regulations by the Environmental
Protection Agency and various state agencies regarding approved methods of
disposal for certain hazardous and non-hazardous wastes; (ii) the Comprehensive
Environmental Response, Compensation, and Liability Act, Federal Resource
Conservation and Recovery Act and analogous state laws which regulate the
removal or remediation of previously disposed wastes (including wastes disposed
of or released by prior owners or operators), property contamination (including
groundwater contamination), and remedial plugging operations to prevent future
contamination; (iii) the Clean Air Act and comparable state and local
requirements which may result in the gradual imposition of certain pollution
control requirements with respect to air emissions from our operations; (iv) the
Oil Pollution Act of 1990 which contains numerous requirements relating to the
prevention of and response to oil spills into waters of the United States; (v)
the Resource Conservation and Recovery Act which is the principal federal
statute governing the treatment, storage and disposal of hazardous wastes; and
(vi)
state regulations and statutes governing the handling, treatment, storage and
disposal of naturally occurring radioactive material. 
Management


-26-





believes
that we are in substantial compliance with applicable environmental laws and
regulations. To date, we have not expended any material amounts to comply with
such regulations, and management does not currently anticipate that future
compliance will have a materially adverse effect on our consolidated financial
position, results of operations or cash flows. However, if we are deemed not to
be in compliance with applicable environmental laws, we could be forced to
expend substantial amounts to be in compliance, which would have a materially
adverse effect on our available cash and liquidity.





ITEM 2. DESCRIPTION OF
PROPERTY





OFFICE
SPACE





We
entered into an amended lease with Essex Tanglewood Investors, L.P., a Texas
limited partnership, in connection with our office space lease at 5851 San
Felipe, Houston, Texas, on August 17, 2005 (the "Lease"). The Lease encompasses
approximately 1,032 square feet of office space. The Lease term is until
September 30, 2010. The monthly rent under the Lease is $1,952 per month from
September 1, 2005 until March 31, 2006; $2,959 per month from April 1, 2006 to
June 30, 2006; and $3,042 per month from July 1, 2007 until September 30, 2010.
The lease may not be terminated by us prior to its stated expiration. We
increased the square footage we rent during 2005 and 2006, in connection with
increases of the number of personnel on our staff.





OIL AND
GAS PROPERTIES





1.)
OPERATED PROPERTIES:





The
Company operates oil and gas properties in Texas under the name of Century
Resources, Inc., a wholly owned subsidiariy of the Company. Century Resources,
Inc. a bonded operator with the Railroad Commission of Texas and our Operator
number is 141835. Of the properties we operate, our working interest ownership
ranges from 80% in the Sargent South Field, to 100% in the San Miguel Creek,
Mustang Creek and Tenna Fields.





SARGENT
SOUTH FIELD- MATAGORDA COUNTY, TEXAS





The
Company acquired 100% of the working interest in the Sargent South Field from
Calpine Natural Gas (NYSE) and its partner, ("Calpine") in January 2004. The
Sargent South Field is located onshore in Matagorda County, Texas, east of
Matagorda Bay. The leasehold is approximately 3,645 acres. Currently, there are
five (5) producing wells on the Hamill Lease; Hamill #2, Hamill #10, Hamill #11,
Hamill #14 and Hamill #17, with daily production in excess of approximately
1,000 MCF of gas per day, (MCFGPD) however,
the Company can provide no assurance that the wells will continue to produce at
this rate, if at all.


-27-


At the
time of this acquisition there were two producing wells, the Hamill #2 and
Hamill #19. In March 2004, the Company recompleted a shut-in well on the lease,
Hamill #10 and established production in the 3,345 foot sand. One of the
original producing wells acquired from Calpine, the Hamill #19 ceased flowing
gas in May of 2004 after producing 615 MMCF of gas from the original completion
at 3,917 foot. This Hamill #19 well was recompleted by the Company in July 2004,
in a sand at 4,324 feet and this sand produced 107 MMCF of gas until it was
depleted in October 2004. A workover was attempted in 2006 on the Hamill #19 at
the 6,700 sand level, however this sand proved to be non-productive. The Hamill
#19 is currently shut-in and nonproducing. During 2007, the Company may attempt
a possible deepening outside of the casing.





A license
to a 10 square mile 3-D seismic survey ("3-D") was also acquired from Calpine
and this 3-D has been reprocessed, along with some recently purchased 2-D
seismic lines. The final reprocessing work was completed in the second quarter
of 2006. Interpretation of the data is underway and a result of this
interpretation project is expected to be completed in the second quarter of
2007. New drilling locations have been identified on this lease for drilling in
2007. The seismic and geological 3-D interpretation project process will be an
ongoing process, over 2007 and 2008. When the results from any new wells are
drilled on this lease, the data from the new wells will be integrated into and
used to update our ongoing interpretation project.





The
Company has an ongoing workover and recompletion project underway in the Sargent
South Field. The first well work began in January 2005, when work over
operations were commenced on the Hamill #17 well, which had been shut-in since
2001 by the previous owner and operator. The wellhead and surface equipment were
replaced and remedial operations commenced to drill out and remove various
cement and cast iron bridge plugs set inside the well casing by previous
operators. The well bore was cleaned out to a depth of 4,500 feet, and tests
were run in the well to evaluate potential productive sands in this well. In
March 2005, the Hamill #17 well was recompleted in a stray sand at 4,230 feet;
and is currently producing gas at the rate of approximately 100 MCF per day on
an 8/64 inch choke. Additional probable and proven behind pipe gas sands have
been identified in the Hamill #17 well for future recompletion attempts, when
the current completion at 4,230 feet depletes.





During
June 2005, work over operations commenced on the Hamill #14 well, which had also
been shut-in since 2001. The wellhead and surface equipment were repaired and
remedial operations commenced to drill out and remove a number of cement and
cast iron bridge plugs set inside the well casing by previous operators. The
well bore was cleaned out to a depth of 5,905 feet, and tests were run in the
well to evaluate potential productive sands in this well. In March 2005, the
Hamill #17 well was recompleted in a stray sand at 4,230 feet; and is currently
producing gas at the rate of 100 MCF per day on an 8/64 inch choke with a
flowing tubing pressure of 460  pounds
per square inch ("psi").  Additional probable
and proven behind pipe gas sands have been identified in the Hamill #17 well for
future recompletion attempts, if and when the current completion at 4,230 feet
depletes.


-28-





During
August 2006, a third workover operation commenced on the Hamill #10 well after
the well ceased producing gas during August 2006. Remedial operations commenced
to clean out produced sand from the well bore and a sand control screen and
gravel pack were installed in the well. Production was restored on September 5,
2006 to 3,270 feet. Additional probable and proven reserves behind pipe gas
sands have been identified in the Hamill #10 well for future recompletion
attempts, when the current completion at 3,270 feet depletes. This well is
currently producing at the rate of approximately 345 MCF per day on a 7/64 inch
choke, with a flowing pressure of 650 psi.





During
August 2005 work over operations commenced on the Hamill #2 well. This well was
a marginal producer and we removed a number of cast iron bridge plugs set inside
the well casing by previous operators. The well was cleaned out to a depth of
6,170 feet. In October of 2005, the Hamill #2 was recompleted in the 5,940 foot
sand at the rate of 950 MCF per day. During the first quarter of 2006 the Hamill
#2 well was shut in due to the formation sand entering the well bore. The well
was cleaned out and gravel packed in March of 2006 and the well is currently
producing at the rate of approximately 320 MCF per day on a 7/64 inch choke,
with a flowing tubing pressure of 550 psi.





During
November of 2005, work over operations commenced on the Hamill #11 well. This
well was a marginal producer and we removed a number of cast iron bridge plugs
set inside the well casing by previous operators. The well was cleaned out to a
depth of 6,000 feet. In February of 2006, the Hamill #11 was recompleted in the
2,760 foot sand at the rate of 275 MCF per day. The well is currently producing
at the rate of 55 MCF per day on a 7/64 inch choke, with a flowing tubing
pressure of 240 psi.





During
August of 2006, re-entry operations commenced on-Hamill #1-R well, that was
originally drilled by Gulf Oil Corporation to a depth of 16,200 feet in 1961 and
subsequently plugged and abandoned by Gulf in June 1967. Recent operations
included milling out and removing numerous cement and bridge plugs set in the
well when it was originally abandoned by Gulf. The well has been cleaned out to
a depth of 11,000 feet inside the existing 9-5/8” casing. Cased hole logs were
run in the well in October of 2006 and the well is being evaluated for possible
gas sands for testing and possible production. The first recompletion attempted
in November of 2006, at a depth of 5,560 feet produced gas, but in
non-commercial quantities. The Hamill #1-R well is currently temporarily
abandoned.





Compression
was installed in the Sargent Field during July of 2006. Presently three
producing wells are on compression, wells numbers 11, 14 and 17.  On or
about March 16, 2007, our working interest partner in the South Sargent field,
Aquatic Cellulose International Corporation (“Aquatic”) executed a Partial
Assignment of Oil and Gas Lease and Bill of Sale whereby Aquatic conveyed to
Century Resources Inc., all of Aquatic’s rights, title and interest in Hamill
and Hamill leasehold for all depths below a depth of 7,000 feet below the
surface. In addition, Aquatics assigned all of its interests, regardless of
depth, in Hamill & Hamill well numbers Nos. 19 and 1-R. In return, we repaid
Aquatics all deposits made toward the Hamill 1-R workover and released Hamill of
all prior commitments made regarding that well.


-29-


SAN
MIGUEL CREEK FIELD- MCMULLEN COUNTY, TEXAS





The San
Miguel Creek Field is located in north central McMullen County, Texas, near its
border with Atascosa County, approximately 75 miles due south of San Antonio,
Texas. The Company currently owns and operates the 200-acre Herrera Lease and
the 40-acre Wheeler #2 lease in this field (240 acres total). The Company now
controls 100% of the working interest on these leases and wells. A new 3D
seismic survey was recently completed in this field, and this data will help
identify further drilling locations in the Wilcox formation at 6,000 feet and
possibly deeper targets down to 14,000 feet on our acreage. We acquired
approximately a 30 square mile portion of this new 3-D seismic survey, and
interpretation of the data is underway. We believe the 3D seismic will help us
delineate additional drilling prospects on our acreage. To date two new drilling
locations have been identified and the Herrera #9 well was drilled in February
2007 and completed as an oil producer.





MUSTANG CREEK FIELD AREA WELLS-
McMULLEN AND ATASCOSA COUNTIES, TEXAS.





On April
28, 2006, the Company’s then newly formed wholly owned subsidiary, Gulf Coast
Oil Corporation (“Gulf Coast”), acquired the majority working interest and
operations over developed and undeveloped oil and gas mineral leases totaling
9,167 acres in the Mustang Creek Field area in McMullen and Atascosa Counties,
Texas. On June 30, 2006, Gulf Coast acquired the remainder of the working
interest ownership from another group of owners, in this same group of leases
and producing wells. As a result of the June 30, 2006 closing, Gulf Coast now
owns a combined 100% working interest in 10 oil wells and one gas well and a 75%
working interest in one additional oil well. The effective date for ownership
for both acquisitions was December 1, 2005. The following table summarizes Gulf
Coast’s ownership in the producing wells as of June 30, 2006:





Schedule
of Acquired and Recently Drilled Wells and Mineral Interests in Mustang Creek
Area Wells:





WORKING
              
              NET
      REVENUEWELL
      NAME
              
              INTEREST
              
              INTERESTHODDE
      #1
              
              100
      %
              
              0.7700
      %DOUBLE
      K #2
              
              100
      %
              
              0.7700
      %DOUBLE
      K #3
              
              100
      %
              
              0.7700
      %KASSNER
      #1
              
              100
      %
              
              0.7700
      %KASSNER
      #2
              
              100
      %
              
              0.7700
      %TYLER
      RANCH UNIT WELL #1
              
              100
      %
              
              0.77375
      %PEACOCK
      #1
              
              100
      %
              
              0.7700
      %POWERS-SWAIM
      UNIT WELL #1
              
              100
      %
              
              0.7700
      %SWAIM
      58-1
              
              100
      %
              
              0.7700
      %WHEELER
      #1
              
              75
      %
              
              0.4375
      %RABKE/MASPERO
      UNIT #1
              
              100
      %
              
              0.77375
      %CAJUN
      CAPER UNIT #1
              
              100
      %
              
              0.75517154
      %RABKE#2
              
              100
      %
              
              0.75
      %RABKE/MASPERO
      UNIT #2
              
              100
      %
              
              0.75
      %
 
 
 -30-
  Mustang
Creek Field area is located approximately 75 miles south of San Antonio, Texas.
Geologically, the Mustang Creek field area is located on the San Marcos Platform
back reef of the Cretaceous Stuart City and Sligo reef trends. The field
produces oil and gas from sands trapped against Wilcox faults from depths
between 3,000 feet and 6,200 feet, which wells commonly have multiple Wilcox pay
sands. In 2004, a new 65 square mile 3-D seismic survey was completed which
helped recognize and delineate numerous shallow Wilcox anomalies. Gulf Coast
acquired 9,167 acres of developed and undeveloped leases from Manti Operating
Company and its partners, along with the recently drilled producing wells noted
in the table above. In addition to the producing wells, in July of 2006, Gulf
Coast acquired a license to approximately 35 square miles of the new 3-D seismic
data and has commenced an interpretation project to further delineate additional
Wilcox drilling opportunities and possibly drilling targets at deeper
depths.
 
 During
the third quarter of 2006, we identified approximately twenty (20) un-drilled
seismic anomalies based on our 3-D seismic interpretation project. We have
contracted with an independent drilling company for drilling approximately ten
(10) locations. As of March 31, 2007, we had drilled three successful wells, the
Swaim 58-2, Rabke #2 and the Rabke Maspero Unit #2 wells. We had also drilled
two dry holes, the Kassner #3 and the Rabke #1. We are continuing our drilling
program into 2007. In July 2006, Tyler Ranch Well Unit #1, the only gas well on
Mustang Creek field ceased producing, it remains shut in and non operational.
 
 During
the first quarter of 2007, work over operations were completed on the Kassner
#2. This well was non operating at the time it was purchased in 2006.  As of
March 31, 2007, current daily 8/8ths production from the producing wells listed
above was approximately 550 barrels of oil equivalent per day (BOPD) from
thirteen producing oil wells.
 
 TENNA
(HILLJE SAND) FIELD- WHARTON COUNTY, TEXAS
 
 The
Company acquired 100% of the working interest in three (3) wells in the Tenna
field in July 2003. The field is located on county road 1300 in western Wharton
County, Texas, approximately 60 miles southwest of Houston, Texas. The Hillje
Sand was discovered in 1991 and has been an oil and gas producer at a shallow
depth of 4,100 feet. A newer 3-D seismic survey has been shot over the field and
the surrounding area and we are in discussions to acquire a portion of the
survey to reprocess and interpret, of which there can be no assurance. There are
mapped attic oil locations on our leases and we anticipate drilling a new well
location(s) in 2007, of which there can be no assurance.
  -31-
 2.)
NON-OPERATED PROPERTIES: WISHBONE FIELD - LINDHOLM HANSON GAS UNIT- McMULLEN
COUNTY, TEXAS:
 
 As of
January 3, 2006, the Company owns a 15.20% non-operated working interest with a
12.214% net revenue interest in the Wishbone Field in McMullen County, Texas,
which is operated by U.S. Enercorp, LTD, headquartered in San Antonio, Texas.
The Company acquired its interest in the Wishbone Field through three (3)
separate transactions. In June of 2005, it acquired a 6.2% working interest and
5.464% net revenue interest. In September of 2005, it acquired a 7.25% working
interest and 5.4375 net revenue interest. In January of 2006, it acquired a
1.75% working interest and 1.3125% net revenue interest. The total combined
interest now owned by the Company is a 15.20% working interest and 12.214% net
revenue interest.
 
 The field
was discovered in 2004 after the successful drilling of the Linholm-Hanson Gas
Unit #1 Well, operated by U.S. Enercorp LTD of San Antonio Texas. The field
produces from Upper Wilcox sands at an average depth of approximately 12,800
feet. All of the producing wells in the Linholm-Hanson Gas Unit have been
fracture stimulated using approximately 400,000 pounds of 20/40 proppant.
Initial producing rates after stimulation in a number of wells has exceeded
15,000 MCFGPD per well. As of January 1, 2006, there are ten (10) producing
wells in the 640 acre unitized Linholm-Hanson Gas Unit. Cumulative production in
the field has been approximately 21 billion cubic feet of gas (Bcf). Well log
analysis indicates probable and possible oil and gas production at shallow
depths in the Wishbone Field. Potential future production may be achieved in the
Slick sand, the 9,100 foot sand, the Hostetter sand and the Tom Lyne sands,
ranging in depth from 7,000 feet to 11,000 feet, of which there can be no
assurance.
 
 Since the
Company acquired its working interest in the Wishbone field, we have
participated in drilling an additional three (3) new wells with in the unitized
Wishbone field. LH Gas Unit #10 was drilled in July of 2005. LH Gas Unit #11 was
drilled in September of 2005. LH Gas Unit #9 was drilled in December of 2005.
The Company also participated in drilling of the Lindholm Fee #1 in September of
2005, this well is not a part of the Lindholm-Hanson Gas unitized gas field and
our working interest is smaller in this well at 12.10%.
 
 RECENT
DEVELOPMENTS IN WISHBONE FIELD
 
 The
Lindholm Hanson Gas Unit Well #1 was recompleted in December 2006 by plugging
off the old perforations in the Wilcox House 3 Sand, and recompleting in the
Wilcox House 2 sand with perforations at 12,310 to 12,324 feet. The new
completion has not been acidized or frac treated, and is currently producing at
a rate of 2,980 MCFGPD with a flowing tubing pressure of 2,500 psi.
 
 The
following chart represents the net revenue interest to the Company in L-H Gas
Unit and Lindholm Fee #1 for the year ended December 31, 2006.
 Well
              
              Revenue
              
              Production
                  Taxes
              
              Lease
      Operating Expenses
              
              Net
      RevenueLH-Gas
      Unit #1
              
              $
              124,914
              
              $
              (6,786
              )
              $
              (13,684
              )
              $
              104,444LH-Gas
      Unit #2
              
              
              527,245
              
              
              (29,910
              )
              
              (43,908
              )
              
              453,427LH-Gas
      Unit #3
              
              
              361,682
              
              
              (20,449
              )
              
              (26,982
              )
              
              314,251LH-Gas
      Unit #4
              
              
              661,482
              
              
              (35,998
              )
              
              (46,116
              )
              
              579,368LH-Gas
      Unit #5
              
              
              692,748
              
              
              (39,095
              )
              
              (42,596
              )
              
              611,057LH-Gas
      Unit #7
              
              
              -
              
              
              -
              
              
              (1,831
              )
              
              (1,831
              )LH-Gas
      Unit #8
              
              
              125,502
              
              
              (5,217
              )
              
              (12,917
              )
              
              107,368LH-Gas
      Unit #9
              
              
              705,279
              
              
              (40,698
              )
              
              (30,531
              )
              
              634,050LH-Gas
      Unit #10
              
              
              497,049
              
              
              (27,633
              )
              
              (32,715
              )
              
              436,701LH-Gas
      Unit #11
              
              
              953,391
              
              
              (58,092
              )
              
              (46,471
              )
              
              848,828Lindholm
      Fee #1
              
              
              22,147
              
              
              (664
              )
              
              (6,231
              )
              
              15,252Total
              
              $
              4,671,439
              
              $
              (264,542
              )
              $
              (303,982
              )
              $
              4,102,915


Current
well status in the Lindholm-Hanson Gas Unit and Lindholm Fee #1 at March 1,
2007:
  Well
                
                Status
                
                Daily
      8/8THS
                  Production
      (Mcf)
                
                Net
      RevenueInterest(Mcf)LH-Gas
      Unit #1
                
                Producing
                
                2,980
                
                364LH-Gas
      Unit #2
                
                Producing
                
                1,186
                
                145LH-Gas
      Unit #3
                
                Producing
                
                904
                
                110LH-Gas
      Unit #4-C
                
                Producing
                
                290
                
                35LH-Gas
      Unit #4-T
                
                Producing
                
                567
                
                69LH-Gas
      Unit #5
                
                Producing
                
                1,470
                
                179LH-Gas
      Unit #7
                
                Shut-in
                
                0
                
                0LH-Gas
      Unit #8
                
                Producing
                
                510
                
                62LH-Gas
      Unit #9
                
                Producing
                
                928
                
                113LH-Gas
      Unit #10
                
                Producing
                
                745
                
                91LH-Gas
      Unit #11
                
                Producing
                
                1,293
                
                158Lindholm
      Fee #1
                
                Producing
                
                90
                
                8Daily
      totals in MCF ofGas
                
                
                
                10,963
                
                1,334




PRADO
FIELD LEASES, JIM HOGG COUNTY, TEXAS.
 
 In June
2004, the Company acquired leases in the Prado Field comprising 1,280 acres in
Jim Hogg County, Texas. The former owner was JMI Energy Inc., of Houston, Texas
("JMI"). As of January 1, 2006, there were four (4) active wells on this lease
and twenty (20) inactive well bores. In July 2004, under the terms of the
Aquatic Agreement, Aquatic exercised its option to participate for a 50% working
interest in this acquisition by purchasing a 50% working interest from the
Company.
 
 On April
26, 2005, the Company and Aquatic Cellulose (a co-owner in the Prado Field
leases) entered into a Development Agreement relating to the Prado Field
interests with Strong Petroleum Group, Inc. (a Texas corporation hereinafter
"Strong") to invest and participate in the re-development of the Company's Prado
field interests (the "Prado Assets" and the "Development Agreement"). The
Development Agreement had an effective date of April 1, 2005 under which Strong
was entitled to receive a Partial Assignment of the interests in the Prado
Field, if Strong completed the Work Program before
September 21, 2006. However, none of the required tasks were completed by Strong
in accordance with the required schedule.
  -32-
  
 Strong
did not earn any assignment in the Prado Assets and as a result of its
non-performance, Strong redelivered to the Company all of the property and
documents associated with the Prado Assets and, Strong's rights terminated with
respect to any and all producing wells associated with the Prado Assets,
effective September 21, 2006, and Strong has executed a Release of Rights
indicating that it does not own or claim any interest in the Prado Assets.
 
 Also, in
September of 2006, the Company purchased the fifty percent (50%) working
interest formerly owned by Aquatic Cellulose in the Prado Field for a cash
payment of $300,000. The Company now owns 100% of the working interest in the
Prado Field production and we are also finalizing a seismic and geological
interpretation of the field for possible future drilling and exploitation.
 
 OTHER
INDUSTRY AGREEMENTS
 
 The
Company has executed agreements with other oil and gas companies and other
industry investors who are interested in participating in the Company's
exploration and production activities.
 
 GEOPHYSICAL
INTERPRETATION AGREEMENT:
 
 In July
2005, the Company executed a Geophysical Interpretation & Exploration
Agreement (“Seismic Agreement”) with Viking International Petroleum, L.L.C.
(“Viking”) which was later amended in May of 2006. Under the Seismic Agreement,
Viking committed to reprocess the Company’s 3-D seismic data base in Matagorda
County, Texas using its proprietary technology for the purpose of reprocessing
the seismic data, identifying new well locations and to provide structural
interpretations and mapping as requested by the Company. Under the original and
amended agreement, in return for reprocessing and interpretation work, the
Seismic Agreement provides for Viking to earn an overriding royalty as it sole
compensation. Under the May 2006 amendment, Vikings earning rights were limited
to a Common Area, any and all other acreage previously covered by the original
July 2005 agreement and outside of the Common Area was released, and is no
longer subject to an overriding royalty as if the original agreement had never
existed. Under the May 2006 amendment Viking retained the right but not the
obligation to participate for between 10% and up to 50% of the working interest,
on a well bore only basis, of any new productive well drilled in the Common
Area. Century Resources, Inc. shall be the operator with respect to any
operations that occur in the Common Area.
 
 -33-
  OIL AND
GAS ACREAGE, PRODUCTIVE WELLS, AND DRILLING ACTIVITY DISCLOSURE OF OIL AND GAS
OPERATIONS:
  COMPARISON
OF AVERAGE SALES PRICES OF OIL AND GAS SOLD BY THE COMPANY FOR THE LAST THREE
FISCAL YEARS OPERATED AND NON-OPERATED PROPERTIES:
  2006
                
                
                2005
                
                
                2004AVERAGE
      SALE PRICE OF OIL(Per
      bbl.)
                
                $
                62.87
                
                
                $
                53.63
                
                
                $
                39.78AVERAGE
      SALE PRICE OF GAS(PER
      MCF)
                
                $
                5.99
                
                
                $
                7.10
                
                
                $
                5.08
 
  ANNUAL
NET SHARE OF OIL PRODUCTION FROM COMPANY OPERATED PROPERTIES FOR THE LAST
THREE FISCAL YEARS:
 
 2006
                
                2005
                
                2004Barrels
                
                Barrels
                
                BarrelsMUSTANG
      CREEK FIELD
                
                
                173,097
                
                --
                
                
                --SAN
      MIGUEL CREEK FIELD
                
                
                9,938
                
                8,143
                
                
                12,174TENNA
      FIELD
                
                
                7,811
                
                7,099
                
                
                7,071ANNUAL
      TOTALS
                
                
                190,846
                
                15,242
                
                
                19,245
 
 ANNUAL
NET GAS PRODUCTION FROM COMPANY OPERATED PROPERTIES FOR THE LAST THREE
FISCAL YEARS:
  
 2006
                
                2005
                
                2004SARGENT
      SOUTH FIELD (MCF)
                
                
                318,229
                
                164,965
                
                
                162,357TYLER
      RANCH GAS UNIT #1 (MCF)*
                
                
                105,861
                
                --
                
                
                --TOTAL
                
                
                424,090
                
                164,965
                
                
                162,357
 
 *In July
2006 the TYLER RANCH GAS UNIT #1 well stopped producing and in now shut-in and
non operational.
 
 ANNUAL
NET GAS PRODUCTION FROM NON-OPERATED PROPERTIES FOR THE LAST THREE FISCAL
YEARS:
 
 2006
                
                2005
                
                2004WISHBONE
      FIELD-LINDHOLM
      HANSONGAS
      UNIT(MCF)
                
                
                715,624
                
                1,374,755
                
                
                627,512
 -34-
 The
table below sets forth the net quantities of oil and gas production (net of all
royalties, overriding royalties and production due to others) attributable to
New Century Energy Corp. for the fiscal years ended December 31, 2006 and 2005,
and the average sales prices, average production costs and direct lifting costs
per unit of production.
 
 Years
      Ended December 31,2006
                2005Net
      ProductionOil
      (Bbls)
                
                190,846
                15,242Gas
      (MMcf)
                
                424,090
                164,965Average
      Sales PricesOil
      (per Bbl)
                
                $  62.87
                $  53.63Gas
      (per Mcf)
                
                $    5.99
                $    7.10Average
      Production Cost1Per
      equivalentBbl
      of oil
                
                $  45.70
                $  75.14Average
      Lifting Costs2Per
      equivalentBbl
      of oil
                
                $    8.41
                $  24.18
 
 
 1Production costs include depreciation, depletion, and amortization, lease
operating expenses and all associated taxes.
 
 2 Direct
lifting costs include lease operating expenses and all associated taxes but do
not include impairment expense, ceiling write-down, or depreciation, depletion
and amortization.
 OIL AND
GAS ACREAGE
 
 In the
data below, "gross" represents the total acres or wells in which we own a
working interest and "net" represents the gross acres or wells multiplied by the
Company's working interest percentage. The following table sets forth New
Century's and subsidiary’s acreage position at December 31, 2006:
  DEVELOPED
                    
                    UNDEVELOPEDGROSS
                    
                    NET
                    
                    GROSS
                    
                    NETGoliad
      County, TX
                    
                    
                    269
                    
                    
                    269
                    
                    
                    183
                    
                    
                    183Jim
      Hogg County, TX
                    
                    
                    1,280
                    
                    
                    640
                    
                    
                    0
                    
                    
                    0Matagorda
      County, TX
                    
                    
                    3,645
                    
                    
                    2,916
                    
                    
                    0
                    
                    
                    0(onshore)Matagorda
      County, TX
                    
                    
                    0
                    
                    
                    0
                    
                    
                    1,610
                    
                    
                    1,288(offshore)McMullen
      County, TX
                    
                    
                    240
                    
                    
                    240
                    
                    
                    0
                    
                    
                    0(San
      Miguel Creek Field)McMullen
      County, TX
                    
                    
                    720
                    
                    
                    109
                    
                    
                    0
                    
                    
                    0(Wishbone
      Field)McMullen
      County, TX
                    
                    
                    4,156
                    
                    
                    4,136
                    
                    
                    5,011
                    
                    
                    5,011(Mustang
      Creek Field)Wharton
      County, TX
                    
                    
                    100
                    
                    
                    100
                    
                    
                    0
                    
                    
                    0Total
                    
                    
                    10,410
                    
                    
                    8,410
                    
                    
                    6,804
                    
                    
                    6,482




The
Company's net undeveloped acreage, subject to expiration in 2007 is 0 acres, the
expiration of the balance of undeveloped acreage is 5,194 acres in 2008; and
1,288 acres in 2011.
 
 PRODUCTIVE WELLS
 
 The
following table sets forth our gross and net productive oil and natural gas
wells at December 31, 2006:




PRODUCING
              
              OIL
      WELLS
              
              PRODUCING
              
              GAS
      WELLSGROSS
              
              NET
              
              GROSS
              
              NETJim
      Hogg County, TX
              
              
              2
              
              
              2
              
              
              0
              
              
              0Matagorda
      County, TX
              
              
              0
              
              
              0
              
              
              5
              
              
              4McMullen
      County, TX
              
              
              17
              
              
              16.75
              
              
              12
              
              
              2.647Wharton
      County, TX
              
              
              2
              
              
              2
              
              
              0
              
              
              0TOTAL
              
              
              21
              
              
              20.75
              
              
              17
              
              
              6.647






-35-




DRILLING
ACTIVITY:
 
 The
following table sets forth the results of our drilling activities over the
three years ending December 31, 2006:
 
 OIL
      WELLS2006
                
                2005
                
                2004Oil
      Gross
                Wells
      Net
                
                Oil
      Gross
                Wells
      Net
                
                Oil
      Gross
                Wells
      NetExploratory
      Wells – Productive  (1)(2)
                1
                1
                
                0
                0
                
                0
                0Exploratory
      Wells- Non-productive    (1)(3)
                1
                1
                
                1
                .5
                
                0
                0Development
      Wells
                0
                0
                
                0
                0
                
                0
                0
 
 
 GAS
      WELLS2006
                
                2005
                
                2004Oil
      Gross
                Wells
      Net
                
                Oil
      Gross
                Wells
      Net
                
                Oil
      Gross
                Wells
      NetExploratory
      Wells – Productive   (1)(2)
                0
                0
                
                4
                .608
                
                0
                0Exploratory
      Wells-
      Non-productive       (1)(3)
                0
                0
                
                1
                .0419
                
                0
                0Development
      Wells
                0
                0
                
                0
                0
                
                0
                0
 
 (1) An
exploratory well is a well drilled either in search of a new, as yet
undiscovered oil or gas reservoir or to greatly extend the known limits of a
previously discovered reservoir. A development well is a well drilled with the
presently proved productive area of an oil or natural gas reservoir, as
indicated by reasonable interpretations of available data, with the objective of
completing in that reservoir.
 
 (2) A
productive well is an exploratory or development well found to be capable of
producing either oil or natural gas in sufficient quantities to justify
completion as an oil or natural gas well.
 
 (3) A
non-productive well is an exploratory or development well that is not a
producing well.
 
 In
2006, we drilled one productive exploratory well, the Rabke Maspero Unit Well
#2.  Drilling of this well was finalized on December 14, 2006 and the
well was logged on December 14, 2006.   Due to local flooding,
testing and completion of this new well did not take place until February of
2007.  Testing of this well was conducted on February 28, 2007 and
confirmed initial oil production of 72 Bopd.
 
 The
reserve report prepared by R.A. Lenser dated April 3, 2007, with an effective
date of December 31, 2006 (the “Lenser Report”), attributed 21,655 net barrels
of oil to the Company in this new well.
 
 The
reserve table in Note 19 to our audited Consolidated Financial Statements in our
original 10KSB filing for the year ended December 31, 2006, which is amended by
this amended report, did not include reserves added due to the drilling of the
Rabke Maspero Unit #2 well in the amount of 21,655 net barrels, and this amended
table correctly includes the Rabke Maspero Unit #2 well, as an upward addition
to proved reserves.
  SIGNIFICANT
OIL AND GAS PURCHASERS AND PRODUCT MARKETING


Oil and
gas sales are made on a day-to-day basis under short-term contracts at the
current area market price. For the quarter ended December 31, 2006, we had four
purchasers that each accounted for 10% or more of our oil and natural gas
revenues on Company operated properties. Two purchasers accounted for 100% of
crude oil sales. Gulf Mark Energy, Inc. purchases all of the crude oil produced
from our Mustang Creek Field wells; and Flint Hill Resources, Inc., acquires the
crude oil produced from our San Miguel Creek, Tenna Field and Prado Field oil
wells. Three separate purchasers individually accounted for 100% of sales of
natural gas products, Harvest Pipeline Company in the Company operated Sargent
South gas field, and Magnus Energy Marketing, Ltd. on the Company operated Tyler
Ranch Gas Unit well. (The Tyler Ranch Gas Unit ceased producing in July 2006 and
our gas contract on this property has terminated due to non-production).
Additionally, our non-operated properties had yet another purchaser that
individually accounted for 100% of sales of all natural gas production from the
Wishbone Field, for the year ended December 31, 2006.
  -36-
  Our
ability to market oil and natural gas depends on many factors beyond our
control, including the extent of domestic production and imports of oil and gas,
the proximity of our gas production to pipelines, the available capacity in such
pipelines, the demand for oil and natural gas, the effects of weather, and the
effects of state and federal regulation. Our production is primarily from
developed fields close to major pipelines or refineries and established
infrastructure. As a result, we have not experienced any difficulty to date in
finding a market for all of our production as it becomes available or in
transporting our production to those markets; however, there is no assurance
that we will always be able to market all of our production or obtain favorable
prices.
 
 OIL
MARKETING
 
 The
quality of our crude oil varies by area as well as the corresponding price
received. In our operated properties in the Mustang Creek and San Miguel Creek
Fields in McMullen County, Texas, and the Tenna Field, in Wharton County, Texas;
our oil production is primarily light sweet crude, which typically sells at or
near NYMEX West Texas Intermediate ("WTI") prices adjusted for transportation
costs by the purchaser.
 
 NATURAL
GAS MARKETING
 
 OPERATED
PROPERTIES
 
 Virtually
all of our natural gas production is close to existing pipelines. We sell all of
our natural gas produced from the Sargent South Field to Harvest Pipeline on a
month-to-month contract with prices fluctuating month-to-month based on a
discount to the published Houston Ship Channel Inside FERC, first of month index
price.
 
 NON-OPERATED
PROPERTIES
 
 All of
the natural gas production sold from the non-operated gas wells in the Wishbone
Field is sold to Cross Tex CCNG Marketing LTD. ("Cross Tex"). The price payable
by Cross Tex is equal to the first of the month "Index" price published in
Inside F.E.R.C.'s Gas Market Report for the Houston Ship Channel as listed in
the table entitled Market center spot-gas prices, less sixteen cents per MMBtu
($0.16/MMBtu).
  ITEM 3. LEGAL
PROCEEDINGS
 
 We are
not a party to, and our properties are not the subject of, any material pending
legal proceeding nor to our knowledge are any such legal proceedings threatened
against us.
 
 
 ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
 
 None.
 
  -37-
  PART II
 
 ITEM 5. MARKET FOR COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
 
 
 "Bid" and
"asked" offers for the common stock are listed on the NASDAQ OTC-Bulletin Board
published by the National Quotation Bureau, Inc.
 
 The table
below sets forth the high and low trading prices for the Company's common stock
for the periods indicated as reported by the NASDAQ OTC-Bulletin Board. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions. On November 2, 2004 in
connection with the Exchange and the Company's change in business focus, the
Company changed its name to "New Century Energy Corp." and the Company's
securities began trading under the symbol "NCEY." Previous to the Company's name
change and the Exchange described above, the Company's securities traded under
the symbol "VERI."
 
  BID
    PRICESQUARTER
      ENDED
              
              HIGH
              
              LOWDecember
      31, 2006
              
              $
              0.20
              
              $
              0.090September
      30, 2006
              
              $
              0.27
              
              $
              0.140June
      30, 2006
              
              $
              0.32
              
              $
              0.170March
      31, 2006
              
              $
              0.32
              
              $
              0.170December
      31, 2005
              
              $
              0.50
              
              $
              0.150September
      30, 2005
              
              $
              0.57
              
              $
              0.325June
      30, 2005
              
              $
              1.70
              
              $
              0.530March
      31, 2005
              
              $
              1.75
              
              $
              0.700




There
were approximately 475 holders of record of the common stock as of March 30,
2007. The Company has never paid a cash dividend on its common Stock and does
not anticipate the payment of a cash dividend in the foreseeable future. The
Company intends to reinvest in its business operations any funds that could be
used to pay a cash dividend. The Company's common stock is considered a "penny
stock" as defined in the Commission's rules promulgated under the Exchange Act.
The Commission's rules regarding penny stocks impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally persons with net worth
in excess of $1,000,000 or an annual income exceeding $200,000 or $300,000
jointly with their spouse). For transactions covered by the rules, the
broker-dealer must make a special suitability determination for the purchaser
and receive the purchaser's written agreement to the transaction prior to the
sale. Thus the Rules affect the ability of broker-dealers to sell the Company's
shares should they wish to do so because of the adverse effect that the Rules
have upon liquidity of penny stocks. Unless the transaction is exempt under
the Rules, under the Securities Enforcement Remedies and Penny Stock Reform Act
of 1990, broker-dealers effecting customer transactions in penny stocks are
required to provide their customers with (i) a risk disclosure document; (ii)
disclosure of current bid and ask quotations if any; (iii) disclosure of the
compensation of the broker-dealer and its sales personnel in the transaction;
and (iv) monthly account statements showing the market value of each penny stock
held in the customer's account. As a result of the penny stock rules the market
liquidity for the Company's securities may be severely adversely affected by
limiting the ability of broker-dealers to sell the Company's securities and the
ability of purchasers of the securities to resell
them.
  -38-
 RECENT
SALES OF UNREGISTERED SECURITIES
 
 On or
about December 28, 2006, in connection with our entry into a Securities Purchase
Agreement with Laurus, we sold Laurus a Secured Term Note in the amount of
$16,210,000. We claim an exemption from registration afforded by Regulation S of
the Act ("Regulation S") for the above issuances since the issuances were made
to a non-U.S. person (as defined under Rule 902 section (k)(2)(i) of Regulation
S), pursuant to an offshore transaction, and no directed selling efforts were
made in the United States by us, a distributor, any respective affiliates, or
any person acting on behalf of any of the foregoing.
 
 ITEM 6. MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 
 This
report contains forward looking statements within the meaning of Section 27a of
the Securities Act of 1933 and Section 21e of the Securities Exchange Act of
1934. These forward looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical results or anticipated results, including those set forth under "Risk
Factors" in this Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this report. The following discussion
and analysis should be read in conjunction with "Selected Financial Data" and
the Company's financial statements and notes thereto included elsewhere in this
report. .
 
 PLAN OF
OPERATIONS OVERVIEW
 
 During
2006, our operations grew externally through two successful acquisitions of
mineral interests in proved producing and undeveloped oil and gas leases in the
Mustang Creek Field area ("Mustang Creek"), located in McMullen County, Texas.
We formed a new wholly owned subsidiary, Gulf Coast Oil Corporation (“Gulf
Coast” or “GCOC”)for financing these acquisitions. The formation of this
subsidiary has contributed to the significant increase in our total assets of
approximately $66 million on the consolidated balance sheet of New Century
Energy, as of December 31, 2006, of which $29 million related to our new
subsidiary Gulf Coast. Our total oil and gas proved reserves as of January 1,
2007, are estimated to total 2,055,000 equivalent barrels. Proved reserves for
oil is estimated at 858,423 barrels, of which 719,000 barrels are
expected from Gulf Coast leases. The 1,197,000 equivalent barrels of proved gas
reserves are expected to be contributed by the Lindholm Hanson Gas Units and
Wells ("L-H Gas Unit") acquired by New Century Energy in three acquisitions
during 2005 and 2006 and our proved producing and proved undeveloped reserves
associated with our Hamill & Hamill lease in the South Sargent Field in
Matagorda County, Texas.
  -39-
   We
achieve production and proved reserve growth primarily through producing
property acquisitions, followed by low-risk development drilling generally
funded by cashflow from production and outside financing. An unstable world
market for gas and oil coupled with a mild winter in the fourth quarter of 2006
caused the prices of both gas and oil to drop significantly for the year ended
December 31, 2006, as compared to the steady rise in gas and oil prices over the
two prior years. The fluctuating market prices have not been reflected in the
cost of operating the field. We continue to be challenged with rising cost
trends that have put pressure not only on our operating costs, but also on our
capital costs.
 
 Like all
oil and gas exploration and production companies, we face the challenge of
natural production decline. An oil and gas exploration and production company
depletes part of its asset base with each unit of oil and gas it produces.
Despite this natural decline, we have been able to grow our production through
acquisitions and development of existing fields, resulting in the addition of
more reserves than we produced. Future growth will depend on our ability to
continue this trend of adding reserves in excess of production at a reasonable
cost.
 
 During
2006, we secured three additional debt instruments to finance acquisition growth
and development of existing fields. A $40 million April 2006 note and a $5
million June 2006 note were issued by Gulf Coast Oil Corporation, to finance the
acquisitions in the Mustang Creek Area. In late December 2006, New Century
signed a $16.2 million note to refinance a portion of the Gulf Coast high
interest debt and to make funds available for development in existing fields. In
addition, amendments were signed to extend the maturity date of the $9.5 million
2005 Secured Term Note, which is now due July 2, 2007; and to reduce the monthly
principal payment due on the 2005 $15 million Amended Convertible Note.
 
 Our goal
for 2007 is to increase reserves significantly. To achieve future production and
reserve growth, we will continue to pursue acquisitions that meet our criteria
and to complete development projects in our inventory of potential drilling
locations. Our 2007 development drilling budget is approximately $8,000,000.
While an acquisition budget has not been formalized, we plan to actively review
additional acquisition opportunities during 2007. We cannot ensure that we will
be able to find properties that meet our acquisition criteria, that we can
purchase such properties on acceptable terms, or secure the necessary funding to
close additional acquisitions.
 
 -40-
 OPERATED
PROPERTIES:
 
 As of
December 31, 2006, we estimated that our daily deliverability was approximately
2,300 Mcf of gas per day, and 620 Bpd of crude oil per day on Company operated
properties. In the fourth quarter of 2006, we commenced our drilling program in
McMullen County and as of March 30, 2007, we had drilled six prospects and set
production casing in four (4) new wells. This drilling program will continue
through the second quarter of 2007, and into the third quarter of 2007, as we
continue to drill our prospects in McMullen County. Additional prospective
acreage has been identified for oil and gas leasing in the Mustang Creek field
area and new wells will be drilled on this acreage in 2007 and beyond. Our gas
production declined in the South Sargent Field due to natural depletion of
reservoirs over time. We have identified 5 new locations to be drilled in this
field and its surrounding area in 2007 and beyond. As producing wells deplete in
current producing sands, we expect to continue our recompletion program on our
owned and operated wells.
 
 In
December 2006, we acquired an inactive wellbore and complete production
facilities from Unit Petroleum Corporation and also purchased new oil and gas
leases in Goliad County, Texas. We intend to recomplete the Lewis A-2 well in
the second quarter of 2007, to exploit probable undeveloped gas reserves
associated with this prospect.
 
 During
2006, we continued interpretation of our 3-D seismic data base in Matagorda
County, Texas. We received results of our first reprocessed seismic data in the
first quarter of 2005 and completed the first phase of our structural and
stratigraphic interpretation in the fourth quarter of 2005. We believe that the
reprocessed 3-D seismic data allows us to better locate and optimize the
structural placement of our new drilling locations.
 
 While it
is extremely difficult to accurately forecast future production, we believe that
our recompletion and drilling programs in Matagorda and McMullen Counties will
provide long-term production growth potential and will be an important source of
our reserve growth for the foreseeable future, of which there can be no
assurance.
 
 During
2006 we acquired additional licenses to 2D and 3D seismic data in McMullen and
Matagorda Counties. We also purchased two new 3D computer workstations and
software packages to evaluate and interpret these 2D and 3D seismic data sets.
We also hired two (2) fulltime exploration professionals to guide these
interpretation projects.
 
 NON-OPERATED
PROPERTIES:
 
 On June
30, 2005, we closed the acquisition of the various non-operated working, term
royalty and overriding royalty interests in the Wishbone Field in McMullen
County, Texas, with an effective date for ownership of April 1, 2005. On
September 19, 2005, we closed the acquisition of additional various non-operated
working interests in the Wishbone Field in McMullen County, Texas, with an
effective date for ownership of July 1, 2005. On January 3, 2006, we closed the
acquisition of an additional working interest in the Wishbone Field in McMullen
County, Texas with an effective date for ownership of October 1, 2005. The
purchase of the June 2005, September 2005 and January 2006 interests are
described in greater detail above under "Description of
Business."
  -41-
  As of
December 31, 2006, we estimate that daily gas deliverability from Wishbone Field
was approximately 11 MMCF of gas per day to the 8/8ths interest, with net
production to the Company's working interest (13.45%) of approximately 1.4 MMCF
of gas per day.
 
 As of
January 1, 2007, our third party engineers have attributed over 6.184 billion
cubic feet of total proved gas reserves in the Wishbone Field to our net
interest, with approximately $32 million of undiscounted future net income
attributed to our interests in the Wishbone Field. The acquisition of the
Wishbone interest helped to increase our proved gas reserves
significantly.
 
 The
Lindholm Hanson Gas Unit Well #1 was recompleted in December 2006 by plugging
off the old perforations in the Wilcox House 3 Sand, and recompleting in the
Wilcox House 2 sand with perforations at 12,310 to 12,324 feet. The new
completion has not been acidized or frac treated, and is currently producing at
a rate of 2,980 MCFGPD with a flowing tubing pressure of 2,500 psi.
 
 We
currently have development plans in the Wishbone Field to drill additional new
well locations to exploit proven, probable and possible gas reserves in 2007 or
2008 as the price of gas and cost of drilling allow.
 
 CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues, expenses, contingent assets and liabilities and the related
disclosures in the accompanying financial statements. Changes in these estimates
and assumptions could materially affect our consolidated financial position,
results of operations or cash flows. Management considers an accounting estimate
to be critical if: (a) it requires assumptions to be made that were uncertain at
the time the estimate was made and (b) changes in the estimate or different
estimates that could have been selected could have a material impact on our
consolidated results of operations or financial condition. All other significant
accounting policies that we employ are presented in the notes to the
consolidated financial statements. The following discussion presents information
about the nature of our most critical accounting estimates, our assumptions or
approach used and the effects of hypothetical changes in the material
assumptions used to develop each estimate.
 
 Oil and
Gas Properties. -
 
 We follow
the successful efforts method of accounting for our investment in oil and
natural gas properties. Under the successful efforts method, the costs of
successful exploratory wells and leases containing productive reserves are
capitalized. Costs incurred to drill and equip developmental wells, including
unsuccessful development wells, are capitalized. Other costs such as geological
and geophysical costs and the drilling costs of unsuccessful exploratory wells
are expensed.
  -42-
  
 All
capitalized costs are accumulated and recorded separately for each field and
allocated to leasehold costs and well costs. Leasehold costs are depleted on a
units-of-production basis based on the estimated remaining equivalent proved oil
and gas reserves of each field. Well costs are depleted on a units-of-production
basis based on the estimated remaining equivalent proved developed oil and gas
reserves of each field.
 
 Proved
Reserve Estimates. -
 
 Our
estimate of proved reserves is based on the quantities of oil and 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. The accuracy of any reserve estimate is a function of the
quality of available data, engineering and geological interpretation, and
judgment. For example, we must estimate the amount and timing of future
operating costs, severance taxes, development costs, and work-over costs, all of
which may in fact vary considerably from actual results. In addition, as prices
and cost levels change from year to year, the economics of producing the
reserves may change and therefore the estimate of proved reserves also may
change. Any significant variance in these assumptions could materially affect
the estimated quantity and value of our reserves. Despite the inherent
imprecision in these engineering estimates, our reserves are used throughout our
financial statements. When converting proved gas reserves to barrel of oil
equivalent, we use a conversion factor of 6,000:1, or 6,000 cubic feet of gas
equaling 1 barrel of oil.
 
 Long-Lived
Assets -
 
 We review
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of any such asset may not be recoverable. We
record impairment losses on long-lived assets, including oil and gas properties,
used in operations when the estimated cash flows to be generated by those assets
are less than the carrying amount of those items. Our cash flow estimates are
based upon, among other things, historical results adjusted to reflect our best
estimate of future market rates, utilization levels, operating performance, and
with respect to our oil and gas properties, future oil and natural gas sales
prices, an estimate of the ultimate amount of recoverable oil and natural gas
reserves that will be produced from a field, the timing of this future
production, future costs to produce the oil and natural gas and other factors.
Our estimate of fair value represents our best estimate based on industry trends
and reference to market transactions and is subject to variability. The oil and
gas industry is cyclical and our estimates of the period over which future cash
flows will be generated, as well as the predictability of these cash flows, can
have significant impact on the carrying value of these assets and, in periods of
prolonged down cycles, may result in impairment charges.
  -43-
  Asset
Retirement Obligations -
  We have
certain obligations to remove tangible equipment and restore land at the end of
oil and gas production operations. Our removal and restoration obligations are
primarily associated with plugging and abandoning wells. We adopted Statement of
Financial Accounting Standards ("SFAS") No. 143, “Accounting for Asset
Retirement Obligations” effective January 1, 2003, as discussed in Note 2 to our
Consolidated Financial Statements. SFAS No. 143 significantly changed the method
of accruing for costs an entity is legally obligated to incur related to the
retirement of fixed assets ("asset retirement obligations" or "ARO"). Primarily,
SFAS No. 143 requires us to estimate asset retirement costs for all of our
assets, adjust those costs for inflation to the forecast abandonment date,
discount that amount using a credit-adjusted-risk-free rate back to the date we
acquired the asset or obligation to retire the asset and record an ARO liability
in that amount with a corresponding addition to our asset value. When new
obligations are incurred, i.e. new well drilled or acquired, we add a layer to
the ARO liability. We then accrete the liability layers quarterly using the
applicable period-end effective credit-adjusted-risk-free rates for each layer.
Should either the estimated life or the estimated abandonment costs of a
property change upon our quarterly review, a new calculation is performed using
the same methodology of taking the abandonment cost and inflating it forward to
its abandonment date and then discounting it back to the present using our
credit-adjusted-risk-free rate. The carrying value of the asset retirement
obligation is adjusted to the newly calculated value, with a corresponding
offsetting adjustment to the asset retirement cost; therefore, abandonment costs
will almost always approximate the estimate. When well obligations are relieved
by sale of the property or plugging and abandoning the well, the related
liability and asset costs are removed from our balance sheet.
 
 Derivatives
-
 
 We follow
the provisions of SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133") along with related interpretations EITF No.
00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock" ("EITF-19") and EITF No. 05-2
"The Meaning of 'Conventional Convertible Debt Instrument' in Issue No. 00-19"
("EITF 05-2"). SFAS No. 133 requires every derivative instrument (including
certain derivative instruments embedded in other contracts) to be recorded in
the Balance Sheet as either an asset or liability measured at its fair value,
with changes in the derivative's fair value recognized currently in earnings
unless specific hedge accounting criteria are met.
 
 We value
these derivative securities under the fair value method at the end of each
reporting period (quarter and annual), and their value is marked to market at
the end of each reporting period with the gain or loss recognition recorded
against earnings. We continue to revalue these instruments each quarter and year
to reflect their current value in light of the current market price of our
common stock. As a result, our consolidated financial statements may fluctuate
from quarter to quarter and year to year based on the change in fair value of
the derivatives and therefore our consolidated financial position and results of
operations may vary significantly from quarter to quarter and year to year,
based on factors other than the Company's revenues and
expenses.
  -44-
  
 We
utilize the Black-Scholes option-pricing model to determine the fair value of
our freestanding derivative instruments. Key assumptions of the Black-Scholes
option-pricing model include applicable volatility rates, risk-free interest
rates and the instruments expected remaining life. We also determined a fair
value for our various embedded derivatives within our $15 million Convertible
Note by using a layered, discounted, probability-weighted cash flow model. The
assumptions used in both modeling techniques required significant management
judgment and estimates of future fluctuation in stock price as well as changes
in future interest rates. The reader should reference Note 6 in the "Notes to
Consolidated Financial Statements" for further details in regards to our
derivative liabilities.
 
 Extinguishment
of Debt -
 
 We follow
the provisions of SFAS No. 140 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS No. 140") along with
related interpretations from Emerging Issues Task Force No. 96-19 ("EITF No.
96-19"). The Task Force reached a consensus that an exchange of debt instruments
with substantially different terms is a debt extinguishment and should be
accounted for in accordance with paragraph 16 of SFAS No. 140. The Task Force
also observed that a debtor could achieve the same economic effect by making a
substantial modification of terms of an existing debt instrument. Accordingly,
the Task Force reached a consensus that a substantial modification of terms
should be accounted for like, and reported in the same manner as, an
extinguishment of debt.
 
 From the
debtor's perspective, an exchange of debt instruments between or a modification
of a debt instrument by a debtor and a creditor in a non-troubled debt situation
is deemed to have been accomplished with debt instruments that are substantially
different in the present value of the cash flows under the terms of the new debt
instrument is at least 10 percent different from the present value of the
remaining cash flows under the terms of the original instrument.
 
 In
evaluating the refinancing that occurred in December 2006 when New Century
Energy Corp exchanged proceeds costing 10.25% interest for that costing 17.5%
interest in terms of present value, it was deemed that SFAS 140 did not apply
since the 17.5% note was liquidated. The present value of the other note
instruments modified in the transaction did not change by more than the minimum
of ten percent.
 
 With the
Third Amendment to the 2005 Amended Convertible Note and the December Option,
the Company has determined that a greater than 10% difference in the net present
value of the remaining cash flows of both the original Convertible Note and the
New Convertible Note has occurred. Therefore, the original Convertible Note,
along with the related unamortized discounts and deferred loan costs, has been
extinguished and a New Convertible Note has been recorded at its fair value on
December 30, 2005. The extinguishment required the Company to record an
extinguishment debt expense of $8,309,759.
  -45-
  
 Income
Taxes -
 
 The
amount of income taxes recorded by us requires the interpretation of complex
rules and regulations of various taxing jurisdictions throughout the world. We
have recognized deferred tax assets and liabilities for all significant
temporary differences, operating losses and tax credit carryforwards. We
routinely assess the realizability of our deferred tax assets and reduce such
assets by a valuation allowance if it is more likely than not that some portion
or all of the deferred tax assets will not be realized. We routinely assess
potential tax contingencies and, if required, establish accruals for such
contingencies. The accruals for deferred tax assets and liabilities are subject
to a significant amount of judgment by us and we review and adjust routinely our
estimates based on changes in facts and circumstances. Although we believe our
tax accruals are adequate, material changes in these accruals may occur in the
future, based on the progress of ongoing tax audits, changes in legislation and
resolution of pending tax matters.
 
 Stock-Based
Compensation.-
 
 On
December 16, 2004, the FASB issued SFAS No. 123(R),"Share-Based Payment", which
is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS
No. 123(R) supersedes Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and amends SFAS No. 95, "Statement
of Cash Flows." Generally, the approach in SFAS No. 123(R) is similar to the
approach described in SFAS No. 123; however, SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee stock options,
be recognized in the income statement based on their fair values. Pro forma
disclosure will no longer be an alternative.
 
 SFAS No.
123(R) permits public companies to adopt its requirements using one of two
methods:
 
 1.
              A
      "modified prospective" method in which compensation cost is recognized
      beginning with the effective date (a) based on the requirements of SFAS
      No. 123(R) for all share-based payments granted after the effective date
      and (b) based on the requirements of SFAS No. 123 for all awards granted
      to employees prior to the effective date of SFAS No. 123(R) that remain
      unvested on the effective date.
 
 2.
              A
      "modified retrospective" method which includes the requirements of the
      modified prospective method described above, but also permits entities to
      restate based on the amounts previously recognized under SFAS No. 123 for
      purposes of pro forma disclosures either (a) all prior periods presented
      or (b) prior interim periods of the year of
  adoption.
 
 We have
elected the modified prospective transition method.
  -46-
  In March
2005, the SEC issued Staff Accounting Bulletin ("SAB") No. 107 which expressed
the views of the SEC regarding the interaction between SFAS No. 123(R) and
certain SEC rules and regulations. SAB No. 107 provides guidance related to the
valuation of share-based payment arrangements for public companies, including
assumptions such as expected volatility and expected term. In April 2005, the
SEC approved a rule that delayed the effective date of SFAS No. 123(R) for
public companies. As a result, SFAS No. 123(R) will be effective for us on
January 1, 2006.
 
 Accounting
pronouncements
 
 In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities", which permits entities to choose to
measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. The statement amends SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity".
 
 In
December 2006, the FASB issued the FASB Staff Position (FSP) No. EITF 00-19-2,
("FSP EITF 00-19-2"), Accounting for Registration Payment Arrangements. This FSP
addresses an issuer's accounting for registration payment arrangements. This FSP
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
FASB Statement No. 5, Accounting for Contingencies. The guidance in this FSP
amends FASB Statements No. 133, Accounting for Derivative Instruments and
Hedging Activities, and No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity, and FASB Interpretation No.
45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, to include scope exceptions for
registration payment arrangements. This FSP further clarifies that a financial
instrument subject to a registration payment arrangement should be accounted for
in accordance with other applicable generally accepted accounting principles
(GAAP) without regard to the contingent obligation to transfer consideration
pursuant to the registration payment arrangement. This FSP shall be effective
immediately for registration payment arrangements and the financial instruments
subject to those arrangements that are entered into or modified subsequent to
the date of issuance of this FSP, or for financial statements issued for fiscal
years beginning after December 15, 2006, and interim periods within those fiscal
years.
 
 The
Company intends to adopt FSP EITF 00-19-2 beginning in 2007. The adoption of
this FSP upon the Company's financial statements has not been
determined.
 
 In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 158 “Employers’ Accounting For Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements Nos. 87, 88, 106 and
132(R)” (“SFAS 158”), which requires companies to recognize the funded status of
a defined benefit postretirement plan as an asset or liability in its balance
sheet. SFAS 158 is effective for fiscal years ending after December 15, 2006. We
have no defined benefit plans; therefore we do not expect the adoption of SFAS
158 to have an impact on our consolidated financial position, results of
operations or cash flows.
  -47-
   
 In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”), which defines fair value, establishes a frame work for measuring fair
value in accordance with generally accepted accounting principles and expands
disclosures about fair value measurements. This Statement applies under other
accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value measurements.
SFAS 157 is effective for fiscal years beginning after December 15, 2007. We
plan to adopt SFAS 157 beginning in the first quarter of fiscal 2008. We are
currently evaluating the impact, if any; the adoption of SFAS 157 will have on
our consolidated financial position, results of operations or cash
flows.
 
 In July
2006, The Financial Accounting Standards Board (“FASB”) issued Financial
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109” (“FIN 48”), to clarify certain aspects
of accounting for uncertain tax positions, including issues related to the
recognition and measurement of those tax positions. This interpretation is
effective for fiscal years beginning after December 15, 2006. We are in the
process of evaluating the impact of the adoption of this interpretation on our
consolidated financial position, results of operations or cash
flows.
 
 In March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets” (“SFAS 156”), which requires all separately recognized servicing assets
and servicing liabilities to be initially measured at fair value. SFAS 156
permits, but does not require, the subsequent measurement of servicing assets
and liabilities at fair value. Adoption is required as of the beginning of the
first fiscal year that begins September 15, 2006. Early adoption is permitted.
The adoption of SFAS 156 is not expected to have a material effect on our
consolidated financial position, results of operation or cash
flows.
 
 In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments, an amendment of FASB Statements No. 133 and 140” (“SFAS
155”). SFAS 155 clarifies certain issues relating to embedded derivatives and
beneficial interests in securitized financial assets. The provisions of SFAS 155
are effective for all financial instruments acquired or issued after fiscal
years beginning after September 15, 2006. We are currently assessing the impact
that the adoption of SPAS 155 will have on our consolidated financial position,
results of operations or cash flows.
 
   -48-
  In
September 2006, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements”.  SAB 108 provides guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in
quantifying a current year misstatement. SAB 108 established a dual
approach that requires quantification of errors under two methods:
(1) roll-over method which quantifies the amount by which the current year
income statement is misstated, and (2) the iron curtain method which
quantifies the error as the cumulative amount by which the current year balance
sheet is misstated. In some situations, companies will be required to record
errors that occurred in prior years even though those errors were immaterial for
each year in which they arose. Companies may choose to either restate all
previously presented financial statements or record the cumulative effect of
such errors as an adjustment to retained earnings at the beginning of the period
in which SAB 108 is applied. SAB 108 is effective for fiscal years
ending after November 15, 2006. The adoption of this pronouncement on our
Company’s financial statements has not yet been determined.
  -49-
  RESULTS OF
OPERATIONS:
 
 COMPARISON OF THE RESULTS OF
OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
 
 Revenues
-
 
 Our
revenues are summarized as follows for the year ended December 31:
  2006
                
                2005
                
                %
      ChangeOil
      sales
                
                $
                8,065,927
                
                $
                1,064,801
                
                
                658
                %Gas
      sales
                
                
                6,797,801
                
                
                5,854,083
                
                
                16Oil
      and gas
                
                
                14,863,728
                
                
                6,918,884
                
                
                115Gain
      on sale of oil and gas interest
                
                
                44,766
                
                
                98,181
                
                
                (54
                )Gas
      operations consulting
                
                
                18,708
                
                
                --
                
                
                100Total
      revenues
                
                $
                14,927,202
                
                $
                7,017,065
                
                
                113
                %
  Oil sales
rose $7 million in 2006 primarily due to the Mustang Creek acquisitions, which
increased our oil well capacity by 10 wells. Revenue of $6,849,266 (105,625
barrels) was generated from the Mustang Creek field in 2006. Also contributing
to the significant increase in 2006 oil revenue was the increase in the price of
oil in the first three quarters of 2006, compared to oil prices in 2005. The
average price of oil for our operated and non operated properties was $62.87 per
barrel in 2006 compared to $53.63 during 2005. Beginning in the third quarter of
2006, oil prices became unstable and started to rapidly decline. The price of
oil per barrel averaged $71.82 during July 2006 but dropped to an average of
$57.93 per barrel by the end of the year.
 
 The major
contributor of the $943,718 increase in gas sales in 2006 was a 93% increase in
production (493,277 Mcf’s) at the South Sargent Field. The higher production,
and revenue increase of $687,368, reflects the benefits of recompletion done to
the Hamill wells during 2005. The lone gas well of the Mustang Creek
acquisitions, Tyler Ranch Unit #1 contributed $214,196 to our increase in 2006
gas sales with production at 32,943 Mcf’s. Gas sales from our 2005 and 2006
acquisitions of the Lindholm-Hanson Gas Unit (the "L-H Gas Unit") yielded an
increase of $56,105 in gas revenue. Offsetting the positive effect of increased
production during the year ended December 31, 2006, was the impact of decreasing
gas prices. The average price of gas dropped from $8.14 per MMBTU in January
2006 to $6.51 per MMBTU in December 2006.
 
 In
October 2006 we sold our 14% working interest in the University # 103 well
located in Lancaster Hill Strawn Field, Crockett County, Texas for $44,766.
  -50-
  During
2006, the non operator working interest partner in the Hamill wells was charged
an operating fee on a per well basis as provided in the joint agreement
governing the property.
 
 Expenses-
 
 Our
expenses were comprised of the following for the year ended December
31:
  2006
                  
                  2005
                  
                  %
      ChangeExploration
                  
                  $
                  1,128,134
                  
                  $
                  134,579
                  
                  
                  738
                  %Lease
      Operating
                  
                  
                  1,509,150
                  
                  
                  640,455
                  
                  
                  136Production
      Taxes
                  
                  
                  704,051
                  
                  
                  393,090
                  
                  
                  79Depreciation,
      depletion and amortization
                  
                  
                  9,737,889
                  
                  
                  2,177,485
                  
                  
                  347General
      and administrative
                  
                  
                  1,291,295
                  
                  
                  2,296,879
                  
                  
                  (44
                  )Total
      expenses
                  
                  $
                  14,370,519
                  
                  $
                  5,642,488
                  
                  
                  155
                  %
  
 Exploration
expenses rose $993,555 in 2006, compared with expenses in 2005, due mainly to
the write-off of the McAdams #1 and Kassner #3 dry wells during the year and the
purchase of seismic data computer software programs.
 
 The added
costs associated with operating the wells in the Mustang Creek acquisitions gave
rise to $541,150 of the $868,695 increase in lease operating expenses for the
year ended December 31, 2006, compared to the year ended December 31, 2005.
Also, due to the rising cost of doing business, there was a slight increase in
lease operating expense for all the oil and gas wells owned by our Company in
2006, compared to 2005. The $310,961 increase in production taxes in 2006 when
compared to 2005 is a reflection of our increased sales during the reported
periods. The production tax rates have not changed during any of the periods
presented.
 
 Depreciation,
depletion and amortization increased by $7,560,404 for the year ended December
31, 2006, compared to the year ended December 31, 2005, primarily due to the
$36,036,970 increase in our depletable asset base in oil and gas properties as a
result of our two acquisitions in the Mustang Creek area and the third
acquisition at the Lindholm Hanson Gas Unit during the year ended December 31,
2006.
 
 General
and administrative expenses decreased by $1,005,584, or 44%, for the year ended
December 31, 2006, compared to the year ended December 31, 2005, which decrease
was primarily associated with a $1.6 million stock based compensation charge for
consulting services incurred during 2005, which charge was not represented
during the year ended December 31, 2006.
  
 -51-
  Other Income (Expense)-
 Other
income (expense) consisted of the following for the year ended December 31:
  2006
                    
                    2005Net
      decrease in fair valueof
      derivative liabilities
                    
                    $
                    1,296,373
                    
                    $
                    7,117,882Loss
      on early extinguishment of debt
                    
                    
                    (204,170
                    )
                    
                    (8,309,759
                    )Interest
      and amortization of discounton
      debt expense
                    
                    
                    (7,958,392
                    )
                    
                    (3,872,265
                    )All
      other, net
                    
                    
                    211,937
                    
                    
                    290,741Other
      income (expense), net
                    
                    $
                    (6,654,252
                    )
                    $
                    (4,773,401
                    )
  The
Convertible Note for the first acquisition of the L-H Gas Unit in June 2005,
comprised freestanding derivatives of warrants and options issued to the lender
(the Warrant and Option, described in greater detail above), and embedded
derivatives relating to a conversion feature, a contract rate adjustment and an
optional redemption provision (the Convertible Note, as described above) which
were bundled together into a single compound embedded derivative for financial
accounting purposes. On December 30, 2005, we executed a Third Amendment to the
Convertible Note, whereby additional options were granted to the lender (the
December Option, as described above) as consideration for extending the date we
were required to have our registration statement filed and declared effective
with the SEC, pursuant to the Registration Rights Agreement, as described in
greater detail above. These derivative liabilities are marked-to-market each
quarter, with the change in fair value recorded in our consolidated statements
of operations. For each of the years ended December 31, 2006 and 2005, the net
decrease in fair value, or increase in income, by derivative was as
follows:
  2006
                      
                      2005Laurus
      Warrant
                      
                      $
                      389,577
                      
                      $
                      2,871,240Laurus
      Stock Option
                      
                      
                      392,765
                      
                      
                      3,571,005Single
      compound embedded derivativewithin
      Convertible Note
                      
                      
                      210,426
                      
                      
                      675,637Laurus
      December Option
                      
                      
                      303,605
                      
                      
                      --Decrease
      in fair value of derivative liabilities
                      
                      $
                      1,296,373
                      
                      $
                      7,117,882
  The
Black-Scholes Method is utilized in determining fair value of the Laurus Stock
Option, Laurus Warrant and the Laurus December Option. Principally due to a
decrease in the price of our common stock since the issuance of the note, the
fair value of these derivative liabilities has decreased sharply, as shown by
the table above. A layered discounted probability-
  -52-
  weighted
expected cash flow method is used for determining the fair value of the single
compound embedded derivative. The effect of the smaller initial assigned fair
market value to the single compound embedded derivative, together with our stock
price representing only one component of the methodology, resulted in the effect
on income not being as great as the freestanding derivatives. So long as the
Convertible Note remains outstanding, the quarterly mark-to-market adjustments
of these derivative liabilities could produce wide fluctuations in our
consolidated financial position and results of operations.
 
 We
utilized a portion of the proceeds from the $16.2 million December 2006 Note to
repay in full the June 2006 Gulf Coast Note, in order to pay off existing higher
interest rate notes, which resulted in the loss on early extinguishment of debt
of $204,170 in the 2006 consolidated statement of operations. The extinguishment
amount is equal to the unamortized discount and deferred loan costs on the June
2006 Gulf Coast Note.
 
 On
December 30, 2005, the execution of the Third Amendment to the Convertible Note,
triggered an early extinguishment of the Convertible Note for financial
reporting purposes, and resulted in a loss of $8,309,759. The extinguishment
amount was comprised of the fair value of the additional Laurus December Option
granted, the change in fair value of the single compound embedded derivative and
the extinguishment of the related unamortized discounts to the note and the
related deferred financing costs.
 
 Interest
and amortization of discount on debt for each of the years ended December 31,
2006 and 2005 can be broken down as follows:
 
  2006
                        
                        2005Interest
      expense on notional balance
                        
                        $
                        6,190,935
                        
                        $
                        1,215,556Accretion
      of note discount
                        
                        
                        1,485,791
                        
                        
                        2,034,910Amortization
      of deferred loan costs
                        
                        
                        281,661
                        
                        
                        558,6277,958,387
                        
                        
                        3,809,093Other
      interest expense
                        
                        
                        5
                        
                        
                        63,172Total
      interest expense
                        
                        $
                        7,958,392
                        
                        $
                        3,872,265
  The
interest on notional balances during the years ended December 31, 2006 and 2005,
represents the stated interest on the Restated and Amended Convertible Note and
the two Secured Term Notes held by us and the two Secured Term Notes held by
Gulf Coast Oil Corporation, our wholly owned subsidiary, using the effective
interest method. Each discount is amortized over the original life of the
notes.
 
 The
accretion of note discount for the periods presented refers to the accretion of
the unamortized discount on the four Secured Term Notes of the consolidated
entity using the effective interest method. Each discount is amortized over the
original life of the note.
  -53-
  Amortization
of deferred loan costs comprises fees (i.e. escrow fees, legal fees, etc.) paid
to non-lenders in connection with the Convertible Note and Secured Term Note
financings. Such costs are capitalized as deferred loan costs and amortized over
the respective life of the note.
 
 Also
included in other income (expense), are the following line items:
 
  2006
                          
                          2005Release
      of Vertica liabilities
                          
                          $
                          60,815
                          
                          $
                          509,028Other
      Vertica expenses
                          
                          
                          --
                          
                          
                          (196,133
                          )Other
      income
                          
                          
                          154,407
                          
                          
                          64,708Other
      expenses
                          
                          
                          (3,284
                          )
                          
                          (104,492
                          )Gain
      on sale of equipment
                          
                          
                          --
                          
                          
                          17,630Total
      all other, net
                          
                          $
                          211,938
                          
                          $
                          290,741
  
 In
connection with the reverse merger with Vertica Software, Inc. in September
2004, we assumed the Company’s pre-merger liabilities which were recorded in our
results of operations in 2004. The resolution of these liabilities through
settlements with creditors and the expiration of the four-year statute of
limitations on bringing such claims resulted in the release of the liabilities
in the corresponding periods.
 
 Included
in other income is interest earned on funds received in the note financings
which have been temporarily invested pending the disbursement for which they
were borrowed.
 
 Income
taxes-
 
 No
federal income taxes have been paid since inception of the Company, due to our
net operating loss carry forwards. Due to the uncertainty surrounding the
realization of the benefits of our tax attributes, including net operating loss
carry forwards, no provision or benefit for federal income taxes has been
recorded in our consolidated statements of operations.
 
 Net Loss
-
 
 The
Company had a net loss of $6,097,568 for the year ended December 31, 2006, as
compared to a net loss of $3,398,824 for the year ended December 31, 2005. The
Mustang Creek acquisitions were a significant part of the $7.9 million increase
in revenue in 2006 over 2005; however such increase had a corresponding cost as
our depletion expense increased $7.6 million, and we had a higher interest cost
of $4.1 million, which mitigated many of the advantages of these acquisitions in
2006. Additionally, the derivative accounting of our Laurus Convertible Note,
Warrant and Options, as described below, and the resulting increase in interest
expense for the year ended December 31, 2006, compared to the year ended
December 31, 2005, which resulted from the accounting treatment associated with
such derivative accounting due to the decrease in the value of our shares of
common stock was a significant factor in our increase in net loss for the year
ended December 31, 2006, compared to the prior year’s period.
 
 -54-
 
 LIQUIDITY AND CAPITAL
RESOURCES
 
 Cash and
cash equivalents -
 
 We
believe our cash and cash equivalents balance of $7,524,278, plus restricted
cash of $4,967,109, as of December 31, 2006, is sufficient to meet our working
capital requirements in 2007. Since October 2006, we have been actively drilling
successful exploratory oil wells. We believe that three of these wells will
begin producing during 2007, of which there can be no assurance. It is
anticipated that the cash flow from the additional capacity these wells will
create, along with the positive cash flow from current operations and a short
term reliance by consumers for our products will provide the cash flow required
to meet our operating needs. Furthermore, the reduction of principal payments
under the Convertible Note will have a favorable effect on our projected 2007
cash flows. We also plan to pursue attractive financing opportunities to enable
us to pursue our oil and gas exploration and production program, including
external growth through acquisition.
 
 Total
Assets -
 
 We had
total assets of $66,045,681 as of December 31, 2006, which included $15,116,923
of current assets, mainly comprised of $7,524,278 of cash, $4,967,109 of
restricted cash and $1,932,235 of accounts receivable; $150,453 of equipment,
net of $36,378 of accumulated depreciation; $50,662,548 of oil and gas
properties net of accumulated depletion of $12,640,446; and deferred loan costs
and other assets of $115,757.
 
 Working
capital -
 
 At
December 31, 2006, we had a working capital deficit of $531,295. Additionally,
as of December 31, 2006, we had current liabilities of $15,648,218, which
included $11,580,577 of current portion of notes payable due in 2007 and
$2,062,374 in derivative liabilities which are subject to wide fluctuations from
quarter-to-quarter. The classification of our derivative liabilities may change
when FASB Staff Position (FSP) No. EITF 00-19-2 becomes effective in 2007. We
are currently evaluating the impact this accounting pronouncement will have on
our financial statements which has not yet been determined. Our current assets
of $15,116,923 at December 31, 2006, are substantially liquid as they comprise
cash and cash equivalents of $7,524,278, restricted cash of $4,967,109, and
accounts receivable of $1,932,235. We believe these current assets are
sufficient, together with our anticipated positive cash flows from operations in
2007, to enable us to meet our financial obligations in 2007.
 
  
 -55-
  Liabilities -
 Total
liabilities as of December 31, 2006 were $69,720,602, and included current
liabilities of $15,648,218; notes payable in connection with amounts loaned to
us by Laurus, less current portion of $53,681,198; and asset retirement
obligation of $391,186.
 
 Off-balance
sheet financing -
 
 We have
not entered into any off-balance sheet financing arrangements.
 
 Change in
prices -
 
 Oil and
natural gas prices are subject to seasonal and other fluctuations that are
beyond our ability to control or predict.
 
 Inflation
-
 
 Although
certain of our costs and expenses are affected by the level of inflation,
inflation has not had a significant effect on our results of operations since
inception.
 
 Cash
flows-
  2006
                            
                            2005Net
      cash provided by /(used in)Operating
      activities
                            
                            $
                            5,162,488
                            
                            $
                            2,044,147Investing
      activities
                            
                            
                            (43,034,594
                            )
                            
                            (21,762,897
                            )Financing
      activities
                            
                            
                            42,084,719
                            
                            
                            22,577,634Increase/(decrease)
      in cash andcash
      equivalents
                            
                            $
                            4,212,613
                            
                            $
                            2,858,884Year
      ended December 31,
                            
                            
                            2006
                            
                            
                            2005Cash
      and cash equivalents
                            
                            $
                            7,524,278
                            
                            $
                            3,311,665
  
 Operating
activities -
 
 Year
ended December 31, 2006
 
 Cash
flows from operating activities of $5,162,488 for the year ended December 31,
2006, were adversely impacted by a net loss for the year of $6,097,568 and other
non-cash adjustments of $82,865. Offsetting the negative impacts were the
benefits of non-cash charges for depletion, depreciation and amortization of
$9,737,889; non-cash financing cost adjustments, which netted to $ 675,249 (net
decrease in fair value of derivative liabilities, the loss on early
extinguishment of debt and accretion of discount and loan cost on debt); changes
in working capital components which totaled $ 896,487 and $33,296 for the asset
retirement obligation for the
year ended December 31, 2006.
 
 -56-
 
 Year
ended December 31, 2005
 
 Cash
flows from operating activities of $2,044,147 for the year ended December 31,
2005, were adversely impacted by a net loss for the year of $3,398,824, changes
in working capital components which netted to $1,508,846 driven by an increase
in accounts receivable, and other non-cash adjustments netting to $613,582. The
Company benefited from non cash charges for depletion, depreciation and
amortization of $2,177,485 and stock for services of $1,602,500. The Company
also benefited from positive cash flows in regards to the Convertible
Note-related non-cash adjustments netting to $3,785,414 (net increase in fair
value of derivative liabilities, the loss on early extinguishment of debt and
accretion of discount and loan cost on debt).
 
 Investing
Activities -
 
 Year
ended December 31, 2006
 
 Cash
flows used in investing activities of $43,034,594 for the year ended December
31, 2006, were primarily attributed to the Mustang Creek area acquisitions which
totaled $32,787,219. We completed a third acquisition of the L-H Gas Unit for
$1,530,874 in cash, excluding an initial deposit of $189,000 paid in 2005. We
made additional investments in oil and gas properties totaling $3,746,808. Other
investing activities netted to a cash outflow of $2,584 during the year ended
December 31, 2006. A portion of the proceeds totaling $4,967,000 from the
December 2006 $16.2 million note was restricted for our drilling program by our
lender. On March 30, 2007, we requested a $1,500,000 tranche from this
restricted account, which funds have not been released to date.
 
 Year
ended December 31, 2005
 
 Cash
flows used in investing activities of $21,762,897 for the year ended December
31, 2005, were primarily attributed to the first and second acquisitions of the
L-H Gas Unit, which totaled $18,840,592. Additionally, we made capital
expenditures for other oil and gas properties of $2,639,997 during 2005 in
accordance with our exploration and production program. Other investing
activities netted to a cash outflow of $282,308 during the year ended December
31, 2005.
 
 Financing
activities -
 
 Year
ended December 31, 2006
 
 Cash
flows from financing activities of $42,084,719 for the year ended December 31,
2006, were generated from net proceeds (after $1,654,705 discount paid to
lender) totaling $43,345,295 on the Gulf Coast 2006 Note and the June 2006 Note
issued to acquire the Mustang Creek Area. In addition, the Secured Note issued
in December 2006 generated $15,970,000 cash (after $240,000 discount paid to
lender). Offsetting the positive cash flows from financings was $17,119,155 in
debt payments and $111,421 to pay deferred loan costs for notes issued in
2006.
 
 -57-
 
  
 Year
ended December 31, 2005
 
 Cash
flows from financing activities of $22,577,634 for the year ended December 31,
2005, were generated from proceeds totaling $24,500,000 on the Convertible Note
and Secured Term Note in connection with the first and second acquisitions of
the L-H Gas Unit. These proceeds were reduced by the deferred financing costs
paid at closing of $1,805,156, and retirement of existing long-term debt of
$776,158. Additionally, our sale of unregistered common stock netted $655,273 of
proceeds during the year.
 
 Outlook:
 
 Our
objective in 2007 is to generate positive cash flows from operations to meet our
working capital requirements and service our debt, namely the principal and
interest payments under the Secured Convertible Note and the three Secured Term
Notes.
 
 Our
strategy with respect to our capital program is to maintain a steady level of
drilling activity. Like all oil and gas exploration and production companies, we
face the challenge of natural production decline. An oil and gas exploration and
production company depletes part of its asset base with each unit of oil and gas
it produces. Despite this natural decline we have been able to grow our
production through acquisitions and development of existing fields, resulting in
the addition of more reserves than we produced. Future growth will depend on our
ability to continue this trend of adding reserves in excess of production at a
reasonable cost.
 
 We have
plans to continue our redevelopment of our South Sargent Field, and also
continue our drilling program in the Mustang Creek field area. Our goal for 2007
is to increase reserves significantly. To achieve future production and reserve
growth, we will continue to pursue acquisitions that meet our criteria and to
complete development projects in our inventory of potential drilling locations.
Our 2007 development drilling budget is approximately $8,000,000. While an
acquisition budget has not been formalized, we plan to actively review
additional acquisition opportunities during 2007. We cannot ensure that we will
be able to find properties that meet our acquisition criteria, that we can
purchase such properties on acceptable terms, or secure the necessary funding to
close additional acquisitions.
 
 Our
exploration staff is also evaluating deeper drilling prospects with the
potential for significant reserves on company owned acreage.
 
 -58-
 
 Our
growth and continued operations could be impaired by limitations on our access
to the capital markets. In the event that we do not generate the amount of
revenues from our oil and gas properties which we anticipate, and/or we decide
to purchase additional oil and gas properties and are required to raise
additional financing, we may be forced to scale back our operations which would
have a material adverse impact upon our ability to pursue our business plan. We
have no commitments from officers, directors or affiliates to provide funding.
There can be no assurance that capital from outside sources will be available,
or if such financing is available, it may involve issuing securities senior to
our common stock or equity financings which are dilutive to holders of our
common stock. In addition, in the event we do not raise additional capital from
conventional sources, it is likely that our growth will be restricted and we may
need to scale back or curtail implementing our business plan.
 
 RISK FACTORS
 
 Our
business is subject to many risk factors, including the following (references to
"our," "us," "we," and words of similar meaning in these Risk Factors refer to
the Company, the Company's wholly owned subsidiary Century Resources, Inc.
("Century"), and the Company's wholly owned subsidiary Gulf Coast Oil
Corporation ("Gulf Coast"), unless the context suggests otherwise).
 
 RISKS RELATING TO OUR
OPERATIONS
 
 WE WILL NEED ADDITIONAL FINANCING TO
CONTINUE OUR BUSINESS PLAN AND DRILL, RECOMPLETE AND STUDY ADDITIONAL WELLS,
WHICH FINANCING, IF WE ARE UNABLE TO RAISE MAY FORCE US TO SCALE BACK OR ABANDON
OUR BUSINESS PLAN.
 
 We raised
$15,000,000 from the sale of a Secured Convertible Term Note to Laurus Master
Fund, Ltd. ("Laurus"); $3,675 from Laurus' exercise of a portion of the Option;
$9,500,000 from the sale of a separate Secured Term Note to Laurus in 2005; and
$16,210,000 from the sale of a Secured Term Note in December 2006. Additionally,
our wholly owned subsidiary, Gulf Coast Oil Corporation ("Gulf Coast") borrowed
an aggregate of $45,000,000 from Laurus during the second quarter of 2006.
However, approximately $61,401,097 of the aggregate of $85,713,675 which was
borrowed from Laurus, was immediately used to purchase interests in the Wishbone
field and interests in McMullen, County, Texas; pay closing costs and fees in
connection with the various funding transactions; and to repay amounts
previously owed. Additionally, in December 2006, we sold Laurus a Secured Term
Note in the amount of $16,210,000, of which $10,000,000 was immediately used to
repay the balance of the $5,000,000 Gulf Coast note, and a portion of the
$40,000,000 Gulf Coast note (the "December 2006 Note"). As a result, as of
December 30, 2006, we had $7,524,387 of cash on hand and $4,967,000 in
restricted cash.
 
 
 -59-
 
 We
believe our cash on hand as of December 31, 2006, and the revenues which we
expect to generate from the sale of oil and gas this year will allow us to pay
our outstanding liabilities and continue our business operations for at least
the next twelve months. However, as described below, the price of oil and gas is
extremely volatile, we cannot be sure that we will find any additional
quantities of oil and/or gas, nor can we provide any assurances that if found,
that the oil and/or gas will be in commercial quantities, that we will be able
to extract it from the ground, that we will not face liability in connection
with our extraction efforts, and/or that we will be able to generate the
revenues we expect from the sale of our oil and gas. Additionally, we may choose
to spend additional monies on the purchases of oil and gas properties in the
future. Depending on the decisions of our management, the volatility of the
prices of oil and/or gas, our exploration activities, and/or potential
liability, and the amount of money we receive from the sale of oil and gas, we
may need to raise additional capital substantially faster than twelve months,
which we currently estimate such previously borrowed monies and monies we
receive through the production of oil and gas will last. As such, we may need to
raise additional capital much sooner than the twelve month estimate which our
management currently feels is reasonable. We do not currently have any
additional commitments or identified sources of additional capital from third
parties or from our officers, directors or majority shareholders. We can provide
no assurance that additional financing will be available on favorable terms, if
at all. If we are not able to raise the capital necessary to continue our
business operations, we may be forced to abandon or curtail our business plan
and/or suspend our exploration activities.
 
 WE OWE LAURUS MASTER FUND, LTD., A
SUBSTANTIAL AMOUNT OF MONEY WHICH WE DO NOT HAVE.
 
 In
connection with the Securities Purchase Agreement, Laurus Master Fund, Ltd.
("Laurus"), purchased a $15,000,000 Secured Convertible Term Note, later amended
and replaced by the Restated Note and subsequent thereto the Second Restated
Convertible Note, described below (the "Note"), which bears interest at the rate
of 10.25% per year (as of March 30, 2007), which is subject to adjustment as
described above under "Description of Business," and which is due and payable on
June 30, 2008, and which $100,000 of principal is payable on the first day of
each month beginning in March 2007 and ending on December 31, 2007, and $250,000
of principal is payable on the first day of each month beginning on January 1,
2008 and ending on June 30, 2008, at which time the remaining principal amount
of the Note is due and payable. Additionally, on September 19, 2005, we sold
Laurus a separate Secured Term Note (the "Term Note") in the amount of
$9,500,000. The Term Note bears interest at the rate of twenty percent (20%) per
year, and is payable monthly in arrears through a payment to Laurus of the
greater of (a) 80% of the production payments on our 7.5% working interest on
the Lindholm-Hanson Gas Unit property purchased in September 2005; or (b) the
monthly interest accrued there under. The Term Note is currently due on July 2,
2007.
 
 Additionally,
our wholly owned subsidiary, Gulf Coast, sold a Secured Term Note in the amount
of $40,000,000, which note bears interest at the prime rate (as published by the
Wall Street Journal) plus 2% (currently 10.25%, with the prime rate at 8.25% as
of March 31, 2007) per year and which unpaid principal and unpaid accrued
interest, if any, shall be due
and payable on October 28, 2009, as well as a forty (40) month Secured Term Note
in the amount of $5,000,000, which was later repaid with a portion of the
December 2006 Note sold to Laurus in December 2006 (defined
below).
 
 -60-
 
 In
December 2006, we sold Laurus a Secured Term Note in the amount of $16,210,000,
of which $10,000,000 was immediately used to repay the balance of the $5,000,000
Gulf Coast note, and a portion of the $40,000,000 Gulf Coast note (the "December
2006 Note"). The December 2006 Note bears interest at the rate of the Prime Rate
plus 2%, until paid, currently equal to 10.25% per annum, and is due and payable
on January 4, 2010. Amortizing payments are due under the December 2006 Note in
the amount of $200,000 on the first day of each month beginning on July 1, 2007
until the December 2006 Note is paid in full.
 
 While, we
do have sufficient cash on hand to pay the April 1, 2007 payment of $100,000 of
principal on the Note and the July 1, 2007 payment of $200,000 on the principal
amount of the December 2006 Note, there can be no assurance that we will
continue to have sufficient funds to pay any principal or interest on the Note
or the December 2006 Note, or the Term Note or Gulf Coast note if such
production payment is not sufficient to pay Laurus the required monthly amounts
of principal when due. Also, we cannot make any assurances that we will have
funds available to repay the full $15,000,000 remaining on the Note, the
approximately $6,351,390 remaining on the Term Note (not including any accrued
or unpaid interest, as of the filing of this Report), that we will have
sufficient funds to repay the $16,210,000 December 2006 Note, and/or that Gulf
Coast will have sufficient funds to repay the $40,000,000 note owed to Laurus if
such repayment amount is not sufficiently covered by the payment of production
proceeds to Laurus, as described below. If we do not have sufficient funds to
pay the total remaining amount of the Note (after taking into effect amortizing
payments of principal, which we may not have sufficient funds to pay, and
conversions) when due, the interest on or the principal amount of the Term Note
or December 2006 Note when due and/or if Gulf Coast does not have sufficient
funds to repay its outstanding note if not sufficiently repaid Laurus may, at
its option, take control of substantially all of our assets (as described in
more detail under "Risks Relating to the Company's Securities") or it can
declare 130% of the then outstanding principal amounts of the notes due and
payable, plus any accrued and unpaid interest.
 
 As a
result as of March 30, 2007, we will need to raise or otherwise generate
approximately $13,200,000 to repay the Note (not including any adjustments for
payment of principal or conversion into shares of our common stock) by June 30,
2008, $16,210,000 to repay the December 2006 Note by January 4, 2010, (not
including any interest which is accruing or payments of principal) $6,351,391 to
repay the Term Note (not including any interest which is accruing or payments of
principal) and $32,189,731 to repay Gulf Coast's note (not including any
interest which is accruing or payments of principal), if such notes are not
repaid by production payments on certain of our properties, as described below,
by July 2, 2007 and October 28, 2009, respectively. If we fail to raise this
money, we could be forced to abandon or curtail our business
operations.
 
 -61-
 
 WE MAY FACE DELAYS AND/OR MAY BE
PREVENTED FROM EXECUTING OUR CURRENTLY PLANNED DRILLING ACTIVITIES IF WE DO NOT
RECEIVE THE APPROXIMATELY $5,000,000 IN CASH HELD IN A RESTRICTED ACCOUNT, WHICH
LAURUS HAS SOLE DISCRETION IN RELEASING TO US.
  We
currently have restricted cash of $4,967,109, which cash is restricted by Laurus
and held in a bank account for use by us in connection with future drilling
operations on the Manti Property by Gulf Coast. The restricted cash must be
released by Laurus for our and Gulf Coast’s use, and although Laurus has agreed
to release $1,500,000 of the restricted cash every ninety (90) days after the
closing date of the December 2006 Note (December 28, 2006), until such funds
have been fully dis bursed , we can
provide no assurances that such funds will be released to us in the
future.  The release of our restricted funds by Laurus is at Laurus’ sole
discretion, and although we have requested our first $1,500,000 tranche of funds
to date, we have not received those funds from Laurus.  If we do not
receive the $1,500,000 from the restricted bank account, which we have requested
to date, and/or if we do not continue to receive the restricted cash which we
currently require to continue our drilling operations, we may be forced to
curtail or abandon our currently planned drilling activities.  If that were
to happen, it may delay or prevent our discovery of new oil and gas reserves, if
any, and may cause the value of our common stock to decline in value or become
worthless.
  
 WE RELY HEAVILY ON EDWARD R.
DESTEFANO, OUR SOLE OFFICER AND DIRECTOR, AND IF HE WERE TO LEAVE, WE COULD FACE
SUBSTANTIAL COSTS IN SECURING A SIMILARLY QUALIFIED OFFICER AND
DIRECTOR.
 
 Our
success depends upon the personal efforts and abilities of Edward R. DeStefano,
our sole Director and our President, Chief Executive Officer, Chief Financial
Officer, Treasurer and Secretary. Our ability to operate and implement our
exploration activities is heavily dependent on the continued service of Mr.
DeStefano and our ability to attract qualified contractors on an as-needed
basis. We face continued competition for such contractors. We do have an
employment contract, as amended, with Mr. DeStefano which is effective for three
years ending on August 30, 2008; and we currently have key man insurance on Mr.
DeStefano in the amount of $1,000,000. Mr. DeStefano is our driving force and is
responsible for maintaining our relationships and operations. We cannot be
certain that we will be able to retain Mr. DeStefano and/or attract and retain
such contractors in the future and/or that he will not terminate his employment
agreement with us. The loss of Mr. DeStefano and/or our inability to attract and
retain qualified contractors on an as-needed basis could have a material adverse
effect on our business and operations.
 
 -62-
 
 EDWARD R. DESTEFANO OWNS
APPROXIMATELY 67.0% OF OUR OUTSTANDING COMMON STOCK, AND HAS SIGNIFICANT
INFLUENCE OVER OUR CORPORATE DECISIONS, AND AS A RESULT, IF YOU INVEST IN US,
YOUR ABILITY TO AFFECT CORPORATE DECISIONS WILL BE LIMITED.
 
 Edward R.
DeStefano, our sole Director and sole executive officer, holds 37,514,350 shares
of our common stock, representing approximately 67.0% of the outstanding shares
of our common stock (and which will represent approximately 37.8% of our
outstanding common stock assuming the sale of all 43,060,789 of the shares
issuable upon conversion of Laurus' Note and the exercise of Laurus' Warrant,
Option and December Option, provided that Laurus may not convert the Note, or
exercise the Warrant or Options if such conversion or exercise would cause it to
own more than 9.99% of our outstanding common stock). This restriction, however,
does not prevent Laurus from converting and/or exercising some of its holdings,
selling those shares (assuming such shares are registered herein, are eligible
to be sold under Rule 144 or another exemption from registration under the
Securities Act), and then converting the rest of its holdings, while still
staying below the 9.99% limit. Accordingly, Mr. DeStefano will have significant
influence in determining the outcome of all corporate transactions or other
matters, including mergers, consolidations and the sale of all or substantially
all of our assets, and also the power to prevent or cause a change in control
even after such conversion and exercise by Laurus, as Mr. DeStefano will likely
continue to be our largest shareholder. The interests of Mr. DeStefano may
differ from the interests of the other stockholders and thus result in corporate
decisions that are adverse to other shareholders. Additionally, potential
investors should take into account the fact that any vote of shares purchased
will have limited effect on the outcome of corporate decisions.
 
 WE DID NOT COMPLY WITH RULE 152 IN
CONNECTION WITH OUR ENTRY INTO THE EIGHTH AMENDMENT WITH LAURUS, WHICH HAS SINCE
BEEN RESCINDED, AND WE MAY CONTINUE TO HAVE LIABILITY IN CONNECTION WITH SUCH
RESCISSION.
 
 We
previously entered into the Eighth Amendment with Laurus (described in greater
detail below), which modified the terms of the Warrant and Options while we were
in registration in connection with our Form SB-2 Registration Statement, in
violation of Rule 152 under the Securities Act of 1933, as amended ("Rule 152").
As a result, we rescinded the Eighth Amendment and all of the amendments and
modifications to the Warrant and Options affected in connection with the Eighth
Amendment pursuant to the Agreement to Rescind the Eighth Amendment (described
below). Although the previous amendments to the Warrant and Options have been
rescinded, we may face liability in connection with our violation of Rule 152
and/or in connection with the rescission of the terms of our Eighth Amendment.
Such liability could cost us substantial time and money, which could, in turn
cause the value of our securities to decrease in value.
 
 -63-
  BECAUSE
OF THE SPECULATIVE NATURE OF OIL AND GAS EXPLORATION, THERE IS SUBSTANTIAL RISK
THAT NO ADDITIONAL COMMERCIALLY EXPLOITABLE OIL OR GAS WILL BE FOUND AND THAT
OUR BUSINESS WILL FAIL.
 
 The
search for commercial quantities of oil as a business is extremely risky. We
cannot provide investors with any assurance that our properties contain
commercially exploitable quantities of oil and/or gas. The exploration
expenditures to be made by us may not result in the discovery of commercial
quantities of oil and/or gas and problems such as unusual or unexpected
formations and other conditions involved in oil and gas exploration, and often
result in unsuccessful exploration efforts. If we are unable to find
commercially exploitable quantities of oil and gas, and/or we are unable to
commercially extract such quantities, we may be forced to abandon or curtail our
business plan, and as a result, any investment in us may become
worthless.
 
 BECAUSE OF THE INHERENT DANGERS
INVOLVED IN OIL AND GAS EXPLORATION, THERE IS A RISK THAT WE MAY INCUR LIABILITY
OR DAMAGES AS WE CONDUCT OUR BUSINESS OPERATIONS, WHICH COULD FORCE US TO EXPEND
A SUBSTANTIAL AMOUNT OF MONEY IN CONNECTION WITH LITIGATION AND/OR A
SETTLEMENT.
 
 The oil
and natural gas business involves a variety of operating hazards and risks such
as well blowouts, caterings, pipe failures, casing collapse, explosions,
uncontrollable flows of oil, natural gas or well fluids, fires, formations with
abnormal pressures, pipeline ruptures or spills, pollution, releases of toxic
gas and other environmental hazards and risks. These hazards and risks could
result in substantial losses to us from, among other things, injury or loss of
life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, cleanup responsibilities,
regulatory investigation and penalties and suspension of operations. In
addition, we may be liable for environmental damages caused by previous owners
of property purchased and leased by us. As a result, substantial liabilities to
third parties or governmental entities may be incurred, the payment of which
could reduce or eliminate the funds available for exploration, development or
acquisitions or result in the loss of our properties and/or force us to expend
substantial monies in connection with litigation or settlements. In accordance
with customary industry practices, we maintain insurance against some, but not
all, of such risks and losses. As such, there can be no assurance that any
insurance obtained by us will be adequate to cover any losses or liabilities. We
cannot predict the availability of insurance or the availability of insurance at
premium levels that justify our purchase. The occurrence of a significant event
not fully insured or indemnified against, could materially and adversely affect
our financial condition and operations. We may elect to self-insure if
management believes that the cost of insurance, although available, is excessive
relative to the risks presented. In addition, pollution and environmental risks
generally are not fully insurable. The occurrence of an event not fully covered
by insurance could have a material adverse effect on our financial condition and
results of operations, which could lead to any investment in us becoming
worthless.
 
 -64-
 
 WE REQUIRE SUBSTANTIAL ADDITIONAL
FINANCING TO CONTINUE OUR EXPLORATION AND DRILLING ACTIVITIES, WHICH FINANCING
IS OFTEN HEAVILY DEPENDENT ON THE CURRENT MARKET PRICE FOR OIL AND GAS, WHICH WE
ARE UNABLE TO PREDICT.
  Our
growth and continued operations could be impaired by limitations on our access
to capital markets. If the market for oil and/or gas were to weaken for an
extended period of time, our ability to raise capital would be substantially
reduced. There can be no assurance that capital from outside sources will be
available, or that if such financing is available, that it will not involve
issuing securities senior to the common stock or equity financings which will be
dilutive to holders of common stock. Such issuances, if made, would likely cause
a decrease in the value of our common stock.
 
 THE MARKET FOR OIL AND GAS IS
INTENSELY COMPETITIVE, AND AS SUCH, COMPETITIVE PRESSURES COULD FORCE US TO
ABANDON OR CURTAIL OUR BUSINESS PLAN.
 
 The
market for oil and gas exploration services is highly competitive, and we only
expect competition to intensify in the future. Numerous well-established
companies are focusing significant resources on exploration and are currently
competing with us for oil and gas opportunities. Additionally, there are
numerous companies focusing their resources on creating fuels and/or materials
which serve the same purpose as oil and gas, but are manufactured from renewable
resources. As a result, there can be no assurance that we will be able to
compete successfully or that competitive pressures will not adversely affect our
business, results of operations and financial condition. If we are not able to
successfully compete in the marketplace, we could be forced to curtail or even
abandon our current business plan, which could cause any investment in us to
become worthless.
 
 WE MAY NOT BE ABLE TO SUCCESSFULLY
MANAGE OUR GROWTH, WHICH COULD LEAD TO OUR INABILITY TO IMPLEMENT OUR BUSINESS
PLAN.
 
 Our
growth is expected to place a significant strain on our managerial, operational
and financial resources, especially considering that we currently only have one
executive officer and Director. Further, as we enter into additional contracts,
we will be required to manage multiple relationships with various consultants,
businesses and other third parties. These requirements will be exacerbated in
the event of our further growth or in the event that the number of our drilling
and/or extraction operations increases. There can be no assurance that our
systems, procedures and/or controls will be adequate to support our operations
or that our management will be able to achieve the rapid execution necessary to
successfully implement our business plan. If we are unable to manage our growth
effectively, our business, results of operations and financial condition will be
adversely affected, which could lead to us being forced to abandon or curtail
our business plan and operations.
 
 -65-
 
 THE PRICE OF OIL AND NATURAL GAS HAS
HISTORICALLY BEEN VOLATILE AND IF IT WERE TO DECREASE SUBSTANTIALLY, OUR
PROJECTIONS, BUDGETS, AND REVENUES WOULD BE ADVERSELY EFFECTED, AND WE WOULD
LIKELY BE FORCED TO MAKE MAJOR CHANGES IN OUR OPERATIONS.
  Our
future financial condition, results of operations and the carrying value of our
oil and natural gas properties depend primarily upon the prices we receive for
our oil and natural gas production. Oil and natural gas prices historically have
been volatile and likely will continue to be volatile in the future, especially
given current world geopolitical conditions. Our cash flows from operations are
highly dependent on the prices that we receive for oil and natural gas. This
price volatility also affects the amount of our cash flows available for capital
expenditures and our ability to borrow money or raise additional capital. In the
short term, our production on a barrel of oil equivalent (BOE) is weighted
towards oil and oil prices are likely to affect us more than gas prices because
as of December 31, 2006 (on a BOE using 6 MCF equals 1 barrel of oil) more than
approximately 73% of our Proved Developed Producing reserves for the Company and
its subsidiary Gulf Coast Oil Corporation were oil. Over the long term, our
production on a barrel of oil equivalent (BOE) is weighted towards gas and gas
prices are likely to affect us more than oil prices because as of December 31,
2006 (on a BOE using 6 MCF equals 1 barrel of oil) more than approximately 58%
of our Total Proved reserves (PDP, PDNP and PUD reserves) for the Company and
its subsidiary Gulf Coast Oil Corporation were gas. The prices for oil and
natural gas are subject to a variety of additional factors that are beyond our
control. These factors include:
 
 o
                            the
      level of consumer demand for oil and natural
  gas;
 
 o
                            the
      domestic and foreign supply of oil and natural
  gas;
 
 o
                            the
      ability of the members of the Organization of Petroleum Exporting
      Countries ("OPEC") to agree to and maintain oil price and production
      controls;
 
 o
                            the
      price of foreign oil and natural
gas;
 
 o
                            domestic
      governmental regulations and taxes;
 
 o
                            the
      price and availability of alternative fuel
  sources;
 
 o
                            weather
      conditions;
 
 o
                            market
      uncertainty due to political conditions in oil and natural gas producing
      regions, including the Middle East;
and
 
 o
                            worldwide
      economic conditions.
 
  
 -66-
 properties.
If the oil and natural gas industry experiences significant price declines, we
may be unable to make planned expenditures, among other things. If this were to
happen, we may be forced to abandon or curtail our business operations, which
would cause the value of an investment in us to decline in value, or become
worthless.
 
 OUR OPERATIONS ARE HEAVILY DEPENDENT
ON CURRENT ENVIRONMENTAL REGULATIONS, WHICH WE ARE UNABLE TO PREDICT, AND WHICH
MAY CHANGE IN THE FUTURE, CAUSING US TO EXPEND SUBSTANTIAL ADDITIONAL
CAPITAL.
 
 Public
interest in the protection of the environment has increased dramatically in
recent years. Our oil and natural gas production and saltwater disposal
operations and our processing, handling and disposal of hazardous materials,
such as hydrocarbons and naturally occurring radioactive materials are subject
to stringent regulation. We could incur significant costs, including cleanup
costs resulting from a release of hazardous material, third-party claims for
property damage and personal injuries fines and sanctions, as a result of any
violations or liabilities under environmental or other laws. Changes in or more
stringent enforcement of environmental laws could force us to expend additional
operating costs and capital expenditures to stay in compliance.
 
 -67-
 
 Various
federal, state and local laws regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment,
directly impact oil and gas exploration, development and production operations,
and consequently may impact our operations and costs. These regulations include,
among others, (i) regulations by the Environmental Protection Agency and various
state agencies regarding approved methods of disposal for certain hazardous and
non-hazardous wastes; (ii) the Comprehensive Environmental Response,
Compensation, and Liability Act, Federal Resource Conservation and Recovery Act
and analogous state laws which regulate the removal or remediation of previously
disposed wastes (including wastes disposed of or released by prior owners or
operators), property contamination (including groundwater contamination), and
remedial plugging operations to prevent future contamination; (iii) the Clean
Air Act and comparable state and local requirements which may result in the
gradual imposition of certain pollution control requirements with respect to air
emissions from our operations; (iv) the Oil Pollution Act of 1990 which contains
numerous requirements relating to the prevention of and response to oil spills
into waters of the United States; (v) the Resource Conservation and Recovery Act
which is the principal federal statute governing the treatment, storage and
disposal of hazardous wastes; and (vi) state regulations and statutes governing
the handling, treatment, storage and disposal of naturally occurring radioactive
material.
 
 Management
believes that we are in substantial compliance with applicable environmental
laws and regulations. To date, we have not expended any material amounts to
comply with such regulations, and management does not currently anticipate that
future compliance will have a materially adverse effect on our consolidated
financial position, results of operations or cash flows. However, if we are
deemed to not be in compliance with applicable environmental laws, we could be
forced to expend substantial amounts to be in compliance, which would have a
materially adverse effect on our financial condition. If this were to happen,
any investment in us could be lost.
  3D SEISMIC INTERPRETATION DOES NOT
GUARANTEE THAT HYDROCARBONS ARE PRESENT OR IF PRESENT WILL PRODUCE IN ECONOMIC
QUANTITIES.
 
 We
rely on 3D seismic studies to assist us with assessing prospective drilling
opportunities on our properties, as well as on properties that we may
acquire.  Such seismic studies are merely an interpretive tool and do
not necessarily guarantee that hydrocarbons are present or if present will
produce in economic quantities.  Our inability to properly use and
interpret the 3D seismic data may adversely affect our financial condition and
results of operations.
 
 OUR FINANCIAL STATEMENTS, INCLUDING
OUR QUARTERLY LIABILITIES AND STATEMENT OF OPERATIONS ARE SUBJECT TO QUARTER BY
QUARTER CHANGES IN OUR DERIVATIVE ACCOUNTING OF THE LAURUS NOTE, WARRANT,
OPTION, SINGLE COMPOUND EMBEDDED DERIVATIVE AND DECEMBER
OPTION.
 
 The value
of the liabilities relating to the Laurus' Note, Warrant, Option, December
Option and single compound embedded derivative on our consolidated Balance
Sheet, as well as the net fair value of the Laurus Note, Warrant, Option,
December Option and single compound embedded derivatives in our consolidated
Statements of Operations, are subject to the changes in the trading value of our
securities. As a result, our consolidated financial statements and results of
operations may fluctuate quarter to quarter based on factors, such as the
trading value of our common stock on the OTCBB and the amount of shares
converted by Laurus in connection with the Note and exercised in connection with
the Warrant, Option and December Option. Consequently, our liabilities and
consolidated statements of operations may vary quarter to quarter, based on
factors other than the Company's revenues and expenses.
 
 -68-
 
 
 RISKS RELATING TO THE COMPANY'S
SECURITIES
 
 A DEFAULT BY US UNDER THE SECURED
CONVERTIBLE TERM NOTE, AS AMENDED AND RESTATED, COMMON STOCK PURCHASE WARRANT,
OPTION, SECURED TERM NOTE, AS AMENDED AND RESTATED, THE DECEMBER 2006 NOTE, OR
GULF COAST'S NOTE, WOULD ENABLE LAURUS MASTER FUND, LTD., TO TAKE CONTROL OF
SUBSTANTIALLY ALL OF OUR ASSETS.
 
 The
Convertible Secured Term Note, as amended and restated, common stock Purchase
Warrant, Option and December Option, as well as the Secured Term Note, as
amended and restated, December 2006 Note, and the Gulf Coast Note, as amended
and restated, are secured by Laurus by a continuing security interest in all of
our assets, including without limitation, our cash, cash equivalents, accounts
receivable, deposit accounts, inventory, equipment, goods, fixtures and other
tangible and intangible assets, which we own or at any time in the future may
acquire rights, title or interest to. As a result, if we default under any
provision of the Note, Warrant, Option, December Option, Term Note, December
2006 Note or the Gulf Coast Note or we fail to pay any amounts due to Laurus,
Laurus may take control of substantially all of our assets. If this were to
happen, we could be left with no revenue producing assets, and the value of our
common stock could become worthless.
 
 Additionally,
pursuant to a Stock Pledge Agreement between Laurus and us, we pledged all of
the outstanding stock of our wholly owned subsidiaries, Century Resources, Inc.
("Century") and Gulf Coast Oil Corporation ("Gulf Coast"), as collateral for the
funds loaned to us and Gulf Coast from Laurus. As a result, if we default under
any provision of the Note, Warrant, Option, December Option, Term Note, December
2006 Note, Gulf Coast Note or any other agreement entered into with Laurus,
Laurus may take control of Century and/or Gulf Coast. If this were to happen, it
could force us to abandon or curtail our business plan, and could result in our
securities becoming worthless.
 
 WE MAY BE REQUIRED TO PAY PENALTIES
TO LAURUS MASTER FUND, LTD. UNDER THE REGISTRATION RIGHTS AGREEMENT, WHICH COULD
FORCE US TO EXPEND A SUBSTANTIAL AMOUNT OF THE MONEY WE HAVE PREVIOUSLY
RAISED.
 
 We
granted Laurus Master Fund, Ltd., registration rights to the shares issuable to
Laurus in connection with the Note, Warrant, Option and December Option,
pursuant to a Registration Rights Agreement, which has been amended several
times, as described herein. While we previously obtained effectiveness of a
registration statement including a portion of the shares issuable to Laurus in
connection with the exercise of the Warrant, we and Laurus agreed that if in the
future, Laurus is not able to sell the remaining shares underlying the Warrant,
Options and/or Convertible Note pursuant to Rule 144(k) we would file an
additional Registration Statement in connection with such shares. As a result,
if we are required to file additional Registration Statements on Laurus’ behalf,
and fail to
obtain effectiveness of such Registration Statements, unless such failure is
waived by Laurus, and/or our common stock ceases to trade on the OTC Bulletin
Board, we will be forced to pay substantial penalties to Laurus, which would
cause us to spend a substantial amount of the money raised in connection with
the sale of the Note and Term Note, and could force us to abandon or scale back
our current planned operations.
 
 -69-
 
 
 THE CONVERTIBLE NOTE, WARRANT, OPTION
AND DECEMBER OPTION CONTAIN PROVISIONS WHEREBY LAURUS MASTER FUND, LTD. MAY HOLD
MORE THAN 9.99% OF OUR COMMON STOCK, PROVIDED THEY PROVIDE US SEVENTY-FIVE (75)
DAYS NOTICE OR AN EVENT OF DEFAULT OCCURS.
 
 Although
Laurus may not convert its Convertible Note and/or exercise its Warrant, Option
and/or December Option if such conversion or exercise would cause it to own more
than 9.99% of our outstanding common stock, the Convertible Note, Warrant,
Option and December Option also contain provisions which provide for the 9.99%
limit to be waived provided that Laurus provides us with 75 days notice of its
intent to hold more than 9.99% of our common stock or upon the occurrence of an
event of default (as defined under the Convertible Note, Warrant, Option and/or
December Option). As a result, if we receive 75 days notice from Laurus and/or
an event of default occurs and our Registration Statement covering Laurus'
securities is declared effective, Laurus may fully exercise the Warrant, Option
and December Option and fully convert the Convertible Note, and become the
beneficial owner of up to approximately 43.6% of our then outstanding common
stock, not including the conversion of interest on the Convertible
Note.
 
 If that
were to happen, Laurus would have significant control over us, including
exerting significant influence over our election of Directors and ability to
cause or prevent a change in control and/or our business operations. If Laurus
were to take control over approximately 47.2% of our outstanding common stock,
it could force us to change our business focus, sell all or substantially all of
our assets, or abandon our business plan. Any such event, if it were to occur
would likely cause the value of our common stock to decline, and could lead to
our common stock becoming worthless.
 
 IF AN EVENT OF DEFAULT OCCURS UNDER
THE CONVERTIBLE NOTE, TERM NOTE, GULF COAST NOTE, DECEMBER 2006 NOTE OR RELATED
AGREEMENTS, WE COULD BE FORCED TO IMMEDIATELY PAY THE AMOUNTS DUE UNDER THE
NOTES.
 
 The
Secured Convertible Term Note, Secured Term Note, December 2006 Note and Gulf
Coast Notes (collectively the "Notes") include provisions whereby Laurus Master
Fund, Ltd., may make the amounts outstanding under all of its outstanding Notes
payable immediately due and payable if an event of default occurs under any one
of the Notes, which events of default include:
 
 o
                            our
      failure to pay amounts due under the
Notes;
 
 -70-
 
 
 o
                            breach
      of any covenants under the Notes, if not cured within 15
    days;
 
 o
                            breach
      of any warranties found in the
Notes;
 
 o
                            the
      occurrence of any default under any agreement, which causes any contingent
      obligation to become due prior to its stated maturity or to become
      payable;
 
 o
                            any
      change or occurrence likely to have a material adverse effect on the
      business, assets, liabilities, financial condition, our operations or
      prospects;
 
 o
                            an
      indictment or other proceedings against us or any executive officer;
      or
 
 o
                            a
      breach by us of any provision of the Securities Purchase Agreement, or any
      other Related Agreement entered into in connection with the sale of the
      Notes.
 
 If any
event of default were to occur under the Notes and Laurus was to make the entire
amount of the Notes immediately due and payable, and we did not have sufficient
funds on hand to pay such amounts, we could be forced to sell some or all of our
assets at less than fair market value, and/or abandon or curtail our business
plan and operations.
 
 THE ISSUANCE AND SALE OF COMMON STOCK
IN CONNECTION WITH THE SECURED CONVERTIBLE TERM NOTE, COMMON STOCK PURCHASE
WARRANT, OPTION AND DECEMBER OPTION MAY DEPRESS THE MARKET PRICE OF OUR COMMON
STOCK.
 
 
 As of
March 30, 2007, we had 56,010,612 shares of common stock issued and outstanding.
Although Laurus may not convert its Note and/or exercise its Warrant, Option
and/or December Option if such conversion or exercise would cause it to own more
than 9.99% of our outstanding common stock (unless Laurus provides us 75 days
notice and/or an event of default occurs, subject to Laurus' pledge under the
December Option, not to exercise any part of the December Option, until (a) the
payment in full of all obligations of the Company to Laurus under the
Convertible Note and (b) the exercise of the Warrant, unless an event of default
occurs and is continuing), this restriction does not prevent Laurus from
converting and/or exercising some of its holdings, selling those shares, and
then converting the rest of its holdings, while still staying below the 9.99%
limit. As a result, as sequential conversions and sales take place, the price of
our common stock may decline to the detriment of our then shareholders. All of
the shares issuable upon conversion of the Note, Warrant, Option and December
Option, may be sold without restriction once our Registration Statement is
declared effective and the sale of these shares may adversely affect the market
price of our common stock.
 
 -71-
 
 THE ISSUANCE OF COMMON STOCK
UNDERLYING THE SECURED CONVERTIBLE NOTE, OPTION, DECEMBER OPTION AND COMMON
STOCK PURCHASE WARRANT WILL CAUSE IMMEDIATE AND SUBSTANTIAL
DILUTION.
 
 The
issuance of common stock upon conversion of the Secured Convertible Note
("Note"), common stock Purchase Warrant ("Warrant"), Option and December Option
will result in immediate and substantial dilution to the interests of other
stockholders since Laurus Master Fund, Ltd., may ultimately receive and sell the
full amount issuable upon conversion and/or exercise of the Note, Warrant and
Option. Although Laurus may not convert its Note and/or exercise its Warrant,
Option and/or December Option if such conversion or exercise would cause it to
own more than 9.99% of our outstanding common stock (unless Laurus provides us
75 days notice and/or an event of default occurs, subject to Laurus' pledge
under the December Option, not to exercise any part of the December Option,
until (a) the payment in full of all obligations of the Company to Laurus under
the Convertible Note and (b) the prior exercise of the Warrant, unless an event
of default occurs and is continuing), this restriction does not prevent Laurus
from converting and/or exercising some of its holdings, selling those shares,
and then converting the rest of its holdings, while still staying below the
9.99% limit. In this way, Laurus could sell more than this limit while never
actually holding more shares than this limit prohibits. If Laurus chooses to do
this, it will cause substantial dilution to our common stock, and could cause
the value of our common stock to decline precipitously.
 
 RISKS RELATING TO OUR COMMON
STOCK
 
 WE HAVE NOT PAID ANY CASH DIVIDENDS
IN THE PAST AND HAVE NO PLANS TO ISSUE CASH DIVIDENDS IN THE FUTURE, WHICH COULD
CAUSE THE VALUE OF OUR COMMON STOCK TO HAVE A LOWER VALUE THAN OTHER SIMILAR
COMPANIES WHICH DO PAY CASH DIVIDENDS.
 
 We have
not paid any cash dividends on our common stock to date and do not anticipate
any cash dividends being paid to holders of our common stock in the foreseeable
future. While our dividend policy will be based on the operating results and
capital needs of the business, it is anticipated that any earnings will be
retained to finance our future expansion. As we have no plans to issue cash
dividends in the future, our common stock could be less desirable to other
investors and as a result, the value of our common stock may decline, or fail to
reach the valuations of other similarly situated companies who have historically
paid cash dividends in the past.
 
 
 THE MARKET FOR OUR COMMON STOCK MAY
BE VOLATILE.
 
 The
market for our common stock has historically been volatile and we anticipate
that such market will continue to be subject to wide fluctuations in response to
several factors, including, but not limited to:
 
 -72-
 
 
 (1)
actual or anticipated variations in our results of operations;
 
 (2) our
ability or inability to generate new revenues;
 
 (3)
increased competition; and
 
 (4)
conditions and trends in the oil and gas exploration industry and the market for
oil and gas.
 
 Our
common stock is traded on the over-the-counter Bulletin Board under the symbol
"NCEY." In recent years, the stock market in general has experienced extreme
price fluctuations that have oftentimes been unrelated to the operating
performance of the affected companies. Similarly, the market price of our common
stock may fluctuate significantly based upon factors unrelated or
disproportionate to our operating performance. These market fluctuations, as
well as general economic, political and market conditions, such as recessions,
interest rates or international currency fluctuations may adversely affect the
market price of our common stock.
 
 IF WE ARE LATE IN FILING OUR
QUARTERLY OR ANNUAL REPORTS WITH THE SEC, WE MAY BE DE-LISTED FROM THE
OVER-THE-COUNTER BULLETIN BOARD.
 
 Pursuant
to new Over-The-Counter Bulletin Board ("OTCBB") rules relating to the timely
filing of periodic reports with the SEC, any OTCBB issuer which fails to file a
periodic report (Form 10-QSB's or 10-KSB's) by the due date of such report (not
withstanding any extension granted to the issuer by the filing of a Form
12b-25), three (3) times during any twenty-four (24) month period is
automatically de-listed from the OTCBB. Such removed issuer would not be
re-eligible to be listed on the OTCBB for a period of one-year, during which
time any subsequent late filing would reset the one-year period of de-listing.
If we are late three times in any twenty-four (24) month period and are
de-listed from the OTCBB, our securities may become worthless and we may be
forced to curtail or abandon our business plan.
 
 
 -73-
 
 OUR COMMON STOCK IS SUBJECT TO THE
"PENNY STOCK" RULES OF THE SECURITIES AND EXCHANGE COMMISSION WHICH LIMITS THE
TRADING MARKET IN OUR COMMON STOCK, MAKES TRANSACTIONS IN OUR COMMON STOCK
CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR COMMON
STOCK.
 
 Our
common stock is considered a "penny stock" as defined in Rule 3a51-1 promulgated
by Commission under the Securities Exchange Act of 1934. The Commission's Rule
15g-9 regarding penny stocks imposes additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally persons with net worth in excess
of $1,000,000 or an annual income exceeding $200,000 or $300,000 jointly with
their spouse). For transactions covered by the rules, the broker-dealer must
make a special suitability determination for the purchaser and receive the
purchaser's written agreement to the transaction prior to the sale. Thus, the
rules affect the ability of broker-dealers to sell our common stock should they
wish to do so because of the adverse effect that the rules have upon liquidity
of penny stocks. Unless the transaction is exempt under the rules, under the
Securities Enforcement Remedies and Penny Stock Reform Act of 1990,
broker-dealers effecting customer transactions in penny stocks are required to
provide their customers with (i) a risk disclosure document; (ii) disclosure of
current bid and ask quotations if any; (iii) disclosure of the compensation of
the broker-dealer and its sales personnel in the transaction; (iv) monthly
account statements showing the market value of each penny stock held in the
customer's account and (v) the rules require that a broker wait two business
days after sending the risk disclosure document to an investor before effecting
a transaction in penny stocks for that investor. As a result of the penny stock
rules, the market liquidity for our common stock may be adversely affected by
limiting the ability of broker-dealers to sell our common stock and the ability
of purchasers to resell our common stock. Additionally, various state securities
laws impose restrictions on transferring "penny stocks" and as a result,
investors in the common stock may have their ability to sell their shares of the
common stock impaired.
 
 
 ITEM 7. FINANCIAL
STATEMENTS
  The
Financial Statements required by Item 310 of Regulation S-B are stated in U.S.
dollars and are prepared in accordance with U.S. Generally Accepted Accounting
Principles.
 
 
 -74-
 
 
 REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 The Board
of Directors and Shareholders
 New
Century Energy Corp.
 
 We have
audited the accompanying consolidated balance sheet of New Century Energy Corp.
(the Company) as of December 31, 2006, and the related consolidated statements
of operations, stockholders' equity (deficit), and cash flows for the years
ended December 31, 2006 and 2005. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of New Century
Energy Corp. as of December 31, 2006, and the results of their operations and
their cash flows for the years ended December 31, 2006 and 2005, in conformity
with generally accepted accounting principles in the United States of
America.
 
 As
discussed in Note 19 – “Supplemental Oil and Gas Information (Unaudited)”, the
Company has revised its oil and gas reserve information.
 
 PMB HELIN
DONOVAN, LLP
 
 /s/ PMB
Helin Donovan, LLP
 
 March 17,
2007, except as to Note 19, as to which the date is April 11,
2008
 Houston,
Texas
   -75-
  PART I.
FINANCIAL INFORMATION
  ITEM 1.
FINANCIAL STATEMENTS
 
 NEW
CENTURY ENERGY CORP.
 CONSOLIDATED
BALANCE SHEET
 December
31, 2006
 ASSETSCurrent
      AssetsCash
      and cash equivalents
                $
                7,524,278Restricted
      cash
                
                4,967,109Certificate
      of deposit
                
                76,801Accounts
      receivable
                
                1,347,480Due
      from Laurus Master Fund, Ltd.
                
                584,755Inventory
                
                326,091Drilling
      and completion advances
                
                62,628Prepaid
      expenses and other
                
                227,781Total
      Current Assets
                
                15,116,923Office
      equipment, net of $36,378 accumulated depreciation
                
                150,453Oil
      and gas properties, using successful efforts accountingProved
      properties
                
                57,492,445Unproved
      properties
                
                418,906Wells
      and related equipment and facilities
                
                5,391,64363,302,994Less
      accumulated depletion and impairment
                
                (12,640,446
                )Net
      oil and gas properties
                
                50,662,548Deferred
      loan costs and other assets, net
                
                115,757TOTAL
      ASSETS
                $
                66,045,681LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      LiabilitiesAccounts
      payable
                $
                831,091Accrued
      liabilities
                
                970,374Liabilities
      related to purchase of Vertica shell
                
                59,260Royalty
      payments
                
                144,542Current
      portion of notes payable
                
                11,580,577Derivative
      liability for Laurus warrant
                
                407,482Derivative
      liability for Laurus stock option
                
                719,683Single
      compound embedded derivatives with convertible note
                
                378,900Derivative
      liability for Laurus December option
                
                556,309Total
      Current Liabilities
                
                15,648,218Notes
      payable, less current portion (net of unamortizeddiscount
      and loan costs of $3,329,070)
                
                53,681,198Asset
      retirement obligation
                
                391,186Total
      Liabilities
                
                69,720,602Commitments
      and Contingencies (see Note 14)
                
                -Stockholders'
      DeficitPreferred
      stock, $.001 par, 20,000,000 shares authorized,Series
      A convertible preferred shares, no sharesissued
      and outstanding
                
                -Series
      B convertible preferred shares, 2,000,000 sharesdesignated,
      none issued
                
                -Common
      stock, $.001 par value, 200,000,000 sharesauthorized,
      56,010,612 shares issued and outstanding
                
                56,011Additional
      paid in capital
                
                9,952,743Retained
      deficit
                
                (13,683,675
                )Total
      Stockholders' Deficit
                
                (3,674,921
                )TOTAL
      LIABILITIES AND STOCKHOLDERS’ DEFICIT
                $
                66,045,681
  The
accompanying notes are an integral part of these consolidated
 financial
statements.
 
  -76-
  NEW
CENTURY ENERGY CORP.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 Years
ended December 31, 2006 and 2005
 2006
                    
                    2005RevenuesOil
      and gas sales
                    
                    $
                    14,863,728
                    
                    $
                    6,918,884Gain
      on sale of oil and gas interest
                    
                    
                    44,766
                    
                    
                    98,181Gas
      operations consulting
                    
                    
                    18,708
                    
                    
                    --Total
      Revenues
                    
                    
                    14,927,202
                    
                    
                    7,017,065ExpensesExploration
                    
                    
                    1,128,134
                    
                    
                    134,579Lease
      operating
                    
                    
                    1,509,150
                    
                    
                    640,455Production
      taxes
                    
                    
                    704,051
                    
                    
                    393,090Depreciation,
      depletionand
      amortization
                    
                    
                    9,737,889
                    
                    
                    2,177,485General
      & administrative
                    
                    
                    1,291,295
                    
                    
                    2,296,879Total
      expenses
                    
                    
                    14,370,519
                    
                    
                    5,642,488Operating
      income
                    
                    
                    556,683
                    
                    
                    1,374,577Other
      income (expense)Net
      decrease in fair value of derivativeliabilities
                    
                    
                    1,296,373
                    
                    
                    7,117,882Loss
      on early extinguishment of debt
                    
                    
                    (204,170
                    )
                    
                    (8,309,759
                    )Interest
      and amortization of discount on debt
                    
                    
                    (7,958,392
                    )
                    
                    (3,872,265
                    )Purchase
      and write down of Vertica liabilities
                    
                    
                    60,815
                    
                    
                    509,028Other
      Vertica expenses
                    
                    
                    --
                    
                    
                    (196,133
                    )Interest
      and other income
                    
                    
                    154,
      407
                    
                    
                    64,708Other
      expenses
                    
                    
                    (3,284
                    )
                    
                    (104,492
                    )Gain
      on sale of equipment
                    
                    
                    --
                    
                    
                    17,630Total
      other income (expense)
                    
                    
                    (6,654,251
                    )
                    
                    (4,773,401
                    )Loss
      before income taxes
                    
                    
                    (6,097,568
                    )
                    
                    (3,398,824
                    )Income
      tax expense (benefit)
                    
                    
                    --
                    
                    
                    --NET
      LOSS
                    
                    $
                    (6,097,568
                    )
                    $
                    (3,398,824
                    )Loss
      per share
                    
                    $
                    (0.11
                    )
                    $
                    (0.07
                    )Weighted
      average common shares used incomputing
      basic loss per share
                    
                    
                    55,909,790
                    
                    
                    50,961,205Diluted
      loss per share
                    
                    $
                    (0.11
                    )
                    $
                    (0.13
                    )Weighted
      average common shares used incomputing
      diluted loss per share
                    
                    
                    55,909,790
                    
                    
                    54,275,225
  The
accompanying notes are an integral part of these consolidated
 financial
statements.
  -77-




NEW
CENTURY ENERGY CORP.
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
 Years
Ended December 31, 2006 and 2005


Series
      APreferred
      Stock
              
              Common
      Stock
              
              Additional
                Paid
      In
              
              Retained
                EarningsShares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              (Deficit)
              
              TotalsBalances,December
      31, 2004
              
              
              5,000
              
              $
              5
              
              
              45,489,666
              
              $
              45,490
              
              $
              4,753,761
              
              $
              (4,186,188
              )
              $
              613,068Stock
      for cash
              
              
              
              
              
              
              
              
              1,721,946
              
              
              1,722
              
              
              653,551
              
              
              -
              
              
              655,273Stock
      for services
              
              
              -
              
              
              -
              
              
              2,300,000
              
              
              2,300
              
              
              1,600,200
              
              
              -
              
              
              1,602,500Stock
      for debt
              
              
              -
              
              
              -
              
              
              46,000
              
              
              46
              
              
              29,954
              
              
              -
              
              
              30,000Stock
      for property
              
              
              -
              
              
              -
              
              
              1,320,000
              
              
              1,320
              
              
              830,280
              
              
              -
              
              
              831,600Warrant
      issued as finder’s fee
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              326,577
              
              
              -
              
              
              326,577Options
      exercised
              
              
              -
              
              
              -
              
              
              3,675,000
              
              
              3,675
              
              
              1,653,258
              
              
              -
              
              
              1,656,933Stock
      for legal settlement
              
              
              -
              
              
              -
              
              
              58,000
              
              
              58
              
              
              25,462
              
              
              -
              
              
              25,520Conversion
      of preferred stock
              
              
              (5,000
              )
              
              (5
              )
              
              1,100,000
              
              
              1,100
              
              
              -
              
              
              (1,095
              )
              
              -Net
      loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (3,398,824
              )
              
              (3,398,824
              )Balances,December
      31, 2005
              
              
              -
              
              
              -
              
              
              55,710,612
              
              
              55,711
              
              
              9,873,043
              
              
              (7,586,107
              )
              
              2,342,647Settlement
      with former officer
              
              
              -
              
              
              -
              
              
              100,000
              
              
              100
              
              
              29,900
              
              
              -
              
              
              30,000Stock
      for contract amendment
              
              
              -
              
              
              -
              
              
              200,000
              
              
              200
              
              
              49,800
              
              
              -
              
              
              50,000Net
      loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (6,097,568
              )
              
              (6,097,568
              )Balances,December
      31, 2006
              
              
              -
              
              $
              -
              
              
              56,010,612
              
              $
              56,011
              
              $
              9,952,743
              
              $
              (13,683,675
              )
              $
              (3,674,921
              )




The
accompanying notes are an integral part of these consolidated
 financial
statements.
   -78-




NEW
CENTURY ENERGY CORP.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 Years
Ended December 31, 2006 and 2005


2006
              
              2005Cash
      flows from operating activitiesNet
      loss
              $
              (6,097,568
              )
              $
              (3,398,824
              )Adjustments
      to reconcile net lossto
      net cash provided by operating activities:Depreciation,
      depletion and amortization
              
              9,737,889
              
              
              2,177,485Imputed
      interest on marketable security
              
              (1,801
              )
              
              --Release
      of Vertica shell liabilities
              
              (60,815
              )
              
              (509,028
              )Gain
      on sale of oil and gas properties
              
              (44,766
              )
              
              (98,181
              )Gain
      on sale of equipment
              
              -
              
              
              (17,630
              )Stock
      for services
              
              50,000
              
              
              1,602,500Settlement
      with former officer
              
              (25,483
              )
              
              -Loss
      on early extinguishment of debt
              
              204,170
              
              
              8,309,759Net
      decrease in fair value of derivatives
              
              (1,296,373
              )
              
              (7,117,882
              )Accretion
      of discount and loan cost ondebt
      to interest expense
              
              1,767,452
              
              
              2,593,537Asset
      retirement obligation
              
              33,296
              
              
              11,257Changes
      in working capital:Accounts
      receivable
              
              454,769
              
              
              (2,293,664
              )Inventory
              
              (278,301
              )
              
              17,913Prepaid
      expenses and other
              
              11,318
              
              
              (174,716
              )Accounts
      payable
              
              140,603
              
              
              427,113Accrued
      liabilities
              
              423,556
              
              
              514,508Royalty
      payments payable
              
              144,542
              
              
              -Net
      cash provided by operating activities
              
              5,162,488
              
              
              2,044,147Cash
      flows from investing activitiesFirst
      acquisition of Mustang Creek field
              
              (28,840,360
              )
              
              --Second
      acquisition of Mustang Creek field
              
              (3,946,859
              )
              
              --Third
      acquisition of Lindholm Hanson gas unitand
      wells, net of cash acquired
              
              (1,530,874
              )
              
              --First
      acquisition of Lindholm Hanson gas unitand
      wells, net of cash acquired
              
              --
              
              
              (10,394,361
              )Second
      acquisition of Lindholm Hanson gas unitand
      wells, net of cash acquired
              
              --
              
              
              (8,446,231
              )Capital
      expenditures on oil and gas properties
              
              (3,746,808
              )
              
              (2,639,997
              )Decrease(increase)in
      drilling advances
              
              199,716
              
              
              (262,343
              )Proceeds
      from sale of oil and gas propertyand
      equipment
              
              44,766
              
              
              115,811Cash
      restricted for drilling operations
              
              (4,967,109
              )Increase
      in other assets
              
              (247,066
              )
              
              (135,776
              )Net
      cash used in investing activities
              
              (43,034,594
              )
              
              (21,762,897
              )Cash
      flows from financing activitiesProceeds
      from acquisition financing
              
              43,345,295
              
              
              24,500,000Proceeds
      from long term debt issuance
              
              15,970,000
              
              
              --Proceeds
      from the sale of common stock
              
              --
              
              
              655,273Proceeds
      from the exercise of Laurus options
              
              --
              
              
              3,675Payments
      to reduce long-term debt
              
              (17,119,155
              )
              
              (776,158
              )Payments
      for deferred loan costs
              
              (111,421
              )
              
              (1,805,156
              )Net
      cash provided by financing activities
              
              42,084,719
              
              
              22,577,634Net
      increase in cash
              
              4,212,613
              
              
              2,858,884Cash
      at beginning of the year
              
              3,311,665
              
              
              452,781Cash
      at end of the year
              $
              7,524,278
              
              $
              3,311,665Supplemental
      disclosures of cash flow information:Interest
      paid
              $
              (5,660,524
              )
              $
              (1,100,220
              )Income
      taxes paid
              $
              --
              
              $
              --Supplemental
      disclosures of noncash investing and financing activities(See
      Notes 14 and 15)


The
accompanying notes are an integral part of these consolidated


financial
statements.
  -79-




NEW
CENTURY ENERGY CORP.
 (formerly
Vertica Software, Inc.)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 1 -
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 New
Century Energy Corp. ("New Century" or the "Company"), was incorporated in
Colorado on April 18, 1997 as "Perfection Development Corporation." On September
29, 1998, the Company entered into an agreement pursuant to which it would
acquire all of the outstanding capital stock of Vertica Software, Inc., a
California corporation ("Vertica California"). On December 31, 1998, Vertica
California merged with and into the Company. The Company was the surviving
corporation in the merger and the separate corporate existence of Vertica
California ceased. Concurrently with the merger, the Company changed its name
from Perfection Development Corporation to Vertica Software, Inc.
("Vertica").
 
 On
September 30, 2004, the Company acquired 100% of the issued and outstanding
common stock of Century Resources, Inc., a Delaware Corporation ("Century"), in
exchange for 37,500,000 newly issued shares of the Company's Common Stock,
pursuant to an Agreement and Plan of Reorganization whereby Century became a
wholly-owned subsidiary of the Company (the "Exchange").
 
 In
connection with the Exchange, the Company agreed to transfer all rights to the
existing installation of hardware and software used to develop intellectual
property, all trademarks, copyrights and marketing materials developed for sales
and distribution of such products relating to Internet/Intranet software
products and services and an Internet web site for the hazardous material to the
Company's wholly owned subsidiary, ERC Solutions, Inc. ("ERC"), and changed its
business focus to oil and gas exploration and production. On October 26, 2004,
in connection with its new business focus, the Company filed Articles of
Amendment with the Colorado Secretary of State, to change its name to New
Century Energy Corp.
 
 Since the
date of the Exchange, the Company has focused on oil and gas exploration and
production. The Company's major business focus for the year 2006 was formation
of the Company’s newly wholly owned subsidiary, Gulf Coast Oil Corporation
(“Gulf Coast”)and its two acquisitions of developed and undeveloped oil and gas
mineral leases totaling 9,167 acres in the Mustang Creek Field area in McMullen
and Atascosa Counties, Texas. The primary reason for the two acquisitions was to
add to our proved developed and undeveloped reserves as well as generate
significant future cash flows for the Company.
 
 Basis of
Presentation
 
 The
consolidated financial statements include the accounts of New Century Energy
Corp., its wholly owned subsidiaries, and its proportionate share of the assets,
liabilities, revenues and expenses. All significant intercompany accounts and
transactions have been eliminated in consolidation.
 
 Use of
estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, as well as certain financial statement
disclosures. While management believes that the estimates and assumptions
used in the preparation of the consolidated financial statements are
appropriate, actual results could differ from these
estimates.
  -80-
  
 Reclassifications
 
 Certain
prior year amounts have been reclassified to conform to the current year
presentation.
 
 Cash and
Cash Equivalents
 
 For
purposes of the statements of cash flows, cash equivalents are considered to be
all highly liquid investments having an original maturity of three months or
less.
 
 Concentration
of credit risk
 
 We
maintain our cash primarily with major U.S. domestic banks. The amounts held in
these banks exceed the federal insured limit of $100,000 from time to time and
exceeded that balance at December 31, 2006 by $12,718,070. The terms of these
deposits are on demand to minimize risk. The certificate of deposit is
maintained in an interest bearing account of a major U.S. domestic
bank.
 
 Revenue
recognition and accounts receivable
 
 Oil and
gas revenues are recognized when production is sold to a purchaser at a fixed or
determinable price, when delivery has occurred and title has transferred, and if
collectibility of the revenue is probable. Cash received relating to future
revenues is deferred and recognized when all revenue recognition criteria are
met. In certain cases, collections from customers are held by our major lender
until specific month end reporting is made, at which time the proceeds are
released for unrestricted use.
 
 Currently
all of our working interest producing wells are located in Texas and all of our
revenue is generated in Texas.
 
 The
Company periodically reviews its accounts receivable for collectibility, and has
determined that no allowance for doubtful accounts is warranted at December 31,
2006.
 
 Inventory
 
 The
Company carries small inventories of crude oil in our stock tanks located on
each oil producing property. Crude oil inventories are carried at the lower of
current market value or cost. Inventory costs include expenditures and other
charges (including depreciation) directly and indirectly incurred in bringing
the inventory to its existing condition and location. Selling expenses and
general and administrative expenses are reported as period costs and excluded
from inventory cost. Inventories of materials and supplies are valued at cost or
less.
 
 Oil and
gas properties
 
 We follow
the successful efforts method of accounting for our oil and gas activities,
capitalizing costs of successful exploratory wells and expensing costs of
unsuccessful exploratory wells. Exploratory geological and geophysical costs are
expensed as incurred. All developmental costs are capitalized. As of December
31, 2006, we have no capitalized costs for exploratory wells pending
determination of proved reserves. We generally pursue acquisition and
development of proved reserves as opposed to exploration activities. A
significant portion of the property costs reflected in the accompanying
consolidated balance sheet are from acquisitions of proved properties from other
oil and gas companies.
  -81-
 
 Depreciation,
depletion and amortization of proved producing properties is computed on the
unit-of-production method based on estimated proved oil and gas reserves. Other
property and equipment is generally depreciated using either the
unit-of-production method for assets associated with specific reserves or the
straight-line method over estimated useful lives which range from 3 to 40 years.
Repairs and maintenance are expensed, while renewals and betterments are
generally capitalized.
 
 If
conditions indicate that long-term assets may be impaired, the carrying value of
the property is compared to management's future estimated pre-tax cash flow from
properties generally aggregated on a field-level basis. If impairment is
necessary, the asset carrying value is written down to fair value. Cash flow
estimates are based on existing proved reserve and production information and
pricing assumptions that management believes are reasonable. Impairment of
individually significant unproved properties is assessed on a
property-by-property basis, and impairment of other unproved properties is
assessed and amortized on an aggregate basis. The Company has not capitalized
any interest in 2006 relating to expenditures for significant exploration and
development projects.
 
 Long-lived
assets
 
 Long
lived assets to be held and used or disposed of other than by sale are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. When required, impairment losses on
assets to be held and used or disposed of other than by sale are recognized
based on the fair value of the asset. Long-lived assets to be disposed of by
sale are reported at the lower of their carrying amount or fair value less cost
to sell.
 
 Other
assets
 
 Other
assets primarily include deferred loan costs that are amortized to interest
expense over the term of the related debt.
 
 Derivative
instruments
 
 New
Century accounts for all derivative financial instruments in accordance with
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
Derivative financial instruments are recorded as liabilities in the consolidated
balance sheet and are measured at fair value. When available, quoted market
prices are used in determining fair value. However, if quoted market prices are
not available, New Century estimates fair value using either quoted market
prices of financial instruments with similar characteristics or other valuation
techniques. These derivative liabilities are marked-to-market each quarter with
the change in fair value recorded in the income statement.
 
 New
Century utilizes the Black-Scholes option-pricing model to determine the fair
value of its freestanding derivative instruments. Key assumptions of the
Black-Scholes option-pricing model include applicable volatility rates,
risk-free interest rates and the instruments expected remaining life. We also
determined a fair value for our various embedded derivatives within our $15
million convertible note by using a layered discounted probability-weighted cash
flow model. The assumptions used in both modeling techniques required
significant management judgment and estimates of future fluctuation in stock
price as well as changes in future interest rates. The reader should reference
Notes 5 and 6 for further details in regards to our derivative
liabilities.
  -82-
 
 Extinguishment
of Debt -
 
 We follow
the provisions of SFAS No. 140 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS No. 140") along with
related interpretations from Emerging Issues Task Force No. 96-19 ("EITF No.
96-19"). The Task Force reached a consensus that an exchange of debt instruments
with substantially different terms is a debt extinguishment and should be
accounted for in accordance with paragraph 16 of SFAS No. 140. The Task Force
also observed that a debtor could achieve the same economic effect by making a
substantial modification of terms of an existing debt instrument. Accordingly,
the Task Force reached a consensus that a substantial modification of terms
should be accounted for like, and reported in the same manner as, an
extinguishment of debt. From the debtor's perspective, an exchange of debt
instruments between or a modification of a debt instrument by a debtor and a
creditor in a non-troubled debt situation is deemed to have been accomplished
with debt instruments that are substantially different if the net present value
of the cash flows under the terms of the new debt instrument is at least 10
percent different from the present value of the remaining cash flows under the
terms of the original instrument.
 
 New
Century Energy utilized a portion of the proceeds from the $16.2 million
December 2006 Note at 10.25% interest to repay in full the June 2006 Gulf Coast
Note, which was at 17.5% interest, in terms of present value, which resulted in
the loss on early extinguishment of debt of $204,170 on the 2006 consolidated
statement of operations. It was deemed that SFAS 140 did not apply since the
17.5% note was liquidated. The present value of the other note instruments
modified in the transaction did not change by more than the minimum of ten
percent.
 
 With the
Third Amendment to the 2005 Amended Convertible Note and the December Option,
the Company has determined that a greater than 10% difference in the net present
value of the remaining cash flows of both the original Convertible Note and the
New Convertible Note had occurred. Therefore, the original Convertible Note,
along with the related unamortized discounts and deferred loan costs, was
extinguished and a New Convertible Note was recorded at its fair value on
December 30, 2005. The extinguishment required the Company to record a loss on
early extinguishment of debt of $8,309,759.
 
 Asset
retirement obligation
 
 For asset
retirement obligations, we follow SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"). SFAS No. 143 requires that an asset retirement
obligation associated with the retirement of a tangible long-lived asset be
recognized as a liability in the period in which it is incurred or becomes
determinable, with an associated increase in the carrying amount of the related
long-lived asset. The cost of the tangible long-lived asset, including the asset
retirement cost, is depreciated over the useful life of the asset.
 
 Asset
retirement obligations primarily relate to the potential abandonment of oil and
gas producing facilities. The fair value of the asset retirement obligation is
recognized in the period in which the liability is incurred if a reasonable
estimate of fair value can be made. Asset retirement obligations include costs
to dismantle and relocate wells and related structures, and restoration costs of
land, including those leased. Depreciation of the capitalized asset retirement
cost and accretion of the asset retirement obligation are recorded over time.
The depreciation on the capitalized asset will generally be determined on a
unit-of-production basis, while the accretion of the liability will be
recognized over the life of the producing assets.
  -83-
 
 Contingencies
 
 We
account for loss contingencies in accordance with SFAS No. 5, "Accounting for
Contingencies." Accordingly, when management determines that it is probable that
an asset has been impaired or a liability has been incurred, we accrue our best
estimate of the loss if it can be reasonably estimated. Our legal costs related
to litigation are expensed as incurred.
 
 Stock-based
compensation
 
 We may,
from time to time, issue common stock, stock options or common stock warrants to
acquire services or goods from non-employees. Common stock, stock options and
common stock warrants issued to persons other than employees or directors are
recorded on the basis of their fair value, as required by SFAS No. 123 -
"Accounting for Stock Based Compensation", which is measured as of the date
required by EITF Issue 96-18, "Accounting for Equity Instruments That Are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." The stock options or common stock warrants are valued using the
Black-Scholes model on the basis of the market price of the underlying common
stock on the "valuation date," which for options and warrants related to
contracts that have substantial disincentives to non-performance, is the date of
the contract, and for all other contracts is the vesting period. Where expense
must be recognized prior to a valuation date, the expense is computed under the
Black-Scholes model on the basis of the market price of the underlying common
stock at the end of the period.
 
 Income
taxes
 
 The
Company accounts for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes". This Statement prescribes the use of the liability method
whereby deferred tax asset and liability account balances are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. In assessing the
realization of deferred tax assets, management considers whether it is likely
that some portion or all of the deferred tax assets will be realized. The
ultimate realization of deferred tax assets is dependent upon the Company
attaining future taxable income during periods in which those temporary
differences become deductible. The effect of changes in tax rates is recognized in the
period of enactment.
 
 Loss per
share
 
 In
accordance with SFAS No. 128, "Earnings Per Share," we report basic loss per
common share, which excludes the effect of potentially dilutive securities, and
diluted loss per common share, which includes the effect of all potentially
dilutive securities unless their impact is antidilutive. The Company has
outstanding free standing and embedded derivatives that were issued with the
Secured Convertible Note in June 2005 and the Third Amendment to the Secured
Convertible Note in December 2005. These are potentially dilutive securities but
their impact was antidilutive in 2006. The unexercised portion of the Laurus
Stock Option had a dilutive effect on loss per share and, therefore, a dual
presentation was made in 2005.
  -84-
 Fair
Value of Financial Instruments
 
 Our
financial instruments consist of accounts receivable, accounts payable, notes
payable and derivative liabilities. The fair values of our accounts receivable,
accounts payable, notes payable and derivative liabilities, in our opinion,
reflect their respective carrying amounts. We believe the fair value of the
Convertible Note, as amended, reflects the amount as presented in Note 5 to the
consolidated financial statements as of December 31, 2006.
 
 Recent
accounting pronouncements
 
 In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 158 “Employers’ Accounting For Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements Nos. 87,88,106 and 132(R)”
(“SFAS 158”), which requires companies to recognize the funded status of a
defined benefit postretirement plan as an asset or liability in its balance
sheet. SFAS 158 is effective for fiscal years ending after December 15, 2006. We
have no defined benefit plans; therefore we do not expect the adoption of SFAS
158 to have an impact on our consolidated financial position, results of
operations or cash flows.
 
 In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”), which defines fair value, establishes a frame work for measuring fair
value in accordance with generally accepted accounting principles and expands
disclosures about fair value measurements. This Statement applies under other
accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value measurements.
SFAS 157 is effective for fiscal years beginning after December 15, 2007. We
plan to adopt SFAS 157 beginning in the first quarter of fiscal 2008. We are
currently evaluating the impact, if any; the adoption of SFAS 157 will have on
our consolidated financial position, results of operations or cash
flows.
 
 In July
2006, The Financial Accounting Standards Board (“FASB”) issued Financial
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109” (“FIN 48”), to clarify certain aspects
of accounting for uncertain tax positions, including issues related to the
recognition and measurement of those tax positions. This interpretation is
effective for fiscal years beginning after December 15, 2006. We are in the
process of evaluating the impact of the adoption of this interpretation on our
consolidated financial position, results of operations or cash
flows.
 
 In March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets” (“SFAS 156”), which requires all separately recognized servicing assets
and servicing liabilities to be initially measured at fair value. SFAS 156
permits, but does not require, the subsequent measurement of servicing assets
and liabilities at fair value. Adoption is required as of the beginning of the
first fiscal year that begins after September 15, 2006. Early adoption is
permitted. The adoption of SFAS 156 is not expected to have a material effect on
our consolidated financial position, results of operation or cash
flows.
  -85-
  In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments, an amendment of FASB Statements No. 133 and 140” (“SFAS
155”). SFAS 155 clarifies certain issues relating to embedded derivatives and
beneficial interests in securitized financial assets. The provisions of SFAS 155
are effective for all financial instruments acquired or issued after fiscal
years beginning after September 15, 2006. We are currently assessing the impact
that the adoption of SPAS 155 will have on our consolidated financial position,
results of operations or cash flows.
 
 In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities", which permits entities to choose to
measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions.  The statement amends SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity”.
 
 In
September 2006, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements”.  SAB 108 provides guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in
quantifying a current year misstatement. SAB 108 established a dual
approach that requires quantification of errors under two methods:
(1) roll-over method which quantifies the amount by which the current year
income statement is misstated, and (2) the iron curtain method which
quantifies the error as the cumulative amount by which the current year balance
sheet is misstated. In some situations, companies will be required to record
errors that occurred in prior years even though those errors were immaterial for
each year in which they arose. Companies may choose to either restate all
previously presented financial statements or record the cumulative effect of
such errors as an adjustment to retained earnings at the beginning of the period
in which SAB 108 is applied. SAB 108 is effective for fiscal years
ending after November 15, 2006. The adoption of this pronouncement on our
company’s financial statements was not material.
 
 In
December 2006, the FASB issued the FASB Staff Position (FSP) No.EITF 00-19-2,
("FSP EITF 00-19-2"), “Accounting for Registration Payment Arrangements”. This
FSP addresses an issuer's accounting for registration payment arrangements. This
FSP specifies that the contingent obligation to make future payments or
otherwise transfer consideration under a registration payment arrangement,
whether issued as a separate agreement or included as a provision of a financial
instrument or other agreement, should be separately recognized and measured in
accordance with FASB Statement No. 5, “Accounting for Contingencies”. The
guidance in this FSP amends FASB Statements No. 133, “Accounting for Derivative
Instruments and Hedging Activities”, and No. 150, “Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity”, and
FASB Interpretation No. 45, “Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, to
include scope exceptions for registration payment arrangements. This FSP further
clarifies that a financial instrument subject to a registration payment
arrangement should be accounted for in accordance with other applicable
generally accepted accounting principles (GAAP) without regard to the contingent
obligation to transfer consideration pursuant to the registration payment
arrangement. This FSP shall be effective immediately for registration payment
arrangements and the financial instruments subject to those arrangements that
are entered into or modified subsequent to the date of issuance of this FSP, or
for financial statements issued for fiscal years beginning after December 15,
2006, and interim periods within those fiscal years. The Company intends to
adopt FSP EITF 00-19-2 beginning in 2007. The effect of the adoption of this FSP
has not been determined.
  -86-
  NOTE 2 -
LIQUIDITY
 
 The
Company incurred net losses of approximately $6.1 million and $3.4 million in
2006 and 2005, respectively, resulting in a stockholders’ deficit of $3.7
million at December 31, 2006. The Company has a balloon payment under its
Secured Term Note agreement for the remaining principal balance, which was
approximately $6.4 million at December 31, 2006, due in July 2007, with an
aggregate indebtedness to this primary lender totaling approximately $65
million, plus the fair value of its derivative liabilities (approximately $2.1
million at December 31, 2006).
 
 The
Company’s aggregate indebtedness to its primary lender is secured by its oil and
gas properties, which had a net present value (at 10% discount) of approximately
$52 million as of December 31, 2006. The Company has approximately $12.5 million
in cash at December 31, 2006, of which $5.0 million is restricted for use by its
primary lender for its drilling program or as specified by the lender, which
could possibly include reduction of its indebtedness to the lender. The Company
has approximately $1.9 million in accounts receivable, including approximately
$0.6 million due from its lender, which can also be used to reduce its
indebtedness or for other working capital requirements.
 
 The
Company has maintained a satisfactory credit relationship with the lender over
the past 18 months, as it has made its principal and interest payments when due,
or has successfully negotiated amendments to its various loan agreements
providing more flexible terms if and when needed. The Company has successfully
financed four of its five acquisitions with borrowings from this lender, with
the remaining acquisition being a cash purchase. Accordingly, the Company
believes it will be successful in meeting its working capital requirements in
2007, including the successful negotiation of a refinancing of its July 2007
balloon payment under the Secured Term Note to a date beyond 2007.
 NOTE 3 -
ACQUISITION OF MUSTANG CREEK I WELLS AND LEASES AND GULF COAST SECURED TERM NOTE
  On April
28, 2006, the Company's newly formed wholly-owned subsidiary, Gulf Coast Oil
Corporation, a Delaware corporation ("Gulf Coast") entered into an Asset
Purchase Agreement with Manti Resources, Inc., a Texas corporation, Manti
Operating Company, a Texas corporation, and Manti Mustang Creek, Ltd., a Texas
limited partnership.
 
 We
acquired a 93.75% working interest in 10 oil wells and one gas well and a 70.31%
working interest in one additional oil well, as well as revenue interests of
72.19% in 9 of the wells and 41.01% and 70.80% in the other two
wells,(collectively "Mustang Creek Assets"). The purchase price of the Assets
was $33,000,000. The effective date of the purchase was December 1,
2005.
 
 The
following table summarizes the initial estimated fair values of the assets
acquired.
 
 Mustang
Creek I Wells and Mineral Interests:
  Leasehold
      costs
                  
                  $
                  31,121,397Equipment
                  
                  
                  1,878,603Total
      assets acquired
                  
                  $
                  33,000,000
   -87-




A summary
of the acquisition consideration is as follows:
 
 Purchase
      price
              
              $
              33,000,000Closing
      costs
              
              
              65,969Mustang
      Creek revenue for 5 months
              
              
              (4,809,904
              )Mustang
      Creek expenses for 5 months
              
              
              584,295Net
      cash paid
              
              $
              28,840,360
 
 GULF COAST NOTE
 
 On April
26, 2006, Gulf Coast, entered into a Securities Purchase Agreement with Laurus
Master Fund, Ltd. ("Laurus"), whereby Gulf Coast sold Laurus a Secured Term Note
in the amount of $40,000,000 (the "Gulf Coast Note") with the following
features:
  Interest
      Rate -
                Wall
      Street Journal Prime Rate plus two points but not less than eight
      percentMaturity
      Date-
                April
      26, 2009Amortizing
      Amount -
                80%
      of net production revenue from Mustang Creek Assets- with a minimum
      monthly payment of $150,000Warrant
      -
                to
      purchase up to 49% of the shares of Gulf Coast Stock - exercisable at a
      price of $.001 per share only after this debt is paidRepayment
      -
                A
      portion of the proceeds from the issue of the New Century Energy Corp.
      December 2006 Secured Term Note (see Note 5), totaling $5,235,788, was
      used to pay principal on this note on or about December 29,
      2006.




At
December 31, 2006, the Gulf Coast Note was classified as
follows:




Gross
      amount
              
              $
              32,529,454Unamortized
      discount
              
              
              (1,173,865
              )Net
      amount
              
              $
              31,355,589
 
 The
accretion of discount and deferred loan costs related to the Gulf Coast Note for
the twelve months ended December 31, 2006 were $275,840 and $14,530,
respectively.
 
 NOTE 4-
ACQUISITION OF MUSTANG CREEK II WELLS AND LEASES AND JUNE 2006 GULF COAST NOTE
 
 ACQUISITION
OF MUSTANG CREEK II WELLS AND LEASES
  On June
30, 2006, Gulf Coast entered into an Asset Purchase Agreement with J&P
Family Properties, Ltd. and Lara Energy, Inc. for assets which Gulf Coast
purchased 7/8th of on April 28, 2006. The purchase price of the June 2006 Assets
was $4,450,000, which amount was paid from funds received from Gulf Coast's sale
of the June 2006 Gulf Coast Note. The effective date of the June 2006 Asset
Purchase Agreement was December 1, 2005. As a result of the June 2006 Asset
Purchase Agreement, Gulf Coast holds a 100% working interest in the producing
properties and undeveloped oil and gas mineral leases, other than one well, in
which Gulf Coast holds a 75% interest.
  -88-
 
 The
following table summarizes the initial estimated fair values of the assets
acquired.
  Mustang
Creek II Wells and Mineral Interests:
 
 Leasehold
      costs
                
                $
                4,324,760Equipment
                
                
                125,240Total
      assets acquired
                
                $
                4,450,000
 
 A summary
of the acquisition consideration is as follows:
 
 Purchase
      price
                
                $
                4,450,000Closing
      costs
                
                
                19,548Mustang
      Creek revenue for 7 months
                
                
                (630,176
                )Mustang
      Creek expenses for 7 months
                
                
                107,487Net
      cash paid
                
                $
                3,946,859
 
 JUNE 2006 GULF COAST
NOTE
 
 On June
30, 2006, Gulf Coast entered into a second Securities Purchase Agreement with
Laurus Master Fund, Ltd. whereby Gulf Coast sold Laurus a Secured Term Note
(“June 2006 Gulf Coast Note”) in the amount of $5,000,000 with the following
features.
  Interest
      Rate -
                  17.5%,
      due beginning July 1, 2006Maturity
      Date -
                  October
      30, 2009Amortizing
      Amount -
                  12.5
      percent of 80% of net production revenue from Mustang Creek assets with a
      minimum monthly payment of $25,000Amendment
      -
                  With
      the issuance of the June 2006 Gulf Coast Note, the amortizing amount for
      the Gulf Coast Note (See Note 3) was amended to be 87.5 percent of 80% of
                    net
      production revenue from Mustang Creek Assets with a minimum monthly
      payment of $150,000. When this note was liquidated, at the end of 2006,
      the
                    Gulf
      Coast Note was amended back to the original terms.Right-
                  Laurus
      was granted a right of first refusal to provide additional financing,
      prior to the incurrence of any additional indebtedness and/or the sale or
      issuance of any equity interests of Gulf Coast.Liquidation
      -
                  A
      portion of the proceeds from the issuance of the New Century Energy Corp.
      December 2006 Secured Term Note (see Note 5), totaling $4,700,237 was used
      to pay principal on this
      note on or about December 29, 2006. The amount represented full and final
      settlement for the note. At the time of liquidation the note had a
      carrying amount as follows:






-89-




Unpaid
      principal
              
              $
              4,700,237Unamortized
      discount
              
              
              (176,034
              )Unamortized
      deferred loan cost
              
              
              (28,136
              )Total
      liability
              
              $
              4,496,067Cash
      paid
              
              
              (4,700,237
              )Loss
      on extinguishment of debt
              
              $
              (204,170
              )




The loss
on extinguishment of debt is recorded in the Statement of Operations - Other
Expenses.
 
 The
accretion of discount and deferred loan costs related to the June 2006 Gulf
Coast Note (up to repayment) for the twelve months ended December 31, 2006 were
$28,966 and $4,990, respectively.
 
 Note 5 -
NEW CENTURY ENERGY NOTES PAYABLE
  In
addition to the Gulf Coast Note (Note 3), New Century Energy has three other
notes outstanding to Laurus.
 
 SECOND AMENDED AND RESTATED SECURED
CONVERTIBLE TERM NOTE
 
 In
connection with the first acquisition of a 6.2% working interest and a 5.464%
net revenue interest in the Lindholm-Hanson Gas Unit, we entered into a
Securities Purchase Agreement with Laurus Master Fund, Ltd., to sell a Secured
Convertible Term Note in the principal amount of $15,000,000. The Secured
Convertible Note as amended and restated includes the following
features:




Interest
      Rate -
              Wall
      Street Journal Prime Rate plus two points but not less than seven
      percentMaturity
      Date -
              June
      30, 2008Amortizing
      Amount -
              $100,000,
      beginning January 1, 2007. With the signing of the December 2006 Secured
      Term Note,(see below) we entered into a Second Amended and Restated
      Secured Convertible Term Note which revised the current amortization
      payments for the note. Under the Restated Convertible Note (signed
      December 2005), we were obligated to make monthly amortization payments
      under the Restated Convertible Note of $250,000 per month, beginning July
      1, 2006. The Second Restated Convertible Note revised the amortization
      payments such that, beginning January 1, 2007, through December 31, 2007,
      we are required to make monthly amortization payments of $100,000, and
      beginning January 1, 2008, through June 30, 2008, we are required to make
      monthly amortization payments of $250,000 per month.Conversion
      -
              Convertible
      into 24,193,548 shares of Common Stock at a conversion price of $0.62 per
      share.Warrant
      -
              Purchase
      up to 7,258,065 shares of Common Stock at $0.80 per share.Option
      -
              Purchase
      up to 10,222,784 shares of our Common Stock for $0.001 per share (as
      amended).December
      Option -
              Purchase
      up to 5,061,392 shares of our Common Stock for $0.001 per share (as
      amended).Registration
      Rights -
              Granted
      Laurus registration rights to the shares convertible in connection with
      the Convertible Note and exercisable in connection with the Warrant and
      Option pursuant to a Registration Rights Agreement. (Such agreement has
      been subsequently amended, see below).Restrictions
      -
              Laurus
      is restricted to owning not more than 9.99% of the outstanding common
      stock of the Company at any time. Options can only be exercised after debt
      is paid in full and the Laurus warrant has been
  exercised.






-90-




The
Secured Convertible Note was deemed to have both freestanding and embedded
derivatives. The Laurus Warrant and Laurus Option have been accounted for as
freestanding derivative liabilities and are fair valued under the Black-Scholes
method. The interest rate adjustment, optional redemption, form of payment and
conversion features of the Secured Convertible Note have been bundled together
as a Single Compound Embedded Derivative Liability, and is fair valued under a
layered discounted probability-weighted expected cash flow methodology (See Note
6).
 
 On
December 30, 2005, we entered into a Third Amendment Agreement ("Third
Amendment") to create the Restated Convertible Note and a December Option. The
December Option, provides Laurus the right to purchase up to 5,061,392 shares of
our common stock at $0.001 per share. Laurus agreed not to exercise any rights
until: (a) payment in full of all of the obligations of the Company under the
June 2005 Restated Note have been paid in full and (b) the exercise of the
Warrant by Laurus, except in the event of default (as defined in the Amended
Note), or upon 75 days notice. (See Note 7)
 
 The
Restated Convertible Note adopted the First and Second amendments of the Secured
Convertible Note with respect to events of default and extended the date on
which the Company was required to begin making monthly principal payments of
$250,000 from January 1, 2006 to July 1, 2006.
 
 During
2006 we entered into the Fourth, Fifth, Sixth and Seventh Amendment Agreements
with Laurus which amended the June 30, 2005 Registration Rights Agreement,
extending the dates that a registration statement was required to be filed with
the Securities Exchange Commission (“the Commission”) to register the shares
convertible under the terms of the June 2005 Amended and Restated Convertible
Note and to amend the date on which such statement was required to be declared
effective. On January 17, 2007, an amended registration statement was filed with
the SEC with 6,108,501 shares registered and on February 12, 2007, the
registration statement was declared effective by the Commission. Of these
shares, only 250,000 were held by a third party and are therefore not available
for the share conversion under the June 2005 Amended and Restated Convertible
Note.


-91-
  New Century Energy Corp. is not in
default and will not be in default under its current contractual obligations to
register shares of New Century Energy Corp.common stock.  In addition, New
Century Energy Corp. will not incur liquidated damages in connection with any
registration obligations at this time. It is acknowledged and agreed by the
parties, that in the event that Laurus sells all securities which have been
registered on the registration statement, Laurus may require New Century Energy
Corp. to file an additional registration statement to register additional shares
in the event that Laurus cannot rely on Rule 144(k) in connection with the sale
of the shares of common stock issuable in connection with the conversion of the
Convertible Note, and exercise of the Warrant, Option or December
Option. New Century Energy may incur significant penalties if it is unable
to file an additional Registration Statement and/or to gain effectiveness of
such registration statement in the future.
 
 In
December 2006, the Company entered into the Eighth Amendment Agreement (the
"Eighth Amendment") with Laurus which amended the terms of our June 30, 2005
Common Stock Purchase Warrant ("Warrant") and June 30, 2005 and December 31,
2005 Options (the "Options") with Laurus, to add a cashless exercise feature,
whereby Laurus may exercise the Warrant and/or Options and receive an amount of
shares of our common stock equal to the number of shares exercised multiplied by
the exercise price of the security divided by the Fair Market Value of our
common stock (as defined in the Warrant and Options).
 
 Laurus
also agreed that we would no longer be bound by the Registration Rights
Agreement entered into in connection with our June 30, 2005 closing with Laurus,
and therefore, would no longer be required to register the shares of common
stock issuable to Laurus in connection with the conversion of the Secured
Convertible Term Note or exercise of the Options.
 
 Laurus
agreed pursuant to the Eighth Amendment that it would not be able to affect a
cashless exercise of the Warrant shares until December 4, 2007. Additionally,
Laurus agreed that it would not be able to affect a cashless exercise of the
Option shares, until the earlier of (i) the date the shares of common stock
exercisable in connection with the Warrant are registered pursuant to an
effective registration statement and (ii) December 4, 2007. Laurus also agreed
that if a registration statement covering all of the shares of common stock
issuable in connection with the exercise of the Warrant has been declared
effective and remains effective, Laurus would be required to pay cash to
exercise the Warrant, and the cashless exercise would not be available to
Laurus.
 
 On or
about January 10, 2007, we entered into an Agreement to Rescind the Eighth
Amendment Agreement (the "Rescinding Agreement"), whereby we and Laurus agreed
to rescind the Eighth Amendment in its entirety, and that all of the provisions
of the Registration Rights Agreement, Options and Warrant which were revised by
the Eighth Amendment would be restored, and the Registration Rights Agreement,
Options and Warrant would have the same terms and conditions as they had
immediately prior to the parties entry into the Eighth Amendment
Agreement.
 
 At
December 31, 2006 the details of the Second Amended and Restated Secured
Convertible Term Note were as follows:
 Gross
      amount
                
                $
                13,500,000Unamortized
      discount
                
                
                (1,915,853
                )Net
      amount
                
                $
                11,584,147
 -92-
  For the
twelve months ended months ended December 31, 2006 and December 31, 2005, the
accretion of discounts related to the Second Amended and Restated Secured
Convertible Term Note was $1,180,337 and $2,034,910, respectively. Deferred loan
costs related to the issue of Note of $220,201 were fully accreted in 2005.
  SECOND AMENDED AND RESTATED SECURED
TERM
 
 In
connection with the second acquisition of a 7.25% working interest and a 5.43%
net revenue interest of the Lindholm-Hanson Gas Unit, on September 19, 2005, the
Company executed a Secured Term note in the amount of $9,500,000, with the
following features:
 
 Interest
      Rate -
                  20%Maturity
      Date -
                  July
      2, 2007Amortizing
      Amount -
                  The
      greater of 80% of gross proceeds paid from 5.4375% net revenue interest in
      Lindholm-Hanson Gas Unit and monthly interest.Amendments
      -
                  On
      March 30, 2006 we entered in to the Amended and Restated Secured Term Note
      agreement with Laurus. The agreement extended the maturity date of the
      note from March 19, 2006 to January 2, 2007. It also provided for monthly
      amortizing payments equal to 80% of gross proceeds paid from 5.4375% net
      revenue interest in Lindholm-Hanson Gas
Unit.
 
 Concurrent
with the signing of the December 2006 Secured Term Note,(see below) we entered
into a Second Amended and Restated Secured Term which revised the current
amortization payments for this note to be the greater of 80% of the gross
proceeds paid from 5.4375% net revenue interest in Lindholm-Hanson Gas Unit or
the current month interest. We also extended the maturity date of this note to
July 2, 2007.
 
 At
December 31, 2006 the details of the Second Amended and Restated Secured Term
was as follows:
 
 Gross
      amount
                    
                    $
                    6,351,391Unamortized
      discount
                    
                    
                    ---Net
      amount
                    
                    $
                    6,351,391
 The
entire balance of this note is a current liability.
 
 The
accretion of deferred loan costs related to the $9.5 million Secured Term Note
for the twelve months ended December 31, 2006 and the twelve months ended
December 31, 2005 were $262,133 and $338,426, respectively. There was not any
accretion of discount related to the $9.5 million Secured Term
Note.
 
 -93-
 DECEMBER 2006 SECURED TERM
NOTE
 
 On
December 28, 2006, we entered into a Securities Purchase Agreement with Laurus
in which we sold a secured term note (“December 2006 Secured Term Note”) in the
amount of $16,210,000 with features as follows:
 
 Interest
      Rate -
                  Wall
      Street Journal Prime Rate plus two points but not less than eight
      percentMaturity
      Date -
                  January
      4, 2010Amortizing
      Amount -
                  Monthly
      payments of $200,000, beginning on July 1, 2007Use
      of Proceeds -
  Management
      discretion
                    
                    $
                    1,000,000Liquidate
      Gulf Coast
                      June
      2006 note (see Note 4)
                    
                    
                    4,700,237Payment
      on Gulf Coast note
                        (see
      Note 3)
                    
                    
                    5,235,788Interest
      on June 2006 note
                    
                    
                    63,975Fees
      to Laurus
                    
                    
                    240,000Escrow
      fees
                    
                    
                    3,000Restricted
      Cash
                    
                    
                    4,967,000$
                    16,210,000
 Restricted
Cash is held by Laurus as security for our obligations under the closing
documents and is payable in $1,500,000 increments every ninety days, until the
entire amount is disbursed, at Laurus’ sole discretion.
  At
December 31, 2006 the details of the December 2006 Secured Term Note was as
follows:
  Gross
      amount
                    
                    $
                    16,210,000Unamortized
      discount
                    
                    
                    (239,352
                    )Net
      amount
                    
                    $
                    15,970,648
  The
accretion of discount and deferred loan costs related to the $16.2 million
Secured Term note for the twelve months ended December 31, 2006, were
insignificant.
 
 A recap
of the Company’s Notes Payable as of December 31, 2006
follows:
  Current
      portionSecond
      Amended and Restated Secured Convertible
                      
                      $
                      1,200,000Second
      Amended And Restated Secured Term
                      
                      
                      6,351,391December
      2006 Secured Term
                      
                      
                      1,200,000Gulf
      Coast
                      
                      
                      2,829,186Total
      current portion of notes payable
                      
                      $
                      11,580,577Noncurrent
      portionSecond
      Amended and Restated Secured Convertible
                      
                      $
                      12,300,000December
      2006 Secured Term
                      
                      
                      15,010,000Gulf
      Coast
                      
                      
                      29,700,268Total
      noncurrent portion of notes payable
                      
                      $
                      57,010,268Less:
      Unamortized discount
                      
                      
                      (3,329,070
                      )Notes
      payable, less current portion(net
      of unamortized discount)
                      
                      $
                      53,681,198






-94-




Future
payments under outstanding notes payable at their notional amounts as of
December 31, 2006 were as follows:
 
 2007
              
              $
              11,580,5772008
              
              
              16,408,1182009
              
              
              30,392,1502010
              
              
              10,210,0002011
              
              
              --$
              68,590,845
 
 
 Interest
and amortization of discount on debt expense for each of the years ended
December 31 can be broken down as follow:
  2006
                
                2005Interest
      expense on notional balance
                
                $
                6,190,935
                
                $
                1,215,556Accretion
      of note discount
                
                
                1,485,791
                
                
                2,034,910Amortization
      of deferred loan costs
                
                
                281,661
                
                
                558,6277,958,387
                
                
                3,809,093Other
      interest expense
                
                
                5
                
                
                63,172Total
      interest expense
                
                $
                7,958,392
                
                $
                3,872,265
 
 Note 6 -
DERIVATIVE LIABILITIES
 
 The
following assumptions were used in the valuation of the derivative liabilities
(See Note 5) at December 31,2006:
  Probability-Weighted
      Expected Cash Flow Methodology -Assumptions:Single
      Compound Embedded Derivative within Convertible NoteRisk
      - free interest rate
                  5.01%Prime
      rate
                  8.50%Increasing
      .25% each quarter of first yearTimely
      registration
                  95.00%Increasing
      by 1% monthly up to 99%Default
      status
                  5.00%Increasing
      by 0.1% monthlyAlternative
      financing available and exercised
                  00.00%Increasing
      2.5% monthly up to 25%(Exercised
      only if the market price is greater than $0.92)Trading
      volume, gross monthly dollars
                  5.00%Monthly
      increaseAnnual
      growth rate of stock price
                  31.715%Future
      projected volatility
                  100.00%
 
 -95-




The
following assumptions were used in the preparation of the valuations at December
31, 2006:
 
 Black-Scholes
Methodology:




LaurusLaurus
              
              December
              
              LaurusAssumptions
              
              Option
              
              Option
              
              WarrantDividend
      yield
              
              0.00%
              
              0.00%
              
              0.00%Risk-free
      interest rate
              
              4.90%
              
              4.90%
              
              4.69%Volatility
              
              100.00%
              
              100.00%
              
              100.00%Expected
      term
              
              20
      years
              
              20
      years
              
              5.50
      years




FAIR
VALUE OF DERIVATIVES
 
 The fair
value of the Company's derivative liabilities comprised the following as of
December 31, 2006:
 Laurus
      Warrant
                
                $
                407,482Laurus
      Stock Option
                
                
                719,683Single
      compound embedded derivativewithin
      Convertible Note
                
                
                378,900Laurus
      December Option
                
                
                556,309Total
                
                $
                2,062,374
 
 The
decrease in fair value of the Company's derivative liabilities for each of the
years ended December 31, 2006 and 2005 increased were as follows:
  2006
                  
                  2005Laurus
      Warrant
                  
                  $
                  389,577
                  
                  $
                  2,871,240Laurus
      Stock Option
                  
                  
                  392,765
                  
                  
                  3,571,005Single
      compound embedded derivativewithin
      Convertible Note
                  
                  
                  210,426
                  
                  
                  675,637Laurus
      December Option
                  
                  
                  303,605
                  
                  
                  --Decrease
      - fair value of derivative liabilities
                  
                  $
                  1,296,373
                  
                  $
                  7,117,882







The
decrease in the fair value of the derivative liabilities (mark-to-market)is due
to the wide, but mostly downward sliding, fluctuations in the price of our
common stock during the year. Prices ranged from $0.32 per share on April 27,
2006 to $0.09 per share on October 11, 2006. The closing price of our stock was
$0.11 per share December 31, 2006, versus $0.17 at December 31, 2005. The
changes in the
fair value of the derivative liabilities have been recorded under Other
Income(Expense) in the accompanying consolidated statements of
operations.





-96-




The
values of the derivative liabilities relating to the Convertible Note, as
reflected in our consolidated financial statements, are subject to changes in
the trading value of the Company's common stock. As a result, our financial
statements may fluctuate quarter-to-quarter based on this factor, and the amount
of shares converted by Laurus in connection with the Convertible Note and
exercised in connection with the Laurus Warrants and Laurus Stock Options.
Consequently, our consolidated financial position and results of operations may
vary significantly from quarter-to-quarter, based on factors other
than the Company's revenues and expenses.
 
 NOTE 7 -
THIRD AMENDMENT AGREEMENT TO THE CONVERTIBLE NOTE AND EXTINGUISHMENT OF
DEBT
 
 On
December 30, 2005, New Century entered into a Third Amendment Agreement ("Third
Amendment") with Laurus. The Third Amendment amended the Registration Rights
Agreement to provide for the December Option; further deferred the date which we
are required to obtain effectiveness of our Registration Statement, to July 1,
2006, from January 31, 2006; and added a provision whereby we are required to
file a Registration Statement covering the shares exercisable in connection with
the December Option, no later than ten (10) business days after the date which
we file our Form 10-KSB for the year ended December 31, 2005, or April 25, 2006,
whichever is earlier.
 
 The Third
Amendment of the Convertible Note as described above was accounted for as an
extinguishment of debt in accordance with EITF 96-19 "Debtor's Accounting for a
Modification or Exchange of Debt Instruments." The Company determined a
substantial difference in the net present value of the cash flows (including
changes in the fair value of our single compound embedded derivatives of the
Convertible Note) under the terms of the Third Amendment was more than 10
percent different from the present value of the remaining cash flows under the
terms of the original Convertible Note. Due to the substantial difference, the
Company determined an extinguishment of debt had occurred with the Third
Amendment. As such, it was necessary to reflect the Convertible Note at its fair
market value.
 
 Accordingly,
the change in the fair value from pre-modification to post-modification of the
Convertible Note for the compound embedded derivative aggregating $451,456, and
the fair value of the December Option issued in connection with the Third
Amendment, amounting to $859,914, were included in the Company's determination
of the debt extinguishment loss recorded in the fourth quarter of fiscal year
2005. The $8,309,759 aggregate loss from these transactions, accounted for as an
extinguishment of debt, is included in Other expenses for the year ended
December 31, 2005. In addition to the fair value change from pre-modification to
post-modification of the Convertible Note for the compound embedded derivative
offset by the fair value of the December Option (both noted above), the
approximately $8.3 million aggregate loss also includes $10,483,291 and $514,200
for the unamortized discounts and deferred financing costs related to the
Convertible Note, offset by the establishment of the discounts to the new note
of $589,327 for the fair value of the compound embedded derivative and
$2,506,863 for the current market yield.
 
 The
following table shows the basis for the debt extinguishment:
  -97-
  
 Extinguishment
of Convertible Note at December 30, 2005:
 Convertible
      Note
                
                $
                (15,000,000
                )Unamortized
      discount of Laurus Warrant
                
                
                3,019,907Unamortized
      discount of Laurus Stock Option
                
                
                5,325,279Unamortized
      discount of Single Compound EmbeddedDerivatives
      of Convertible Note
                
                
                1,397,910Unamortized
      discount of ECS Warrant
                
                
                270,054Unamortized
      discount of Laurus closing costs
                
                
                470,141Unamortized
      discount of Non-Laurus closing costs
                
                
                514,200Subtotal
                
                
                10,997,491Extinguishment
      of Convertible Note
                
                $
                (4,002,509
                )


Record
      New Convertible Note at December 30, 2005:Convertible
      Note
              
              $
              15,000,000Unamortized
      discount of Single Compound EmbeddedDerivatives
      of Convertible Note
              
              
              (589,327
              )Unamortized
      discount for market yield based on 20% rate
              
              
              (2,506,863
              )Subtotal
              
              
              (3,096,190
              )Fair
      value of the new Convertible Note
              
              $
              11,903,810Other
      items relating to the extinguishment:Extinguishment
      loss on the December Option
              
              $
              859,914Change
      in fair value from pre-modificationto
      post-modification of the ConvertibleNote
      for the compound embedded derivative
              
              
              (451,456
              )Other
      items relating to the extinguishment
              
              
              408,458Extinguishment
      of Convertible Note
              
              
              (4,002,509
              )Fair
      value of the new Convertible Note
              
              
              11,903,810


Loss
      on early extinguishment of debt
            
            $
            8,309,759


NOTE 8 -
THIRD ACQUISITION OF MINERAL INTERESTS IN THE LINDHOLM-HANSON GAS UNIT AND
WELLS





On
January 3, 2006, New Century acquired a 1.75% working interest and a 1.3125% net
revenue interest in the Lindholm-Hanson Gas Unit and Wells ("L-H Gas
Unit")("Third Acquisition") in the Wishbone Field in McMullen County, Texas,
located 80 miles south of San Antonio, Texas. The Third Acquisition increased
New Century's working interest and net revenue interest in production from the
L-H Gas Unit to a 15.20% working interest and a 12.2140% net revenue interest.
The effective date of the Third Acquisition was October 1, 2005, with net
revenues for October 2005 split equally between New Century and the seller of
the property, and the cost of the acquired interests was $1,890,000. The L-H Gas
Unit is engaged primarily in the exploration for, and acquisition, development,
and production of, natural gas. The L-H Gas Unit sells its gas production
primarily to domestic pipelines and refineries.


-98-







The
following table summarizes the initial estimated fair values of the assets
acquired and liabilities assumed, which may be adjusted within one year of the
purchase date for changes in estimates of their fair value.




Assets
      acquired:Accounts
      receivable
              
              
              
              
              $
              186,258Lindholm-Hanson
      Gas Unit and WellsLeasehold
      costs
              
              $
              1,567,839Equipment
              
              
              152,0351,719,874Total
      assets acquired
              
              
              
              
              
              1,906,132Liabilities
      assumedAccounts
      payable
              
              
              
              
              
              16,132Net
      assets acquired
              
              
              
              
              $
              1,890,000A
      summary of the acquisition consideration is as follows:Purchase
      price
              
              
              
              
              $
              1,890,000Closing
      costs
              
              
              
              
              
              16,132L-H
      Gas unit revenue for 2.5 months
              
              
              
              
              
              (281,089
              )L-H
      Gas unit expenses for 2.5 months
              
              
              
              
              
              94,831$
              1,719,874Less:
      2005 Cash deposit
              
              
              
              
              
              (189,000
              )Net
      cash paid in 2006
              
              
              
              
              $
              1,530,874




NOTE 9
-SECOND ACQUISITION OF MINERAL INTERESTS IN THE LINDHOLM HANSON GAS UNIT AND
WELLS
 
 Acquisition
-
 
 On
September 19, 2005, New Century entered into a Purchase and Sale Agreement with
certain "Sellers" whereby New Century agreed to purchase certain mineral
interests that have been pooled together in the L-H Gas Unit for an aggregate
purchase price of $8,750,000. The interests purchased total a 7.25 percent
working interest and a 5.4375 percent net revenue interest in the leases. The
effective date of the agreement regarding the L-H Gas Unit's revenues and
expenses was agreed upon by both New Century and the Sellers as July 1, 2005.
These revenues and expenses, which netted to $300,941, were accounted for as an
adjustment to the purchase price.






-99-




The
following table summarizes the initial estimated fair values of the assets
acquired and liabilities assumed, which may be adjusted within one year of the
purchase date for changes in estimates of their fair value.




Assets
      acquired:Accounts
      receivable
              
              
              
              
              $
              902,083L-H
      Gas UnitLeasehold
      costs
              
              $
              7,669,451Equipment
              
              
              779,6088,449,059Total
      assets acquired
              
              
              
              
              
              9,351,142Liabilities
      assumedAccounts
      payable
              
              
              
              
              
              341,453Accrued
      liabilities
              
              
              
              
              
              259,689Net
      assets acquired
              
              
              
              
              $
              8,750,000This
      acquisition was financed by the Secured Term Note (See Note
    5)A
      summary of the acquisition consideration at December 31, 2005 is as
      follows:Purchase
      price
              
              
              
              
              $
              8,750,000Cash
      received from the net of revenues andexpenses
      from July 1 to September 19, 2005
              
              
              
              
              
              (300,941
              )Remaining
      payable for acquisition
              
              
              
              
              
              (2,828
              )Total
      acquisition consideration
              
              
              
              
              $
              8,446,231




NOTE 10 -
FIRST ACQUISITION OF MINERAL INTERESTS IN THE LINDHOLM HANSON GAS UNIT AND
WELLS
 
 We
acquired certain working interests, overriding royalty interests, and term
royalty interests, which together entitled New Century to a 6.2% working
interest and a 5.464% net revenue interest in production from the L-H Gas Unit.
New Century paid the sellers $10,753,255 in cash and also issued 1,320,000
shares of common stock towards the purchase price of the L-H Gas Unit. The fair
market common share price was $0.63 a share for this transaction. The common
shares issued for the purchase were valued at $831,600. Also, the effective date
of the agreement regarding the L-H Gas Unit's revenue and expenses was agreed
upon by both New Century and the sellers as April 1, 2005. These revenues and
expenses, which netted to $683,662, were accounted for as an adjustment to the
purchase price.
 
 The
following table summarizes the initial estimated fair values of the assets
acquired and liabilities assumed, which may be adjusted within one year of the
purchase date for changes in estimates of their fair value.
 Assets
      acquired:Cash
                
                
                
                
                $
                246,745Accounts
      receivable
                
                
                
                
                
                470,585L-H
      Gas UnitLeasehold
      costs
                
                $
                10,438,692Equipment
                
                
                787,26911,225,961Total
      assets acquired
                
                
                
                
                
                11,943,291Liabilities
      assumedAccounts
      payable
                
                
                
                
                
                107,299Accrued
      liabilities
                
                
                
                
                
                4,392Net
      assets acquired
                
                
                
                
                $
                11,831,600This
      acquisition was financed by the Secured Convertible Note (See Note
      5)A
      summary of the acquisition consideration at December 31, 2005 is as
      follows:Purchase
      price
                
                
                
                
                $
                11,831,600Common
      stock issued (1,320,000 shares at $.63 per share)
                
                
                
                
                
                (831,600
                )Cash
      received from the net of revenues andexpenses
      from April 1 to June 30, 2005
                
                
                
                
                
                (683,662
                )Other
      closing costs
                
                
                
                
                
                78,023Total
      acquisition consideration
                
                
                
                
                $
                10,394,361






NOTE 11 -
OTHER INCOME (EXPENSE)
 
 For each
of the periods ended December 31, 2006 and December 31, 2005, $60,815 and
$509,028 has been released into Other income, in connection with the reverse
merger with Vertica in 2004. The release is comprised of settlements with
creditors, the expiration of the statutory four-year aging period, and the
settlement agreement with prior Vertica employees regarding disputed back wages.
As of December 31, 2006, liabilities related to the purchase of the Vertica
shell were $59,260.
 
 
 NOTE 12 -
INCOME TAXES
 
 The
Company has net operating loss for financial accounting purposes of
approximately $6,097,568 for the year ended December 31, 2006. The Company has a
potential deferred tax asset of approximately $4,205,798 as a result of the tax
net operating loss and percentage depletion carry forward for December 31, 2006.
Due to the uncertainty surrounding the realization of the benefits of its tax
attributes, including net operating loss carry forwards, in future tax returns,
the Company has provided a 100% valuation allowance on its deferred tax assets.
The valuation allowance increased by approximately $2,431,000 for the year ended
December 31, 2006.
  The
following table sets forth a reconciliation of the statutory federal income tax
for the year ended December 31, 2006 and 2005.
  2006
                
                2005Loss
      before income taxes
                
                $
                (6,097,568
                )
                $
                (3,398,824
                )Income
      tax expense(benefit)computed
      at statutory rates
                
                $
                (2,073,173
                )
                $
                (1,155,600
                )Net
      decrease in fair value of derivativeliabilities
                
                
                (440,767
                )
                
                (1,728,229
                )Loss
      on early extinguishment of debt
                
                
                69,418
                
                
                2,825,318Permanent
      differences
                
                
                2,452
                
                
                (163,503
                )Increase
      in valuation allowance
                
                
                2,431,494
                
                
                220,729Other
                
                
                10,576
                
                
                1,285Tax
      provision for income taxes
                
                $
                0
                
                $
                0
  -100-





No
federal income taxes have been paid since the inception of the Company. The
Company has a net operating loss and percentage depletion carry forward for
financial reporting purposes of approximately $12,209,000 at December 31, 2006
and December 31, 2005, respectively, which will expire in 2024 through 2026 if
not utilized. Section 382 of the Internal Revenue Code limits net operating loss
and tax credit carry forwards when an ownership change of more than fifty
percent of the value of the stock in a loss corporation occurs within a
three-year period.
 
 The tax
effects of the temporary differences between income for financial and income tax
reporting purposes are recognized as a deferred tax assets and liabilities.
Significant components of deferred tax assets and liabilities as of December 31,
2006 are set out below:
  2006Deferred
      tax assets:Net
      operating loss and percentage depletion carry forwards
                
                $
                4,205,798Asset
      retirement obligation
                
                
                133,003Valuation
      allowance
                
                
                (3,683,362
                )Tax
      over book amortization of loan costs
                
                
                678,353Revision
      to net operating loss carry forward
                
                
                (449,858
                )Deferred
      tax liabilities:Book
      over tax depreciation, depletionand
      capitalization methods on oiland
      gas properties
                
                
                (883,934
                )Net
      deferred tax asset
                
                $
                0




NOTE 13 -
ASSET RETIREMENT OBLIGATION
 
 A summary
of the changes in the asset retirement obligation during 2006 and 2005 is as
follows:
  2006
                
                2005Carrying
      amount of obligation at beginning of year
                
                $
                305,073
                
                $
                293,816Obligations
      incurred
                
                
                60,325
                
                
                7,508Accretion
      expense
                
                
                33,296
                
                
                22,200Revision
      in estimated liabilities
                
                
                (7,508
                )
                
                (18,451
                )Carrying
      amount of obligation at end of year
                
                $
                391,186
                
                $
                305,073




-101-
  NOTE 14 -
COMMITMENTS AND CONTINGENCIES
 
 Leases
 
 The
Company has entered into a lease for its corporate office in Houston, Texas,
under a third party non-cancelable operating lease through September 30, 2010.
Future minimum lease commitments are as follows as of December 31,
2006:
 
  Years
      ending December 312007
              
              
              36,0002008
              
              
              36,5002009
              
              
              36,5002010
              
              
              27,400Total
              
              $
              136,400




Rent
expense for 2006 and 2005 was $32,636 and $20,089, respectively.
 
 Litigation
 
 In
February 2005, we received correspondence from four former employees, which
alleged that we owed those former employees approximately $298,000 in accrued
and unpaid wages, payroll taxes and unpaid loans and interest. We settled with
three of the individuals in July 2005 and filed suit against the fourth
individual, our former officer and Director, Hans Nehme, in October 2005, in
Harris County, Texas, alleging that Mr. Nehme agreed to settle the claims by
exchange of written correspondence on May 10, 2005, and later agreed upon the
form of a final settlement, but failed to sign with the other three plaintiffs.
Mr. Nehme filed suit against us on October 21, 2005, which complaint was amended
on November 11, 2005, which claimed he was owed $15,000 in connection with
monies loaned to us, $113,733 in connection with accrued wages, $1,458 in 401(k)
payments that Mr. Nehme claimed he was due, and other damages.
 
 On or
about March 20, 2006, we entered into a Settlement and Release Agreement with
Mr. Nehme (the "Nehme Settlement"). Pursuant to the Nehme Settlement, Mr. Nehme
agreed to all necessary pleadings to dismiss his previously filed lawsuit
against us, with prejudice and we agreed to pay Mr. Nehme $25,483.09 and to
issue him 100,000 shares of our restricted common stock.
 
 In
February 2006, the Board of Directors approved the dissolution of ERC Solutions,
Inc., one of our former wholly owned subsidiaries. The State of Delaware
authorized the dissolution on February 9, 2006.
 
 Other
than the above, the Company is not a party to, and its properties are not the
subject of, any material pending legal proceeding nor to the knowledge of the
Company, are any such legal proceedings threatened
 
 Employment
Agreements
 
 The
Company's Chief Executive Officer and President (the "Officer") signed a three
year employment agreement with us on June 1,2006 with an effective date of June
1, 2006 which runs through December 31, 2008. Under this agreement, the Officer
receives a different annual salary for each period covered by the employment
agreement, including the following:
  For
      the year ended:2006
                
                $
                283,333*2007
                
                
                350,000*2008
                
                
                350,000*Total
                
                $
                983,333*
   -102-




* Solely
for the periods covered by the employment agreement and does not include amounts
the Officer was paid prior to the entry into the employment agreement, or which
he may be paid after the expiration of the employment agreement. Additionally,
these amounts do not include any bonuses the Officer may be paid.
 
 In
addition, the Officer may also be granted bonus payments of cash or shares of
the Company's common stock from time to time at the discretion of the Company's
Board of Directors. The Officer may participate in any incentive, discretionary
bonus and stock option plans approved by the Board of Directors.
 
 The
agreement also provides that, in the event the Officer terminates his employment
for good reason, as defined in the agreement, the Officer is terminated without
cause, or a change in control of the Company occurs, the Officer is entitled to
a lump-sum payment of 150% of the full yearly salary then in
effect.
  On June
6, 2005, we entered into a Settlement Agreement and Mutual Release (the
"Settlement Agreement") with Core Concepts, LLC ("Core Concepts and two former
directors of our company. Pursuant to the terms of the Settlement Agreement, we
agreed to issue two hundred and fifty thousand (250,000) restricted shares of
our Common Stock to Core Concepts in return for Core Concepts and the directors
agreeing to settle their disputes with us. We also granted Core Concepts
piggyback registration rights in connection with the 250,000 shares. These
shares were included in the Registration statement that we filed on January 17,
2007.
  Amended
Viking Agreement
 
 On or
about May 30, 2006, we entered into an Agreement Modifying Prior Geophysical
Interpretation and Exploitation Agreement, with Viking International Petroleum,
L.L.C. ("Viking"), and two individuals (the "Amended Viking Agreement"). The
Amended Viking Agreement amended the terms of the Geophysical Interpretation and
Exploration Agreement dated July 13, 2005, entered into between the parties. The
Amended Viking Agreement provided that approximately $17,919 previously paid to
Viking represented the full amount of consideration owed to Viking under the
original agreement.
  Pursuant
to the Amended Viking Agreement, we agreed that Viking has the right but
not the obligation to participate for between 10% and up to 50% of the working
interest on a wellbore only basis of any new production well drilled on the
acreage covered by the Amended Viking Agreement, subject to the terms and conditions
of the original agreement. Additionally, we agreed that if a well is completed
in the area covered by the agreement and a subsequent well is proposed within
1200 feet of the original well that (a) drains the same reservoir or (b)develops
a behind-pipe reservoir identified in the original well and in the same
fault block as the original well, then Viking has the right to participate
in that well under the same terms as well. Additionally, the Amended
Viking Agreement provided that such royalty interests to be assigned on any
new well bores will be subject to certain overriding royalty interests as
provided in the Amended Viking Agreement.
 
 -103-
  Additionally,
pursuant to the Amended Viking Agreement, we agreed to issue an
aggregate of 200,000 restricted shares of common stock, 100,000 shares each to two
individuals. With such issuance, the individuals agreed, pursuant to a Lock-Up
Agreement not to sell their restricted shares of common stock until
July 1, 2008, to comply with Laurus' Convertible Note restrictions on our
ability to issue shares of common stock without affecting the Fixed Conversion
Price of the Convertible Note (see note 5).
 
  NOTE 15 -
OTHER STOCKHOLDERS' EQUITY TRANSACTIONS
 Common stock
 In March
2006, New Century Energy Corp. issued 100,000 shares of restricted common stock
as part of a Settlement and Release Agreement with Hans Nehme, a former officer
and director.(see Note 14)
 
 In June
2006, in connection with our entry into an amended agreement with Viking
International Petroleum, L.L.C., we issued an aggregate of 200,000 shares of our
restricted common stock to two individuals, who have agreed not to sell the
shares of common stock until after July 1, 2008. (see Note 14)
  Articles of Amendment to Our Articles
of Incorporation
 
 We filed
Articles of Amendment (the "Amendment") to our Articles of Incorporation with
the Secretary of State of Colorado, on June 12, 2006. The Amendment increased
our authorized shares to Two Hundred Million (200,000,000) shares of common
stock, re-authorized the par value of $0.001 per share of common stock,
re-authorized Twenty Million (20,000,000) shares of preferred stock, and
re-authorized the par value of $0.001 per share of preferred stock.
 
 The
Amendment was approved at our Special Meeting of Shareholders, held on June 12,
2006 (the "Meeting"). The number of shares of our common stock outstanding
as of the record date of the Meeting, May 9, 2006, was 55,810,612.
  Options and
Warrants
  Activity
      in 2006
                          
                          Options
                          
                          WarrantsOutstanding,
      1/1/2006
                          
                          11,609,176
                          
                          8,158,065Granted
                          
                          0
                          
                          0Exercised
                          
                          0
                          
                          0Expired
      or cancelled
                          
                          0
                          
                          0Outstanding,
      end of year
                          
                          11,609,176
                          
                          8,158,065Exercisable,
      end of year
                          
                          11,609,176
                          
                          8,158,065Available
      for grant, end of year
                          
                          0
                          
                          0
 
 -104-
 The
weighted average option and warrant exercise price information for 2006 is as
follows:
 Activity
      in 2006
                        
                        Options
                        
                        WarrantsOutstanding,
      beginning of year
                        
                        $
                        0.001
                        
                        $
                        0.80Granted
      during the year
                        
                        $
                        -
                        
                        $
                        -Exercised
      during the year
                        
                        $
                        -
                        
                        $
                        -Expired
      or cancelled during the year
                        
                        $
                        -
                        
                        $
                        -Outstanding
      at end of year
                        
                        $
                        0.001
                        
                        $
                        0.80Exercisable
      at end of year
                        
                        $
                        0.001
                        
                        $
                        0.80
   Significant
option and warrant groups outstanding at December 31, 2006, and related
weighted average exercise price and remaining life information is as follows:
   Grant
      date
                  
                  Options
                  
                  Warrants
                  
                  Exercisable
                  
                  WeightedRemaining
      Life (Years)
                  
                  Outstanding
                  
                  Outstanding
                  
                  Options
                  
                  Warrants
                  
                  Exercise
      PriceJune
      30, 2005 (indefinite)
                  
                  
                  6,547,784
                  
                  
                  
                  
                  
                  6,547,784
                  
                  
                  
                  
                  $
                  0.001June
      30, 2005 (5.50)
                  
                  
                  
                  
                  
                  7,258,065
                  
                  
                  -
                  
                  
                  7,258,065
                  
                  $
                  0.800June
      30, 2005 (1.50)
                  
                  
                  
                  
                  
                  900,000
                  
                  
                  -
                  
                  
                  900,000
                  
                  $
                  0.800December
      30,2005 (indefinite)
                  
                  
                  5,061,392
                  
                  
                  
                  
                  
                  5,061,392
                  
                  
                  
                  
                  $
                  0.001As
      ofDecember
      31, 2006
                  
                  
                  11,609,176
                  
                  
                  8,158,065
                  
                  
                  11,609,176
                  
                  
                  8,158,065






At
December 31, 2006, approximately 44.0 million shares of common stock were
reserved for issuance under the Convertible Note, the Laurus Stock Option, the
Laurus Warrant, the ECS Warrant and the Laurus December Option. Additionally, 5.2
million, 70,000 and 30,000 shares of common stock were reserved for issuance
under the 2004 Plan (see Note 17), 2002 Employee Stock Purchase Plan and 2000
Employee Stock Purchase Plan, respectively.
 
 On
January 17, 2007, we filed a Registration statement with the SEC to register
6,108,501 shares of Common Stock. The shares represent a portion of the shares
of common stock underlying the Laurus Warrant to purchase our shares of common
stock at an exercise price of $0.80 per share pursuant to the terms of the
Secured Convertible note (see Notes 5 and 6), as well as 250,000 shares of
common stock currently held by Core Concepts, LLC (see Note 14). On February 12,
2007, the registration statement was declared effective by the SEC.
  New
Century Energy Corp. is not in default under its current contractual obligations
to register shares of New Century Energy Corp. common stock.  In addition,
New Century Energy Corp. will not incur liquidated damages in connection with
any registration obligations at this time. It is acknowledged and agreed by
the parties, that in the event that Laurus sells all securities which have been
registered on the registration statement, Laurus may require New Century Energy
Corp. to file an additional registration statement to register additional shares
in the event that Laurus cannot rely on Rule 144(k) in connection with the sale
of the shares of common stock issuable in connection with the conversion of the
Convertible Note, and exercise of the Warrant, Option or December
Option. New Century Energy Corp. may incur significant penalties if it is
unable to file an additional Registration Statement and/or to gain effectiveness
of such registration statement in the future.
  -105-
  NOTE 16
-LOSS PER SHARE
 
 Basic
loss per share is computed by dividing net loss attributable to common stock by
the weighted average number of common shares outstanding during each period.
 
 In
calculating diluted earnings per share using the “if converted” method, the
Company “adds back” to net income or loss the interest expense on its Second
Amended and Restated Convertible Note (the “Convertible Note”)(see Note 5)and
the effect of the change in the fair value of the embedded derivatives within
the Convertible Note (see Note 6). The effect of each derivative is considered
individually. The
denominator can also change as the related number of weighted average shares may
be affected. Options and warrants only have a dilutive effect if the average
market price of the common stock during the period exceeds the exercise price
(“in the money”) For potential dilutive options or warrants that are dilutive,
the treasury stock method is applied to determine the number of weighted average
shares to be included as dilutive earnings or loss per share.
 
 In 2006,
the impact of the derivatives and interest from the Convertible Note was
antidilutive and therefore, basic and dilutive EPS were the same. However, in
2005 the unexercised portion of the Laurus Stock Option for 6,547,784 common
shares had a diluted impact on earnings.
 
 The
following table sets forth the computation of basic and diluted loss per common
share for 2006 and 2005:
  For
      the years ended December 31,
                
                2006
                
                2005Numerator
      for basic loss percommon
      share-Net loss, as reported
                
                $
                (6,097,568
                )
                $
                (3,398,824
                )Effect
      of dilutive securities
                
                
                --
                
                
                (3,571,005
                )Numerator
      for diluted loss percommon
      share
                
                $
                (6,097,568
                )
                $
                (6,969,829
                )Denominator
      for basic lossper
      common share-weighted averagecommon
      shares
                
                
                55,909,790
                
                
                50,961,205Effect
      of dilutive securities
                
                
                --
                
                
                3,314,020Denominator
      for diluted loss percommon
      share-adjusted weightedshares
      and assumed conversions
                
                
                55,909,790
                
                
                54,275,225Basic
      loss per common share
                
                $
                (0.11
                )
                $
                (0.07
                )Diluted
      loss per common share
                
                $
                (0.11
                )
                $
                (0.13
                )






-106-




NOTE 17 -
EMPLOYEE BENEFIT PLANS
 
 401(k)
Plan
 
 Our
Company has an employee benefit plan available to all full-time employees under
Section 401(k) of the Internal Revenue Code("401(k) plan"). Employees may make
contributions up to a specified percentage of their compensation. The Company is
not obligated to make contributions under the 401(k) plan. At the end of 2006
and 2005 the total plan assets were $36,222 and $23,390, respectively. In
addition, the Company made $2,750 in matching employer contribution to the
401(k) Plan in 2006 while not making any matching contributions in
2005.
 
 2004
Directors, Officers and Consultants Stock Option, Common Stock Warrant and Stock
Award Plan ("2004 Plan")
 
 On
December 8, 2004, the Company registered 9,700,000 shares of its common stock
for its 2004 Plan. The aggregate number of shares that may be optioned subject
to conversion or issued under the 2004 plan is 13,000,000 shares of common
stock, warrants, options, preferred stock, or any combination thereof ("Company
Securities"). The Company's Board of Directors administers the 2004 Plan and has
sole discretionary authority to describe, authorize and designate the directors,
employees and consultants who will be granted securities under the 2004 Plan. As
of December 31, 2006, there were no options or warrants granted or outstanding
under the 2004 Plan.




2004
      Plan activity
              
              
              2006
              
              
              2005Beginning
      of year
              
              
              5,150,000
              
              
              7,450,000Issued
      stock for services
              
              
              -
              
              
              (2,300,000
              )Remaining
      shares available to issueat
      end of year
              
              
              5,150,000
              
              
              5,150,000




NOTE 18 -
CONCENTRATIONS
 
 Major
Purchaser
 
 During
2006, New Century‘s operated properties had two purchasers who accounted for
100% of crude oil sales and two different purchasers who accounted for 100% of
sales of natural gas products. New Century’s non-operated properties had yet
another purchaser who individually accounted for 100% of sales of all natural
gas production for the same periods of 2006 and 2005.
 
 Predominance
of Sales
 
 In 2006
and 2005, crude oil sales accounted for 54% and 16%, respectively, and sales of
natural gas products accounted for 46% and 84%, respectively, of total revenue
from oil and gas operations.
 
 Single
lender
  All of
our outstanding notes payable are due, on various dates during the next four
years to Laurus Master Fund, LTD. (see notes 3 and 5)
  -107-
  NOTE 19 -
SUPPLEMENTAL OIL AND GAS INFORMATION (Unaudited)
 
 Capitalized
Costs
 
 Capitalized
costs incurred in property acquisition, exploration, and development activities:
  December
      31, 2006Proved
      properties
                
                $
                57,492,445Unproved
      properties
                
                
                418,906Wells
      and related equipment and facilities
                
                
                5,391,643$
                63,302,994Less
      accumulated depreciation, depletion,amortization
      and impairment
                
                
                (12,640,446
                )Net
      capitalized costs
                
                $
                50,662,548




Costs
incurred for property acquisition, exploration, and development activities.
  Year
      ended December 31,2006
                
                2005Acquisition
      of properties-Proved
                
                $
                34,318,093
                
                $
                19,675,020-Unproved
                
                
                346,416
                
                
                -Exploration
      costs
                
                
                1,116,058
                
                
                134,579Development
      costs
                
                
                3,465,334
                
                
                2,650,666Total
      costs incurred for propertyacquisition,
      exploration, anddevelopment
      activities
                
                $
                39,245,901
                
                $
                22,460,265




Results
of Operations for oil and gas producing activities:




Year
      ended December 31,2006
              
              
              2005Oil
      and gas sales
              
              $
              14,863,728
              
              $
              6,918,884Gain
      on sale of oil and gas interest
              
              
              44,766
              
              
              98,181Gas
      operations consulting
              
              
              18,708Production
      costs
              
              
              (2,213,201
              )
              
              (1,033,545
              )Exploration
      expenses
              
              
              (1,128,134
              )
              
              (134,579
              )Depreciation,
      depletion and amortization
              
              
              (9,737,889
              )
              
              (2,177,485
              )1,847,978
              
              
              3,671,456Income
      tax expense, 34% rate
              
              
              (628,313
              )
              
              (1,248,295
              )Results
      of operations for oil andgas
      producing activities (excludingcorporate
      overhead and financing costs)
              
              $
              1,219,665
              
              $
              2,423,161






-108-


Reserve
Information





The
following estimates of proved developed reserve quantities and related
standardized measure of discounted net cash flow are estimates only, and do not
purport to reflect realizable values or fair market values of New Century's
reserves. New Century emphasizes that reserve estimates are inherently
imprecise. Accordingly, these estimates are expected to change as future
information becomes available. All of New Century's reserves are located in
Texas and Louisiana, which are considered a single geographic area.





Proved
reserves are estimated reserves of crude oil (including condensate and natural
gas liquids) and natural gas that geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. Proved developed
reserves are those expected to be recovered through existing wells, equipment,
and operating methods.





The
standardized measure of discounted future net cash flows is computed by applying
year-end prices of oil and gas (with consideration of price changes only to
the extent provided by contractual arrangements) to the estimated future production
of proved oil and gas reserves, less estimated future expenditures (based on
year-end costs) to be incurred in developing and producing the proved reserves,
less estimated future income tax expenses (based on year-end statutory tax
rates) to be incurred on pretax net cash flows less tax basis of the properties
and available credits, and assuming continuation of existing economic conditions.
The estimated future net cash flows are then discounted using a rate of 10
percent a year to reflect the estimated timing of the future cash
flows.




The
revised table below reconciles the Company’s proved developed reserves of oil
and gas for the years ended December 31, 2006 and 2005:
 
 2006
              
              2005Oil
              
              Gas
              
              Oil
              
              Gas(Bbls)
                (Revised)
              
              (MMcf)
              
              (Bbls)
              
              (MMcf)Proved
      developed and undeveloped reservesBeginning
      of year
              
              
              121,067
              
              8,062
              
              113,000
              
              1,116Revisions
      of previous estimates a
              
              
              (45,852
              )
              (1,022
              )
              23,309
              
              182Purchases
      of minerals in place b
              
              
              952,399
              
              1,215
              
              -
              
              5,447Production
              
              
              (190,846
              )
              (1,068
              )
              (15,242
              )
              (643
              )Extensions
      and discoveries c
              
              
              21,655
              
              -
              
              -
              
              1,960End
      of the year
              
              
              858,423
              
              7,187
              
              121,067
              
              8,062Proved
      developed reservesBeginning
      of year
              
              
              121,067
              
              4,517
              
              98,858
              
              151End
      of the year d
              
              
              790,800
              
              2,131
              
              121,067
              
              4,517
 
 a The
downward revision of  previous estimates by 45,852 net barrels is a
result of two revisions.  First, there was a downward revision of
112,324 net barrels resulting from the unsuccessful drilling of a PUD location,
the Kassner #3 well.  When the Company acquired the Mustang Creek
Field oil reserves in 2006, we attributed proved undeveloped reserves to this
location and, as a result of the unsuccessful well, it is necessary to subtract
these net barrels from our proved reserve base.  Second, there were
upward revisions in the reserve estimates for several of our wells from our
January 1, 2006 reserve report to our December 31, 2006 reserve report which
accounted for the remaining 66,472 net barrel increase in previous
estimates.
 
 b The
significant increase in purchases of minerals in place is attributable to the
acquisition of the Mustang Creek Assets in April and June of
2006.  The downward revision by 29,950 net barrels from the original
10KSB filing to 952,399 net barrels, results from an adjustment to the effective
date of our acquisition reserve report from December 1, 2005 to January 1, 2006
and new production information available after August 4, 2006.  The
original report included reserves from December 2005, which we have determined
was included in error.
 
 c In 2006,
we drilled one productive exploratory well, the Rabke Maspero Unit Well
#2.  Drilling of this well was finalized on December 14, 2006 and the
well was logged on December 14, 2006.   Due to local flooding,
testing and completion of this new well did not take place until February of
2007.  Testing of this well was conducted on February 28, 2007 and
confirmed initial oil production of 72 barrels of oil per day
(“Bopd”).
 
 The
reserve report prepared by R.A. Lenser dated April 3, 2007, with an effective
date of December 31, 2006 (the “Lenser Report”), attributed 21,655 net barrels
of oil to the Companyin this new
well.
 
 The
reserve table in Note 19 to our audited Consolidated Financial Statements in our
original 10KSB filing for the year ended December 31, 2006, which is amended by
this amended report, did not include reserves added due to the drilling of the
Rabke Maspero Unit #2 well in the amount of 21,655 net barrels, and this amended
table correctly includes the Rabke Maspero Unit #2 well, as an upward addition
to proved reserves.
 
 d This
amended table includes a significant upward revision to the Company’s end of
year total for proved developed oil from the previously reported 117,959 net
barrels, increasing to 790,800 net barrels.  The reason for this
increase is due to the fact that the original 10KSB filing for the period ending
December 31, 2006, only included net reserves attributed to the parent company,
New Century Energy Corp., and did not correctly include the net reserves
attributed to our wholly owned consolidated subsidiary, Gulf Coast Oil
Corporation. The table has been amended to present the combined proved developed
reserves on a consolidated basis.


-109-


Standardized
      Measure of Discounted FutureNet
      Cash Flows at December 31, 2006 and 2005 (in $000's)2006
                
                2005Future
      cash inflows
                
                $
                98,529
                
                $
                75,281Future
      production costs
                
                
                (18,042
                )
                
                (13,467
                )Future
      development costs
                
                
                (4,994
                )
                
                (3,146
                )Future
      income tax expenses, at 34%
                
                
                (3,743
                )
                
                (9,985
                )Future
      gross cash flows
                
                
                71,750
                
                
                48,683Less:
      10% annual discount forestimated
      timing of cash flows
                
                
                (20,184
                )
                
                (11,634
                )Standardized
      measures of discounted future net cash flowsrelating
      to proved oil and gas reserves
                
                $
                51,566
                
                $
                37,049


The
following reconciles the change in the standardized measure of discounted future
net cash flow during 2006 and 2005.
  2006
                
                2005Beginning
      of year
                
                $
                37,049
                
                $
                2,423Sales
      of oil and gas produced, net of production costs
                
                
                (12,600
                )
                
                (5,825
                )Net
      changes in sales price, net of production costs
                
                
                (22,635
                )
                
                3,660Extensions
      and discoveries, net of development costs
                
                
                -
                
                
                10,911Purchase
      of reserves in place
                
                
                51,248
                
                
                23,290Accretion
      of discount
                
                
                1,686
                
                
                154Net
      changes in estimated future development costs
                
                
                222
                
                
                1,517Revisions
      of previous quantity estimates
                
                
                (8,132
                )
                
                1,606Changes
      in future income tax expense
                
                
                4,759
                
                
                (4,607
                )Changes
      in production rates and other
                
                
                (31
                )
                
                3,920End
      of year
                
                $
                51,566
                
                $
                37,049




NOTE 20 -
SUBSEQUENT EVENTS
 
 On or
about March 16, 2007 we signed a partial assignment of oil and gas lease and
bill of sale with our working interest owner in the South Sargent field, Aquatic
Cellulose International Corporation (“Aquatic”). Under the terms of the
assignment, Aquatic conveyed all of its rights, title and interest in Hamill
well Nos. 2, 9, 20 , 11, 14 and 17 below 7,000 feet below the surface to us. In
addition, all of Aquatic’s rights, title and interests in Hamill Nos. 19 and 1-R
at all depths were transferred in the contract.
 
 On March
29, 2007, we entered into the First Amendment to Common Stock Warrant (the
“Agreement”) with Energy Capital Solutions, LP (“ECS”). In consideration for ECS
agreeing that the shares of common stock which their Warrant (originally issued
with the Secured Convertible Note, see Note 5) was exercisable did not have to
be registered on the same Registration Statement as the Laurus stock were
registered, we agreed to extend the expiration date of the Warrant from June 30,
2008 to June 30, 2009.
 -110-
 ITEM 8. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
 
 
 (i)
              On
      January 22, 2007, we were informed by Helin, Donovan, Trubee &
      Wilkinson, LLP (“HDTW”), our independent registered public accounting
      firm, as follows:
 
 (1)
              HDTW
      had consummated a merger with Pohl, McNabola, Berg & Co., LLP (“PMB”).
      PMB is located in San Francisco, California, and is also registered with
      the Public Company Accounting Oversight Board (United States). The name of
      the post-merger firm is PMB Helin Donovan, LLP (“PMB+HD”).
 
 (ii)
              HDTW’s
      report on our consolidated financial statements as of and for the year
      ended December 31, 2005 did not contain an adverse opinion or a disclaimer
      of opinion, nor was either such report qualified or modified as to
      uncertainty, audit scope or accounting principles.
 
 (iii)
              The
      report of HDTW on the Company’s financial statements for the most recent
      fiscal year ending December 31, 2005, did not contain an adverse opinion
      or a disclaimer of opinion, nor was such report qualified or modified as
      to uncertainty, audit scope or accounting principles.
 
 (1)
              During
      the year ended December 31, 2005, and through January 22, 2007, there were
      no disagreements with HDTW on any matter of accounting principles or
      practices, financial statement disclosure, or auditing scope or procedure,
      which disagreements, if not resolved to the satisfaction of HDTW, would
      have caused them to make reference thereto in their report on the
      financial statements for such year.
 
 (2)
              During
      the year ended December 31, 2005, and through January 22, 2007, there were
      been no reportable events (as defined in Regulation S-B
      Item 304(a)(1)(iv)(B)).
 
 (iv)
              The
      Company has requested that HDTW furnish it with a letter addressed to the
      Securities and Exchange Commission stating whether or not HDTW agrees with
      the above statements. A copy of HDTW’s letter required by
      Item 304(a)(3) of Regulation S-B is incorporated by reference as
      exhibit 16.3 hereto.
 
  -111-
  
 (2)
              During
      the Company’s two most recent fiscal years and through January 22, 2007,
      neither the Company, nor anyone on its behalf, consulted with PMB
      regarding either the application of accounting principles to a specified
      transaction, either completed or proposed; or the type of audit opinion
      that might be rendered on the Company’s financial statements; or any
      matter that was either a subject of disagreement (as defined in
      Item 304(a)(1)(iv)(A) of Regulation S-B and the related instructions
      to that Item) or a reportable event (as described in
      Item 304(a)(1)(iv)(B) of Regulation S-B).
 
  Our
consolidated financial statements for the year ended December 31, 2004 were
audited by Malone & Bailey, PC, Certified Public Accountants (“Malone”).
Effective April 11, 2005, the client auditor relationship between us and Malone
ceased as the former accountant was dismissed. Effective April 11, 2005, we
engaged HDTW as our principal independent public accountant for the fiscal year
ended December 31, 2005. The decision to change accountants from Malone to HDTW
was recommended and approved by the Company’s Board of Directors on
April 11, 2005. Malone had been engaged by the Company on June 2, 2004.
 
 During
the period beginning June 2, 2004 (the date that the Company engaged Malone) up
to and including the date the relationship with Malone ceased, there were no
disagreements with Malone on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement(s), if not resolved to the satisfaction of Malone would have caused
Malone to make reference to the subject matter of the disagreement(s) in
connection with its report on the Company’s financial statements. There have
been no reportable events as defined in Item 304(a)(1)(iv)(B) of Regulation S-B
during the interim period up to and including the date the relationship with
Malone ceased.
   Malone
audited the balance sheet of the Company as of December 31, 2004, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the fiscal years ended December 31, 2004 and 2003. Malone's report on
the Company's financial statements for the fiscal years ended December 31, 2004
and 2003 did not contain any adverse opinion or disclaimer of opinion and was
not qualified or modified as to uncertainty, audit scope or accounting
principles.
 
 The
Company authorized Malone to respond fully to any inquiries of any new auditors
hired by the Company relating to their engagement as the Company's principal
independent accountant. The Company has requested that Malone review the
disclosure and Malone has been given an opportunity to furnish the Company with
a letter addressed to the Commission containing any new information,
clarification of the Company's expression of its views, or the respect in which
it does not agree with the statements made by the Company herein. Such letter is
filed as an exhibit to this report.
  -112-
  
 The
Company did not previously consult with HDTW regarding either (i) the
application of accounting principles to a specified transaction, either
completed or proposed; or (ii) the type of audit opinion that might be rendered
on the Company's financial statements; or (iii) any matter that was either the
subject matter of a disagreement (as defined in Item 304(a)(1)(iv)(A) of
Regulation S-B) between the Company and Malone, the Company's previous principal
independent accountants, as there were no such disagreements, or an other
reportable event (as defined in Item 304(a)(1)(iv)(B) of Regulation S-B) during
the interim period up to an including the date the relationship with Malone
ceased. Neither has the Company received any written or oral advice concluding
there was an important factor to be considered by the Company in reaching a
decision as to an accounting, auditing, or financial reporting
issue.
 
 ITEM 8A. CONTROLS AND
PROCEDURES
 
 (a)
Evaluation of disclosure controls and procedures. Our Chief Executive Officer
and Principal Financial Officer, after evaluating the effectiveness of our
"disclosure controls and procedures" (as defined in the Securities Exchange Act
of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by
this Annual Report on Form 10-KSB/A (the "Evaluation Date"), has
concluded that as of the Evaluation Date, our disclosure controls and procedures
are effective to provide reasonable assurance that information we are required
to disclose in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Accounting Officer, as appropriate, to allow
timely decisions regarding required disclosure.
 
 (b)
Changes in internal control over financial reporting. There were no changes in
our internal control over financial reporting during our most recent fiscal
quarter that materially affected, or were reasonably likely to materially
affect, our internal control over financial reporting.
 
  -113-
  ITEM 8B. OTHER
INFORMATION.
 
 We have
recently become aware of a potential stock scam regarding the proposed purchase
of shares of our common stock from offshore investors. At least one investor has
been contacted by a third party offering to purchase the shares of our common
stock which that investor holds for well over the current market price of our
common stock. However, the third party also requests certain legend removal fees
and transaction fees which must be paid up front before moving forward with the
sale of the common stock. We believe these offers to buy shares of our common
stock are fraudulent and that such third parties will not honor their sales once
they receive their substantial up front costs. We urge any investor in the
Company to only make sales of common stock through licensed broker/dealers
and/or to consult with a licensed broker before signing any unsolicited purchase
agreements they may receive.
  -114-
  PART III
 
 ITEM 9. DIRECTORS, EXECUTIVE
OFFICERS, PROMOTERS AND CONTROL PERSONS COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT
 
 The
following table sets forth the name, age and position of our director and
executive officer. There are no other persons who can be classified as a
promoter or controlling person of us. Our officer and director is as
follows:
 
 Name
                Age
                PositionEdward
      R. DeStefano
                54
                Chief
      Executive Officer,President,
      Chief Financial Officer,Secretary,
      Treasurer and Director
 EDWARD R.
DESTEFANO
 Chief Executive Officer, President,
Chief Financial Officer, Secretary, Treasurer and Director
 
 Edward R.
DeStefano has served as our Chief Executive Officer, President, Chief Financial
Officer, Secretary, Treasurer and Director since November 2, 2004. Mr. DeStefano
has served as the Chief Executive Officer of Century Resources, Inc. since June
1985, which company became our wholly owned subsidiary in connection with the
Exchange, discussed below under "Description of Business". From June 1981 to
June 1985, Mr. DeStefano served as the Director of Operations of Aracca
Petroleum Corporation. From January 1976 to June 1981, Mr. DeStefano was
employed as an exploration associate with Gulf Oil Corporation. Mr. DeStefano
obtained a Bachelors of Science degree from Ithaca College in 1975. He completed
additional course work in Energy Economics at the University of Houston in 1980.
Mr. DeStefano is a member of the Houston Geological Society, North Texas Oil and
Gas Association, Society of Petroleum Engineers, and the American Association of
Petroleum Geologists.
 
 Our
Director will hold office until the next annual meeting of the shareholders,
and/or until his successor has been elected and qualified. Our officer was
elected by the Board of Directors and holds office at the pleasure of the
Board.
 
 EMPLOYMENT
AGREEMENT
 
 Mr.
DeStefano serves as our Chief Executive Officer and President under a three year
Executive Employment Agreement effective from September 1, 2005 to August 31,
2008, which was amended, effective June 1, 2006, and which is renewable for
successive one (1) year terms upon its expiration. Under the Executive
Employment Agreement, Mr. DeStefano shall receive a different "Yearly Salary"
depending on the year which Mr. DeStefano is employed,
including:
  -115-
  (i) a
Yearly Salary of $200,000 for the year ended December 31, 2005, of which he was
paid the pro rata amount of approximately $66,667 for the four month period
beginning on September 1, 2005 and ending on December 31, 2005;
 
 (ii) a
Yearly Salary of $225,000 for the five month period beginning on January 1, 2006
and ending on May 31, 2006 of which approximately $93,750 was paid to Mr.
DeStefano during such five month period (which period represents the Yearly
Salary Mr. DeStefano was to earn under the original Executive Employment
Agreement, from January 1, 2006 until the June 1, 2006, the date the Amended
Executive Employment Agreement took effect (the "Executive Employment
Agreement");
 
 (iii) a
Yearly Salary of $325,000 for the seven month period beginning on June 1, 2006,
and ending on December 31, 2006, of which approximately $189,583 is payable to
Mr. DeStefano during such seven month period; and
 
 (vi) a
Yearly Salary of $350,000 for the twelve month period beginning January 1, 2007
and ending December 31, 2008.
 
 In
addition to Mr. DeStefano's Yearly Salary under the Executive Employment
Agreement, he may be granted bonus payments of cash or shares of our common
stock from time to time at the discretion of our Board of Directors; he shall be
reimbursed for business expenses incurred in connection with his employment; he
shall be allotted a car allowance of $750.00 per month to be spent on obtaining
and maintaining transportation; he shall be entitled to fourteen (14) days of
paid time off (PTO) per year which shall roll-over into the next year if unused;
and he shall be entitled to participate in any stock option plan of the Company
which may be approved in the future by the Board of Directors.
 
 Under the
Executive Employment Agreement, we agreed to indemnify and hold harmless Mr.
DeStefano, his nominees and/or assigns against any and all losses, claims,
damages, obligations, penalties, judgments, awards, liabilities, costs, expenses
and disbursements (incurred in any and all actions, suits, proceedings and
investigations in respect thereof and any and all legal and other costs,
expenses and disbursements in giving testimony or furnishing documents in
response to a subpoena or otherwise), including without limitation, the costs,
expenses and disbursements, as and when incurred, of investigating, preparing or
defending any such action, suit, proceeding or investigation that is in any way
related to his employment with us (whether or not in connection with any action
in which he is a party). Such indemnification does not apply to acts performed
by Mr. DeStefano, which are criminal in nature or a violation of law. We also
agreed that he shall not have any liability (whether direct or indirect, in
contract or tort, or otherwise) to us, for, or in connection with, the
engagement of Mr. DeStefano under the Executive Employment Agreement, except to
the extent that any such liability resulted primarily and directly from his
gross negligence and willful misconduct.
 
 -116-
  The
Executive Employment Agreement shall terminate:
  (a) in
the event Mr. DeStefano suffers an injury, illness, or incapacity of such
character as to prevent him from performing his duties without reasonable
accommodation for a period of more than thirty (30) consecutive days upon us
giving at least thirty (30) days written notice of termination to
him;
 
 (b) upon
Mr. DeStefano's death;
 
 (c) at
any time because of, (i) the conviction of Mr. DeStefano of an act or acts
constituting a felony or other crime involving moral turpitude, dishonesty or
theft or fraud; or (ii) his gross negligence in the performance of his duties
hereunder;
 
 (d) Mr.
DeStefano may terminate his employment for "good reason" by giving us ten (10)
days written notice if: (i) he is assigned, without his express written consent,
any duties materially inconsistent with his positions, duties, responsibilities,
or status with us, or a change in his reporting responsibilities or titles as in
effect as of the date hereof; (ii) his compensation is reduced; or (iii) we do
not pay any material amount of compensation due hereunder and then fail either
to pay such amount within the ten (10) day notice period required for
termination hereunder or to contest in good faith such notice; or
 
 (e) at
any time without cause.
 
 In the
event of the termination of Mr. DeStefano's employment pursuant to (a), above,
he will be entitled to a one time lump sum payment equal to 50% of the full
Yearly Salary then in effect in addition to all payments of salary earned
through the date of termination, which shall be immediately due and payable
(plus life insurance or disability benefits).
 
 In the
event of the termination of Mr. DeStefano's employment pursuant to (b) or (c)
above, he will be entitled only to the compensation earned by him as of the date
of such termination (plus life insurance or disability benefits).
 
 In the
event of Mr. DeStefano's termination pursuant to (d) or (e) above, he will be
entitled to receive as severance pay, a one time lump sum payment equal to 150%
of the full Yearly Salary then in effect, in addition to all payments of salary
earned through the date of such termination, which shall be immediately due and
payable; provided however, that any severance payment is contingent upon the
execution by Mr. DeStefano of a Settlement Agreement and Mutual Release
releasing us from any and all obligations under the Executive Employment
Agreement.
 
 SECTION 16 (A) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE
 
 Section
16(a) of the securities Exchange Act of 1934, as amended, requires our
directors, executive officers and persons who own more than 10% of a class of
our equity securities which are registered under the Exchange Act to file with
the Securities and Exchange Commission initial reports of ownership and reports
of changes of ownership of such registered securities. Such executive officers,
directors and greater than 10% beneficial owners
are required by Commission regulation to furnish us with copies of all Section
16(a) forms filed by such reporting persons.
  -117-
 To our
knowledge, based solely on a review of the copies of such reports furnished to
us and on representations that no other reports were required, we are of the
opinion that William Mason failed to make a Form 4 filing and a Schedule 13d
filing in connection with his ownership of 5,000 shares of our Series A
Convertible Preferred Stock, which were converted into 1,100,000 shares of our
common stock in December 2005. Based on stockholder filings with the SEC, Edward
R. DeStefano and Laurus Master Fund, Ltd.(through Promethean(as defined
herein)), are currently subject to Section 16(a) filing
requirements.
 
 
 ITEM 10. EXECUTIVE
COMPENSATION
 Other(1)AnnualName &
      Principal
                  
                  
                  
                  
                  
                  Compen-
                  
                  Options
                  
                  
                  
                  TotalPosition
                  
                  Year
                  
                  Salary
    ($)
                  
                  sation($)
                  
                  SARs
                  
                  Bonus($)
                  
                  Compensation
      ($)Edward R.
      DeStefano
                  
                  
                  2006(2
                  )
                  
                  283,333
                  
                  
                  9,750
                  
                  
                  --
                  
                  
                  26,667
                  
                  $
                  319,750CEO,
      President CFO,
                  
                  
                  2005(3
                  )
                  
                  207,957
                  
                  
                  3,000
                  
                  
                  --
                  
                  
                  14,587
                  
                  $
                  225,544Treasurer
      and
                  
                  
                  2004
                  
                  
                  76,340
                  
                  
                  --
                  
                  
                  --
                  
                  
                  --
                  
                  $
                  76,340Secretary
      (4)William F.
      Mason(5)
                  
                  
                  2004
                  
                  
                  --
                  
                  
                  --
                  
                  
                  --
                  
                  
                  --
                  
                  
                  --CEO
      and President




* Does
not include perquisites and other personal benefits in amounts less than 10% of
the total annual salary and other compensation. Other than the individuals
listed above, we have no other executive employees who have received more than
$100,000 in compensation, including bonuses and options, during each of the last
three (3) fiscal years.
 
 (1) No
Executive Officer received any LTIP payouts, non-equity incentive plan
compensation, non-qualified deferred compensation earnings, or restricted stock
awards during the years ended 2003, 2004, or 2005, and no salaries are being
accrued. since September 1, 2005, in connection with Mr. DeStefano's Employment
Agreement, beginning September 2005, he has been receiving approximately $750
per month as a car allowance, which amount represents the $9,750 of other annual
compensation in 2006 and $3,000 in 2005.
 
 (2) Mr.
DeStefano earned $283,333 for the fiscal year ended December 31, 2006 which
included $93,750 earned from January 1, 2006 to May 31, 2006, which was paid
under the terms of his Executive Employment Agreement; and $189,583 which he was
paid during the remainder of 2006 (June 1, 2006 through December 31, 2006)
pursuant to his Amended Executive Employment Agreement (see footnote 4 below).
Additionally, Mr. DeStefano received $26,667 in bonuses for his performance in
regards to completing the 2006 acquisitions described above under "Description
of Business."
  -118-
  
 (3) Mr.
DeStefano earned $207,957 for the fiscal year ended December 31, 2005 which
included $141,290 earned by Mr. DeStefano from January 1, 2005 to August 31,
2005 and $66,667 which he was paid pursuant to his Executive Employment
Agreement (see footnote 4 below), from September 1, 2005, through December 31,
2005. Additionally, Mr. DeStefano received $14,587 in bonus for his performance
in regards to completing the "Development Plan for the Prado Field" with Strong
Petroleum and for his efforts in completing the Lindholm-Hanson Gas Unit
acquisitions described above under "Description of Business."
 
 (4) Mr.
DeStefano is employed under a three year Amended Executive Employment Agreement
with us which expires on December 31, 2008, and is described in greater detail
under "Directors, Executive Officers, Promoters and Control Persons,"
above.
 
 (5)
William F. Mason served as our Chief Executive Officer and President from
October 19, 2001 to November 2, 2004, at which time he resigned and Mr.
DeStefano was appointed Chief Executive Officer, President, Chief Financial
Officer, Treasurer and Secretary of the Company.
 
 COMPENSATION DISCUSSION AND
ANALYSIS
 
 Director
Compensation
 
 Edward R.
DeStefano, our sole officer and Director, does not receive any separate
consideration from the Company other than the compensation he is paid as the
Company’s sole executive officer, for his service on the Board of Directors.
However; the Board of Directors reserves the right in the future to award the
members of the Board of Directors cash or stock based consideration for services
to the Company, which awards, if granted shall be in the sole determination of
the Board of Directors.
 
 Executive Compensation
Philosophy
 
 Our Board
of Directors, consisting solely of Edward R. DeStefano, determines the
compensation provided to our sole executive officer, Mr. DeStefano, and/or any
other executive officers we may hire in the future in its sole determination.
Our executive compensation program is designed to attract and retain talented
executives (such as Mr. DeStefano), to meet our short-term and long-term
business objectives. In doing so, we attempt to align our executive’s interests
with the interests of our shareholders by providing an adequate compensation
package to such executive. This compensation package includes a base salary,
which we believe is competitive with other companies of our relative size.
Additionally, our Board of Directors reserves the right to award incentive
bonuses which are linked to our performance, as well as to individual executive
officer’s performance in the future. This package may also include long-term,
stock based compensation to Mr. DeStefano and/or any additional executives we
may hire in the future, which are intended to align the performance of our
executives with our long-term business strategies.
  -119-
  
 Base Salary
  The base
salary of Mr. DeStefano, our Chief Executive Officer, Chief Financial Officer,
President, Secretary and Treasurer, was established by our entry into an Amended
Employment Agreement with Mr. DeStefano, effective June 1, 2006, described in
greater detail above, Mr. DeStefano’s salary was established by evaluating the
range of responsibilities of his positions, as well as the anticipated impact
that Mr. DeStefano could have in meeting our strategic objectives. The
established base salary of Mr. DeStefano. Mr. DeStefano’s base salary and/or the
base salaries of any additional executive officers we may hire in the future
will be adjusted to reflect the varying levels of position responsibilities and
individual executive performance.
 
 Incentive Bonus
 
 Along
with Mr. DeStefano’s base salary, the Board of Directors reserves the right to
give incentive bonuses to Mr. DeStefano, which bonuses the Board of Directors
may grant in its sole discretion, if the Board of Directors believes such
bonuses are in the Company’s best interest, after analyzing our current business
objectives and growth, if any, and the amount of revenue we are able to generate
each month, which revenue is a direct result of the actions and ability of Mr.
DeStefano in the sole discretion of the Board of Directors.
 
 Long-term, Stock Based
Compensation
 
 In order
to attract, retain and motivate executive talent necessary to support the
Company’s long-term business strategy we may award executives with long-term,
stock based compensation in the future, in the sole discretion of our Board of
Directors, which we do not currently have any immediate plans to
award.
 
 Criteria for Compensation
Levels
 
 The
Company has always sought to attract and retain qualified executives and
employees able to positively contribute to the success of the Company for the
benefit of its various stakeholders, the most important of which is its
shareholders, but also including its customers, its employees, and the
communities in which the Company operates.
 
 The Board
of Directors (in establishing compensation levels for Mr. DeStefano) and the
Company (in establishing compensation levels for all employees of the Company)
consider many factors, including, but not limited to, the individual’s abilities
and executed performance that results in: the advancement of corporate goals of
the Company, execution of the Company’s business strategies, contributions to
positive financial results, contributions to the Company’s overall image and
reputation in the Company’s industry, and contributions to the development of
the management team and other employees. An employee must demonstrate his or her
ability to deliver results in his or her areas of responsibility, which can
include, among other things: business development, efficient management of
operations and systems, implementation of appropriate changes and improvements
to operations and systems, personnel management, financial management, and
strategic decision making. In determining compensation levels, the Board of
Directors also considers: competitiveness of compensation packages relative to
other comparable companies, both inside and outside of the oil and gas
exploration industries, and the experience level of each particular
individual.
  -120-
 Compensation
levels for executives and employees are generally reviewed upon the expiration
of such executive’s employment and/or consulting agreements (if any), and/or
annually, but may be reviewed more often as deemed appropriate.
 
 Compensation Philosophy and
Strategy
 
 In
addition to the “Criteria for Compensation Levels” set forth above, the Company
has a “Compensation Philosophy” for all employees of the Company (set forth
below), and a “Compensation Strategy for Key Management Personnel” (set forth
below), a substantial portion of which also applies to all employees of the
Company.
 
 Compensation
Philosophy
 
 The
Company’s compensation philosophy is as follows:
  ·
              The
      Company believes that compensation is an integral component of its overall
      business and human resource strategies. The Company’s compensation plans
      will strive to promote the hiring and retention of personnel necessary to
      execute the Company’s business strategies and achieve its business
      objectives.
 
 ·
              The
      Company’s compensation plans will be strategy-focused, competitive, and
      recognize and reward individual and group contributions and results. The
      Company’s compensation plans will strive to promote an alignment of the
      interests of employees with the interests of the shareholders by having a
      portion of compensation based on financial results and actions that will
      generate future shareholder value.
 
 ·
              In
      order to reward financial performance over time, the Company’s
      compensation programs generally will consist of: base compensation, and
      may also consist of short-term variable incentives and long-term variable
      incentives, as appropriate.
 
 ·
              The
      Company’s compensation plans will be administered consistently and fairly
      to promote equal opportunities for the Company’s
  employees.
 
 Compensation Strategy for Key
Management Personnel
 
 The
Company’s compensation strategy for its key management personnel is as
follows:
  -121-
  ·
              Total
      compensation may include base salary and short-term and long-term variable
      incentives based on annual and long term performance, and long-term
      variable incentives, in each case, where
  appropriate.  ·
              Compensation
      will be comparable to general and industry-specific compensation
      practices.
 
 ·
              Generally,
      base compensation, and targeted short and long-term variable compensation,
      if any, will be established within the range of compensation of similarly
      situated companies in the Company’s industry. The Company’s organization
      size and complexity will be taken into account, and therefore similarly
      situated companies include companies of similar size and complexity
      whether or not such companies are in the Company’s industry or
      not.
 
 ·
              When
      determining compensation for officers, managers and consultants, the
      Company takes into account the employee’s (and/or consultant’s) knowledge,
      experience, past employment history and connections in the industry,
      including industry specific knowledge and experience, to the extent such
      knowledge and experience contributes to the Company’s ability to achieve
      its business objectives.
 
 ·
              The
      Company reserves the right to adjust annual base salaries of employees
      and/or to award performance based bonuses if individual performance is at
      or above pre-established performance
  expectations.
 
 
 ITEM 11. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
 
 The
following table provides the names and addresses of each person known to own
directly or beneficially more than 5% of our outstanding common stock (as
determined in accordance with Rule 13d-3 under the Exchange Act) as of March 30,
2007, and by the officers and directors, individually and as a group. Except as
otherwise indicated, all shares are owned directly.
 Name and Address
      ofBeneficial
      Owner
                
                Shares
                
                Percent(1)Edward
      R. DeStefano*
                
                
                37,514,350
                
                
                67.0%5851
      San Felipe, Suite 775Houston,
      Texas, 77057Laurus
      Master Fund, Ltd.(2)(4)
                
                
                3,675,000(3
                )
                
                6.6%P.O.
      Box 309GT
      Ugland HouseGeorge
      TownSouth
      Church StreetGrand
      Cayman,Cayman
      IslandsAll of the officers and
                
                
                37,514,350
                
                
                67.0%directors as a group (1
      person)






-122-




* Mr.
DeStefano received 37,500,000 shares of our restricted common stock in December
2004, pursuant to a share exchange, whereby he exchanged 100% of the outstanding
shares of Century, for 37,500,000 shares of our common stock. He purchased
14,350 shares of common stock during the fourth quarter of 2006 and the first
quarter of 2007, in market transactions at the then value of our common
stock.
 
 (1) Using
56,010,612 shares of common stock issued and outstanding as of March 30,
2007.
 
 (2) The
beneficial owner of Laurus Master Fund, Ltd. is Laurus Capital Management, LLC,
a Delaware limited liability company, who manages Laurus Master Fund, Ltd.
Eugene Grin and David Grin are the sole members of Laurus Capital Management,
LLC.
 
 (3)
Laurus currently holds 3,675,000 shares of our common stock and has
contractually agreed not to hold more than 9.99% of our issued and outstanding
common stock, unless an event of default occurs or upon providing 75 days prior
notice to us. If an event of default occurs or upon 75 days prior notice to us,
subject to Laurus' pledge under the December Option, not to exercise any part of
the December Option, until (a) the payment in full of all obligations of the
Company to Laurus under the Convertible Note and (b) the exercise of the
Warrant, unless an event of default occurs and is continuing, Laurus is able to
hold an aggregate of 46,735,789 shares of our common stock assuming full
conversion of the Note, and exercise of the Warrant, Option and December Option.
The shares of common stock issuable in connection with the conversion of the
Note, the exercise of the Warrant and exercise of the Option and the December
Option represent an aggregate of 43,060,789 shares, including 24,193,548 shares
representing the full conversion of the Note, 7,258,065 shares representing full
exercise of the Warrant, 6,547,784 shares representing the remaining amount of
the Option, and 5,061,392 shares representing full exercise of the December
Option (which is subject to the limitation above), defined and described in
greater detail above under "Description of Business", and not including any
shares of our common stock for conversion of interest on the Note, or any
changes in the Fixed Conversion Price, plus the 3,675,000 shares of common stock
which Laurus already holds. Assuming full conversion of the Note and exercise of
the Warrant, Option and December Option upon an event of default or upon 75 days
prior notice to us (subject to the limitation of exercise of the December
Option, described above), Laurus could hold 46,735,789 shares of our common
stock, which would represent approximately 45.5% of our then outstanding common
stock (assuming the issuance of no additional shares of common stock other than
in connection with the conversion of the Note, Warrant and
Option).
  -123-
  (4) In
June 2006, Laurus provided us notice of their transfer of their rights
underlying the Warrant, Option, December Option and Gulf Coast Warrant to an
entity controlled by Laurus, Promethean Industries, Inc. ("Promethean"). For the
purposes of the table above, all references to Laurus include the ownership of
Promethean.
 
 Changes In
Control
 
 The
Company does not anticipate any changes in control of the Company.
 
 ITEM 12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
 
 Throughout
2004, $169,123 was repaid to our Chief Executive Officer, Edward R. DeStefano,
in consideration of monies he loaned to us.
 
 In
October 2004, we loaned $5,000 which was non-interest bearing to Century Assets
Corporation, a company owned solely by our Chief Executive Officer, Edward R.
DeStefano which is not affiliated with us. The $5,000 was repaid to us in the
second quarter of 2005.
 
 In
December 2004, we issued 37,500,000 shares of restricted common stock to our
Chief Executive Officer, Edward R. DeStefano, pursuant to the
Exchange.
 
 On March
7, 2005, we entered into an amended agreement with Aquatic (as described and
defined above under "Description of Property") under the original Aquatic
Agreement, our Chief Executive Officer, Edward R. DeStefano, was to receive 15%
of Aquatic's outstanding common stock. Under the Amendment, that percentage was
changed to 7.5%, and Mr. DeStefano transferred his right to the 7.5% of
Aquatic's common stock to us, which will be issued upon Aquatic's reorganization
and re-capitalization.
 
 Throughout
2005, $10,000 was repaid to our Chief Executive Officer, Edward R. DeStefano, in
consideration of monies he loaned us.
 
 Effective
September 1, 2005, we entered into an Executive Employment Agreement with our
Chief Executive Officer and President, Edward R. DeStefano, whereby Mr.
DeStefano agreed to serve as our Chief Executive and President for a period of
three years, until August 31, 2008 under the Executive Employment Agreement
(described in greater detail above under "Directors, Executive Officers,
Promoters and Control Persons").
 
 In 2005,
we granted our Chief Executive Officer, Edward R. DeStefano $14,587 in bonus
consideration for his performance in regards to completing the "Development Plan
for the Prado Field" with Strong Petroleum and for his efforts in completing the
Lindholm-Hanson Gas Unit acquisitions.
  -124-
  Effective
June 1, 2006, we entered into an Amended Executive Employment Agreement with our
Chief Executive Officer and President, Edward R. DeStefano, which amended the
terms of the Executive Employment Agreement entered into with Mr. DeStefano
which was originally effective September 1, 2005. The Amended Executive
Employment Agreement is described in greater detail above under "Directors,
Executive Officers, Promoters and Control Persons".
 
 In 2006,
we paid Mr. DeStefano a bonus in the amount of $26,667 in consideration for his
help and guidance in connection with Gulf Coast's acquisition of the Manti
Property (as described and defined herein) as well as his guidance in connection
with the development and expansion of our operations and assets over the course
of the year ended December 31, 2006.
 
 During
the fourth quarter of 2006 and the first quarter of 2007, Mr. DeStefano
purchased 14,350 shares of our common stock, in market transactions at the then
value of our common stock.
 
 ITEM 13. EXHIBITS AND
REPORTS ON FORM 8-K
 
 (a)
EXHIBITS




Exhibit No.
              Description of Exhibit10.1(1)
              Securities
      Purchase Agreement2.1(1)
              Agreement
      and Plan of Reorganization (without exhibits)3.1(2)
              Articles
      of Incorporation3.2(2)
              Articles
      of Amendment to Articles of Incorporation3.3(3)
              Articles
      of Amendment to Articles of Incorporation3.4(3)
              Articles
      of Amendment to Articles of Incorporation3.5(3)
              Certificate
      of Correction filed with the Colorado Secretary of
State3.5(25)
              Articles
      of Amendment to Articles of Incorporation filed with the Colorado
      Secretary of State3.6(2)
              Bylaws10.1(4)
              Purchase
      and Sale & Exploration Agreement with Aquatic10.2(4)
              First
      Amendment of Purchase and Sale & Exploration Agreement with
      Aquatic
   -125-
  10.3(5)
              Development
      Agreement with Strong (with all confidential information
      removed)10.4(6)
              Settlement
      Agreement and Mutual Release with Core Concepts, LLC10.5(7)
              Securities
      Purchase Agreement between Laurus Master Fund, Ltd. and New Century Energy
      Corp.10.6(7)
              Secured
      Convertible Term Note10.7(8)
              Amended
      and Restated Secured Convertible Note10.8(7)
              Common
      Stock Purchase Warrant10.9(7)
              Master
      Security Agreement10.10(7)
              Registration
      Rights Agreement10.11(7)
              Option
      Agreement10.12(7)
              Purchase
      and Sale Agreement (June 2005)10.13(9)
              Finder's
      Warrant10.14(10)
              Purchase
      and Sale Agreement (September 2005)10.15(11)
              September
      2005 Securities Purchase Agreement10.16(12)
              Amended
      and Restated Secured Term Note10.17(11)
              September
      2005 Reaffirmation and Ratification Agreement10.18(11)
              Mortgage,
      Deed of Trust, Security Agreement, Financing Statement and Assignment of
      Production in Wharton County, Texas10.19(11)
              Mortgage,
      Deed of Trust, Security Agreement, Financing Statement and Assignment of
      Production in McMullen County, Texas10.20(11)
              Mortgage,
      Deed of Trust, Security Agreement Financing Statement and Assignment of
      Production in Matagorda County, Texas10.21(13)
              Purchase
      and Sale Agreement dated November 1, 2005 and exhibits10.22(13)
              Amendment
      to Purchase and Sale Agreement dated November 2, 200510.23(13)
              Amendment
      Agreement to June 2005 Securities Purchase
  Agreement
  -126-
  10.24(14)
              Edward
      R. DeStefano Employment Agreement10.25(31)
              Edward
      R. DeStefano Amended Employment Agreement10.26(15)
              Second
      Amendment Agreement with Laurus10.27(16)
              Third
      Amendment Agreement10.28(16)
              December
      Option10.29(16)
              Settlement
      Agreement with William F. Mason10.30(17)
              Asset
      Purchase Agreement10.31(17)
              Securities
      Purchase Agreement (Gulf Coast and Laurus)10.32(17)
              Secured
      Term Note (Gulf Coast)10.33(17)
              Common
      Stock Purchase Warrant (Gulf Coast)10.34(17)
              Guaranty
      (New Century and Century)10.35(17)
              Guaranty
      (Gulf Coast)10.36(17)
              Stock
      Pledge Agreement (Gulf Coast)10.37(17)
              Mortgage,
      Deed of Trust, Security Agreement, Financing Statement and Assignment of
      Production, filed in Atascosa County and McMullen County,
      Texas10.38(17)
              Amended
      and Restated Mortgage, Deed of Trust, Security Agreement, Financing
      Statement and Assignment of Production, filed in Matagorda County,
      McMullen County and Wharton County, Texas10.39(17)
              Master
      Security Agreement10.40(17)
              Collateral
      Assignment10.41(17)
              Letter
      Agreement regarding Shareholder Agreement10.42(17)
              Reaffirmation,
      Ratification and Amendment Agreement10.43(17)
              Fourth
      Amendment Agreement with Laurus10.44(26)
              Fifth
      Amendment Agreement with Laurus
   -127-
  10.45(27)
              June
      2006 Asset Purchase Agreement10.46(27)
              June
      2006 Securities Purchase Agreement (Gulf Coast and
  Laurus)10.47(27)
              June
      2006 Secured Term Note (Gulf Coast)10.48(27)
              June
      2006 Amended and Restated Term Note (Gulf Coast)10.49(27)
              June
      2006 Amended and Restated Mortgage, Deed of Trust, Security Agreement,
      Financing Statement and Assignment of Production, filed in Matagorda
      County, McMullen County and Wharton County, Texas10.50(27)
              Collateral
      Assignment10.51(27)
              Reaffirmation
      and Ratification Agreement (Gulf Coast)10.52(27)
              Reaffirmation
      and Ratification Agreement (New Century and Century)10.53(29)
              Sixth
      Amendment Agreement10.54(30)
              Seventh
      Amendment Agreement10.55(32)
              Eighth
      Amendment Agreement10.55(33)
              Escrow
      Agreement in connection with the June 30, 2005 closing with
      Laurus10.56(33)
              Funds
      Disbursement Letter in connection with the June 30, 2005 closing with
      Laurus10.57(34)
              Securities
      Purchase Agreement - December 200610.58(34)
              Second
      Amended and Restated Secured Term Note10.59(34)
              Second
      Amended and Restated Secured Term Convertible Note10.60(34)
              Secured
      Term Note - December 2006 10.61(34) Reaffirmation, Ratification and
      Amendment Agreement - December 200610.62(34)
              Amended
      Guaranty (Gulf Coast Oil Corporation) - December 200610.63(34)
              Master
      Security Agreement - December 200610.64(34)
              Funds
      Disbursement Letter - December 2006
  -128-
  10.65(34)
              Escrow
      Agreement - December 200610.66(35)
              Agreement
      to Rescind the Eighth Amendment10.67( 37 )
              1stAmendment to Energy Capital Solutions Warrant16.1(18)
              Letter
      from Randolph Scott and Company, Certified Public
    Accountants16.2(19)
              Letter
      from Malone and Bailey, PC, Certified Public
Accountants16.3(36)
              Letter
      from Helin, Donovan, Trubee & Wilkinson, LLP21( 37 )
              Subsidiaries
      of New Century Energy Corp.31.1*
              Certificate
      of the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2*
              Certificate
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1*
              Certificate
      of the Chief Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2*
              Certificate
      of the Chief Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200299.1(20)
              Glossary
      of Oil and Gas Terms99.2(9)
              R.A.
      Lenser and Associates, Inc. Summary Letter of Reserves and Future
      Production of New Century Energy Corp.'s Oil and Gas Properties as of
      January 1, 200599.3(31)
              R.A.
      Lenser and Associates, Inc. Summary Letter of Reserves and Future
      Production of New Century Energy Corp.'s Oil and Gas Properties as of
      January 1, 200699.4(21)
              Financial
      Statements of the Company's first acquisition in the Lindholm-Hanson Gas
      Unit99.5(21)
              Pro
      Forma Financial Information of the Company's first acquisition in the
      Lindholm-Hanson Gas Unit99.6(22)
              Financial
      Statements of the Company's second acquisition in the Lindholm-Hanson Gas
      Unit99.7(22)
              Pro
      Forma Financial Information of the Company's second acquisition in the
      Lindholm-Hanson Gas Unit
   -129-
 99.8(23)
              Financial
      Statements of the Company's third acquisition in the Lindholm-Hanson Gas
      Unit99.9(23)
              Pro
      Forma Financial Information of the Company's third acquisition in the
      Lindholm-Hanson Gas Unit99.10(24)
              Financial
      Statements of Gulf Coast's 1st acquisition in the Mustang Creek
      Property99.11(24)
              Pro
      Forma Financial Information of Gulf Coast's 1st acquisition in the Mustang
      Creek Property99.10(28)
              Financial
      Statements of Gulf Coast's 2nd acquisition in the Mustang Creek
      Property99.11(28)
              Pro
      Forma Financial Information of Gulf Coast's 2nd acquisition in the Mustang
      Creek Property




* Filed
herewith.
 
 (1) Filed
as exhibit 99 to the Form 8-K filed October 20, 2004, and incorporated by
reference herein.
 
 (2) Filed
as exhibits 2.1, 2.2, and 2.3 to our Form 10-SB, filed January 7, 2000, and
incorporated herein by reference.
 
 (3) Filed
as exhibits 3.1, 3.2, and 3.3 to our quarterly report for the period ended
September 30, 2004, and incorporated herein by reference.
 
 (4) Filed
as exhibits to our 10-KSB filed on March 31, 2005, and incorporated herein by
reference.
 
 (5) Filed
as exhibit 10.4 to our Form 10-QSB filed on May 23, 2005, and incorporated
herein by reference.
 
 (6) Filed
as exhibit 10.1 to our Report on Form 8-K, filed on June 16, 2005, and
incorporated herein by reference.
 
 (7) Filed
as exhibits to our Report on Form 8-K, filed on July 8, 2005, and incorporated
herein by reference.
 
 (8) Filed
as exhibits to the Company's Report on Form 8-K filed with the Commission on
January 4, 2006, and incorporated herein by reference.
 
 (9) Filed
as exhibits to our Form SB-2 Registration Statement filed on August 5, 2005, and
incorporated herein by reference.
 
 (10)
Filed as exhibit 10.1 to our Report on Form 8-K filed on September 6, 2005, and
incorporated herein by reference.
  -130-
  
 (11)
Filed as exhibits to our Report on Form 8-K filed on September 22, 2005 and
incorporated herein by reference.
 
 (12)
Filed as exhibit 16.2 to our Form 8-K filed on April 14, 2005, and incorporated
herein by reference.
 
 (13)
Filed as exhibits to our Report on Form 8-K filed on November 7, 2005 and
incorporated herein by reference.
 
 (14)
Filed as exhibits to the Company's Report on Form 10-QSB filed with the
Commission on December 20, 2005, and incorporated herein by
reference.
 
 (15)
Filed as exhibit 10.1 to the Company's Report on Form 8-K filed with the
Commission on December 19, 2005, and incorporated herein by
reference.
 
 (16)
Filed as exhibits to the Company's Report on Form 8-K filed with the Commission
on January 4, 2006, and incorporated herein by reference.
 
 (17)
Filed as exhibits to the Company's Report on Form 8-K filed with the Commission
on May 3, 2006, and incorporated herein by reference.
 
 (18)
Filed as exhibit 16.1 to our Form 8-K filed December 1, 2004, and incorporated
herein by reference.
 
 (19)
Filed as exhibit 16.2 to our Form 8-K filed on April 14, 2005, and incorporated
herein by reference.
 
 (20)
Filed as an exhibit to the Company's Form 10-KSB filed with the Commission on
March 31, 2005, and incorporated herein by reference.
 
 (21)
Filed as exhibits to the Company's amended Report on Form 8-K/A, filed with the
Commission on May 8, 2006, and incorporated herein by reference.
 
 (22)
Filed as exhibits to the Company's amended Report on Form 8-K/A, filed with the
Commission on May 8, 2006, and incorporated herein by reference.
 
 (23)
Filed as exhibits to the Company's amended Report on Form 8-K/A, filed with the
Commission on May 8, 2006, and incorporated herein by reference.
 
 (24)
Filed as exhibits to the Company's amended Report on Form 8-K/A, filed with the
Commission on July 13, 2006, and incorporated herein by reference.
 
 (25)
Filed as an exhibit to our Report on Form 8-K, filed with the Commission on June
14, 2006, and incorporated herein by reference.
  -131-
  (26)
Filed as exhibit 10.1 to our Report on Form 8-K, filed with the Commission on
June 23, 2006, and incorporated herein by reference.
 
 (27)
Filed as exhibits to our Report on Form 8-K, filed with the Commission on July
7, 2006, and incorporated herein by reference.
 
 (28)
Filed as exhibits to the Company's amended Report on Form 8-K/A, filed with the
Commission on September 13, 2006, and incorporated herein by
reference.
 
 (29)
Filed as an exhibit to the Company's Form 8-K, filed with the Commission on
September 13, 2006, and incorporated herein by reference.
 
 (30)
Filed as an exhibit to the Company's Form 8-K, filed with the Commission on
October 26, 2006, and incorporated herein by reference.
 
 (31)
Filed as an exhibit to the Company's Form SB-2, filed with the Commission on
July 18, 2006, and incorporated herein by reference.
 
 (32)
Filed as an exhibit to the Company's Form 8-K, filed with the Commission on
December 8, 2006, and incorporated herein by reference.
 
 (33)
Filed as exhibits to the Company's Report on Form 10-QSB, filed with the
Commission on November 16, 2006, and incorporated herein by
reference.
 
 (34)
Filed as exhibits to the Company's Report on Form 8-K, filed with the Commission
on January 10, 2007, and incorporated herein by reference.
 
 (35)
Filed as an exhibit to the Company's Report on Form 8-K, filed with the
Commission on January 10, 2007, and incorporated herein by
reference.
 
 (36)
Filed as an exhibit to the Company’s Report on Form 8-K, filed with the
Commission on January 25, 2007, and incorporated herein by
reference.
  (37)
Filed as an exhibit to the Company’s Report on Form 10-KSB, filed with the
Commission on April 12, 2007, and incorporated herein by
reference.
 
 * Filed
herein
 
 (b)
REPORTS ON FORM 8-K
 
 We filed
the following reports on Form 8-K during the fourth quarter of
2006:
 
 o
              The
      Company filed a report on Form 8-K on October 26, 2006 to report its entry
      into a Seventh Amendment Agreement with Laurus Master Fund, Ltd. which
      amended the terms of our Registration Rights Agreement with Laurus.
 
 o
              The
      Company filed a report on Form 8-K on October 26, 2006 to report its entry
      into a Letter of Intent with two third parties to purchase oil and gas
      interests totaling a 30.35% working interest and a 22.1555% net revenue
      interest in the Javelina Field, in Hidalgo County,
  Texas.
  -132-
  
 o
              The
      Company filed a report on Form 8-K on December 1, 2006 to report its
      decision not to move forward with the Javelina Field
      acquisition.
 
 o
              The
      Company filed a report on Form 8-K on December 8, 2006 to report its entry
      into an Eighth Amendment Agreement with Laurus Master Fund, Ltd., which
      Eighth Amendment was later repealed and rescinded by the
      parties.
 
 We filed
the following reports on Form 8-K subsequent to the period covered by this
Annual Report on Form 10-KSB:
 
 o
              The
      Company filed a report on Form 8-K on January 10, 2007 to report its sale
      of a Secured Term Note in the aggregate principal amount of $16,210,000 to
      Laurus Master Fund, Ltd. In connection with the closing of a Purchase
      Agreement in December 2006, as well as our entry into a Second Amended and
      Restated Secured Term Note; and a Second Amended and Restated Secured
      Convertible Term Note with Laurus.
 
 o
              The
      Company filed a report on Form 8-K on January 10, 2007 to report its entry
      into an Agreement to Rescind the Eighth Amendment Agreement, whereby we
      and Laurus agreed to rescind the Eighth Amendment Agreement in its
      entirety.
 
 o
              The
      Company filed a report on Form 8-K on January 25, 2007 to report that its
      independent registered public accounting firm HDTW consummated a merger
      with Pohl, McNabola, Berg & Co., LLP
  (“PMB”).
 
 ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
 
 AUDIT
FEES
 
 The
aggregate fees billed for each of the fiscal years ended December 31, 2006 and
2005 for professional services rendered by the principal accountant for the
audit of the Company's annual financial statements and the review of the
financial statements included in the registrant's Form 10-QSB or for services
that are normally provided by the accountant in connection with statutory and
regulatory filings or engagements for those fiscal years was approximately
$68,575 and $40,900, respectively.
 
 AUDIT
RELATED FEES
 
 The
aggregate audit-related fees billed during 2006 totaled $79,115, which comprised
three acquisition audits and related Form 8-K filings, review of a registration
statement on Form SB-2 and two amendments to the Form SB-2, and Company
responses to comment letters received from the Securities and Exchange
Commission.
  The aggregate audit-related fees billed during 2005
totaled $64,750, which comprised two acquisition audits and related Form 8-K
filings, review of a registration statement on Form SB-2, and Company responses
and amendments to prior filings as a result of comment letters received from the
Securities and Exchange Commission.
  -133-
  TAX
FEES
 
 The
aggregate fees billed in each of the last two fiscal years ended December 31,
2006 and December 31, 2005, by the principal accountant for tax compliance was
$11,709 and $6,250, respectively.
 
 ALL OTHER
FEES
 
 None.
 
  -134-
  SIGNATURES
 
 In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
  NEW CENTURY ENERGY
      CORP.Dated: 
      April  14, 2008
                By:
                /s/  Edward R.
      DeStefanoEdward
      R. DeStefano
                  Chief Executive Officer and
                  (Principal Executive
  Officer)
 
 
 In
accordance with the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
  NAME
                  
                  TITLE
                  
                  DATE/s/ Edward R.
      DeStefano
                    Edward
      R. DeStefano
                  
                  Chief
      Executive Officer
                    (Principal
      Executive Officer)
                  
                  April
      14, 2008Secretary,
      Treasurer and Director/s/ Ken ClevelandKen
      Cleveland
                  
                  Chief
      Financial Officer
                    (Principal
      Accounting Officer)
                  
                  April
      14, 2008
 -135-