SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

|X|   Annual Report Pursuant to 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 of 15(d) of the Securities Exchange Act
      of 1934

For the transition period from ___________ to __________

                           SEC file number: 333-116890

                            Baseline Oil & Gas Corp.
                 (Name of small business issuer in its charter)

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

  11811 N. Freeway (I-45), Suite 200, Houston, TX              77060
      (Address of principal executive offices)               (Zip code)

         Issuer's telephone number, including area code: (281) 445-5880

       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

Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. |_|

Check whether the issuer: (1) 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 contained in this form, and no disclosure will be contained, to
the best of 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| (Not applicable)

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 its most recent fiscal year were $0.

      As of April 16, 2007, the aggregate market value of the issuer's common
equity held by non-affiliates was $7,304,795.20, based on the closing price of
$0.40 per share for its common stock on the OTC Bulletin Board on April 16,
2007. As of April 16, 2007, 31,436,488 shares of the issuer's common stock were
outstanding.

                    DOCUMENTS INCORPORATED BY REFERENCE: None

    Transitional Small Business Disclosure Format (check one): Yes |_| No |X|


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<PAGE>

                                     PART I

Cautionary Notice Regarding Forward Looking Statements

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

      Readers should not place undue reliance on these forward-looking
statements, which are based on management's current expectations and projections
about future events, are not guarantees of future performance, are subject to
risks, uncertainties and assumptions (including those described below) and apply
only as of the date of this report. Our actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed in "--Risk
Factors" below as well as those discussed elsewhere in this report, and the
risks discussed in our press releases and other communications to shareholders
issued by us from time to time, which attempt to advise interested parties of
the risks and factors that may affect our business. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.

Item 1. Description of Business.

General

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

      We are the surviving corporation of a merger transaction with Coastal
Energy Services, Inc. ("Coastal") that was effective on April 6, 2005. As a
result of the merger, Coastal Energy Services, Inc. was treated as the
"acquiring" company and the historical financial statements of our company were
restated to be those of Coastal for financial accounting and reporting purposes.

      During fiscal year ended 2006 we were a "shell company" as that term is
defined in Rule 405 promulgated under the Securities Act of 1933 (the
"Securities Act") and Rule 12b-2 promulgated under the Securities Exchange Act
of 1934 (the "Exchange Act"), and as such, are subject to rules of the
Securities and Exchange Commission (SEC) applicable to shell companies. To date,
we have only conducted nominal operations and have only nominal assets.


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<PAGE>

Development of Business.

      Initial Registered Offering. In 2004, we filed a registration statement on
Form SB-2 for the sale by certain selling stockholders of up to 232,000 shares
of our common stock, $.001 par value (the "Common Stock"). At that time, our
business plan involved our engaging in development consulting, construction
management and general contracting services and support for small to mid-size
commercial developers and users of commercial buildings and various types of raw
land for speculation and development. For the nine months ended January 31,
2005, we had minimal revenues from general contracting activities and management
fees.

      Coastal Merger. Effective April 6, 2005, we completed a merger transaction
with Coastal Energy Services, Inc., a closely-held Delaware corporation
("Coastal"). Under the Plan and Agreement of Merger, Coastal was merged with and
into our company in exchange for 17,206,000 shares of our common stock issued to
the former Coastal stockholders. In addition, all stock options and other rights
to purchase shares of common stock of Coastal were converted into options or
rights to purchase an equal number of shares of our common stock. As of the
effective date of the merger, options to acquire up to 500,000 shares of Coastal
common stock were converted into options to acquire 500,000 shares of our common
stock.

      Under the merger agreement, we assumed all of the obligations and
liabilities of Coastal, including Coastal's obligations to repay outstanding
indebtedness under its $350,000 original principal amount of 10% convertible
promissory notes. These notes are convertible into shares of our common stock at
an effective conversion price of $0.21 per share. Subject to the rights of the
holders of these notes to convert into shares of our common stock, all of the
indebtedness under these notes became due and was paid on April 6, 2006. In
addition, on the effective date of the merger, Coastal delivered the sum of
$125,000 to us to discharge amounts owed by us for prior legal services rendered
to us and for expenses incurred by us in connection with the merger transaction.

      As a result of the merger, Barrie M. Damson and Alan D. Gaines, a former
and current officer and director of our Company, respectively, each became
beneficial owners of 27.9% of our then-outstanding shares of common stock. As
disclosed elsewhere in this Form 10-KSB, Mr. Damson became chairman of the
board, chief executive officer and a director, and Mr. Gaines became vice
chairman and a director. On March 21, 2007, Mr. Damson resigned as an officer
and director of our Company.

      Coastal had been formed to engage in the energy business, and following
the merger, the Company began pursuing opportunities in the energy industry and
more particularly, the oil and gas industries.

      As discussed below under the heading "- Subsequent Events", our efforts
culminated with the following two subsequent transactions during the first
quarter of 2007 which, taken together, caused us to cease to be a shell company:

      o     redemption on March 16, 2007 of our prior membership interest in a
            joint venture in exchange for a direct working interest in
            approximately 171,000 acres in the Illinois Basin located in
            southern Indiana known to contain New Albany Shale, as more
            particularly described below under the heading "-Southern Indiana
            Oil, Gas and Mineral Rights - New Albany Shale" and in our Current
            Report on Form 8-K previously filed with the SEC on March 19, 2007;
            and


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<PAGE>

      o     consummation on April 12, 2007 of our acquisition of the Statex
            Assets (as defined and described more particularly below under the
            heading "- Subsequent Events") under that Purchase and Sale
            Agreement dated as of December 20, 2006, as subsequently amended,
            among us and each of Statex Petroleum I, L.P. and Charles W. Gleeson
            LP (the "Stephens County Transaction"), including those wells and
            properties located on approximately 4600 acres in north Texas, as
            disclosed below under "- Subsequent Events - Stephens County
            Transaction" and in our Current Reports on Forms 8-K previously
            filed with the SEC on December 21, 2006 and March 15, 2007

      During fiscal year 2006, our business activities focused on (i) the
continued development of our southern Indiana (long life, natural gas reserves)
asset base region and (ii) the realization of potential acquisitions in this
same region and, through the Stephens County Transaction, north Texas (long
life, oil and gas reserves) asset base region.

Southern Indiana Oil, Gas and Mineral Rights - New Albany Shale.

      From November 25, 2005 until March 16, 2007, we held a 50% economic and
voting membership interest in New Albany-Indiana, LLC, a Delaware limited
liability company ("New Albany"), a joint venture with Rex Energy Operating
Corp. ("Rex Energy"), a privately held Delaware corporation, and since January
20, 2006, certain of Rex Energy's affiliates and assigns, formed for the purpose
of acquiring working interests in all oil and gas properties rights through
leasehold interests (the "New Albany Rights") in leasehold acreage in the
Illinois Basin located in Southern Indiana known to contain New Albany Shale
formations. Rex Energy Wabash, LLC, an affiliate of Rex Energy, is the managing
member of New Albany and responsible for its day-to-day operations.

      The New Albany Rights represented the following working interests acquired
by New Albany during our 2006 fiscal year:

      o By that Purchase and Sale Agreement dated November 15, 2005 between New
Albany and Aurora Energy Ltd., a Nevada corporation ("Aurora"), New Albany
purchased on February 1, 2006 an undivided 48.75% working interest (40.7% net
revenue interest) in (i) certain oil, gas and mineral leases covering
approximately 80,000 acres in several counties in Indiana and (ii) all of
Aurora's rights under a certain Farmout and Participation Agreement with a third
party. The total purchase price to New Albany for the acquisition of the working
interests, together with the grant of an option to acquire a 50% working
interest in any and all acreage leased or acquired by Aurora or its affiliates
within certain other counties located in Indiana (estimated to be 68,000 acres),
at a fixed price of $25 per net acre, was $10,500,000. Of the total purchase
price, we paid an aggregate of $5,250,000. Subsequent to February 1, 2006 New
Albany acquired leases covering an additional 42,000 acres. We obtained funding
to pay our share of New Albany's purchase price for this acquisition through
private placements of (i) our convertible notes and stock in November 2005 and
(ii) shares of our common stock in February 2006, as discussed elsewhere in this
Annual Report under the heading "Item 6 "Management's Discussion and Analysis or
Plan of Operations".

      o On March 6, 2006, New Albany purchased from Source Rock Resources, Inc.
("Source Rock") a 45% working interest in certain oil, gas and mineral leases
covering approximately 21,000 acres in Knox and Sullivan Counties in Indiana,
which we believe contain New Albany Shale formation stratum. The purchase price
paid by New Albany was $735,000, of which we paid half. Subsequently, New Albany
acquired a working interest in approximately 20,000 additional acres in this
region. Rex Energy operates the wells drilled on this acreage.


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<PAGE>

      o     In June 2006, New Albany entered into a Joint Operating Agreement
with El Paso Exploration & Development Corp., Pogo Producing Company and Aurora
Energy Ltd., pursuant to which New Albany contributed certain of its acreage in
exchange for a 17% working interest in a new area of mutual interest covering
8,700 acres, targeting the New Albany Shale formation in Greene County, Indiana.
Under this joint operating agreement, El Paso serves as operator.

      The name "New Albany Shale" refers to brownish-black shale exposed along
the Ohio River at New Albany in Floyd County, Indiana, and is present in the
subsurface throughout much of the Illinois Basin. The Illinois Basin covers
approximately 60,000 square miles in parts of Illinois, southwestern Indiana and
western Kentucky. The New Albany Shale has produced natural gas since 1858,
mostly from wells located in southwestern Indiana and western Kentucky (at least
40 fields in Kentucky and 19 in Indiana). As is the case with other organic
shale reservoirs, the gas is stored both as free gas in fractures and as
absorbed gas on kerogen and clay surfaces within the shale matrix. Wells
typically begin producing high volumes of water and low volumes of gas when
first beginning to produce in a new area. As more and more wells are drilled in
an area, the formation becomes dewatered and the gas continues to desorb from
the shale. An initially high level of water is a positive indicator of natural
fracturing in the New Albany Shale.

      Prior to 1994, according to industry sources, over 600 New Albany Shale
wells had produced commercially in the Illinois Basin. Horizontal drilling may
be able to exploit the anisotropic nature of the New Albany Shale natural
fracture systems. Vertical fractures are dominant in the New Albany Shale and
the fracture system contains water. Historically, the potential for wells in
this area was limited by the efficiency of water disposal methods. Improved
technology for pumping and disposal of water may allow for better rates of gas
production.

      During our fiscal year 2006 we also explored acquiring the 50% membership
interest in New Albany not then owned by us, together with all rights of New
Albany in the Aurora Agreement and certain assets directly from Rex Energy and
its affiliates, including working and royalty interests in oil and gas leases as
operator and non-operator, located in Illinois, Indiana, Pennsylvania, West
Virginia, Texas, New Mexico, Virginia and New York, that contain approximately
2,028 gross producing oil and natural gas wells. As disclosed in our Current
Report on Forms 8-K previously filed with the SEC on January 17, 2006, we
entered into a purchase agreement dated January 16, 2006 (the "Rex Purchase
Agreement") to purchase these assets for approximately $73.2 million in cash and
shares of our Common Stock and, in accordance therewith issued a total of
12,069,250 shares of our Common Stock to certain designees of the selling
parties who were designated to become part of our management.

      By that Mutual Termination Agreement (the "Termination Agreement") dated
June 8, 2006, the parties mutually terminated the transactions contemplated by
the Rex Purchase Agreement and also entered into a mutual release and
non-disparagement agreement. In exchange for the earlier termination of the Rex
Purchase Agreement and our release of the selling parties from any liability
thereunder, 12,069,250 shares of our Common Stock previously issued were
surrendered and cancelled. Nothing in the Termination Agreement, the release or
the non-disparagement agreement affected our rights with respect to New Albany.
As a result of the termination of the Rex Purchase Agreement, none of the
additional anticipated changes (including changes to management, our board of
directors or the relocation of our headquarters) previously disclosed in our
Form 10-KSB for the year ended December 31, 2005 transpired.

Subsequent Events

      New Albany Shale. On March 16, 2007, pursuant to that certain Membership
Interest Redemption Agreement of even date between us and New Albany, we
redeemed our membership interest in New Albany for a direct assignment to us of
an undivided 40.423% working interest in and to the New Albany Rights. The
reduction in from our membership interest of 50% to a 40.423% direct working
interest reflected an adjustment of our membership interest in New Albany at the
time of our redemption, as a result of outstanding capital calls owed by us but
assumed by the affiliates and/or assigns of Rex Energy, the other joint venture
partner.


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<PAGE>

      After redeeming our membership interest in New Albany on March 16, 2007,
we now own the following assets:

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

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

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

      Stephens County Transaction. On December 20, 2006 we entered into a
Purchase and Sale Agreement with Statex Petroleum I, L.P. and Charles W Gleeson
LP for a number of oil and gas producing properties in Stephens County in north
Texas (the "Stephens County Transaction"), as initially disclosed by us in our
Current Report on Form 8-K filed with the SEC on December 21, 2006. The purchase
price was approximately $ 28,600,000, which included interest from January 15,
2007 until date of closing. Upon execution of the agreement we paid a $1,000,000
non-refundable deposit to be credited against the purchase price at the closing
scheduled to take place on or before March 9, 2007. On March 9, 2007 we entered
into an amendment to the agreement whereby for an additional deposit of $300,000
paid by March 16, 2007 the deadline to close on the purchase of the Stephens
County assets was extended until April 16, 2007 and the effective date for the
transfer of the assets was changed from December 1, 2006 to February 1, 2007.

      We closed this transaction on April 12, 2007, whereupon we acquired
various: (i) leasehold interests, royalty interests, net profit interests,
productions payments, operating rights, and similar interest attributable to
identified oil, gas and mineral leases, and the leasehold interest created
thereby; (ii) all wells thereon or lands pooled, unitized or communitized
therewith and all oil, gas, minerals or substances produced therefrom; (iii) all
agreements relating thereto; (iv) surface and subsurface machinery and
equipment, supplies, facilities or other personal property thereon or thereunder
that relate to production, treatment, storage, or transportation of
hydrocarbons; and (v) all records relating to the foregoing (collectively, the
"Statex Assets"). Regarding environmental defects, other than the express
remedies provided for in the agreement, we acquired the Statex Assets in "as is,
where is" condition. Under the agreement we also assumed at the closing certain
obligations, which were considered in the calculation of the cash purchase
price. The assumed obligations included, but are not limited to: (i) obligations
occurring on or after the Effective Date related to ownership or operation of,
and production allocable to, the Statex Assets; (ii) obligations under all
agreements existing on the Effective Date and affecting the Statex Assets; (iii)
obligations related to certain overproduction imbalances or imbalances owed by
Seller under certain transportation agreements; and (iv) obligations related to
plugging, abandonment, removal, disposal, site clearance and similar activities.
We also assumed all environmental obligations without regard to when the act,
omission or event that gave rise to such obligations.


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<PAGE>

Employees

      Other than our Thomas Kaetzer, our Chairman and Chief Executive Officer,
and Richard Cohen, our Chief Financial Officer, we do not currently have any
other employees.

Risk Factors

      Our business activities are subject to risks, including the following:

      Risks Relating to Our Business and the Oil and Natural Gas Industry.

A substantial or extended decline in oil and natural gas prices may adversely
affect our business, financial condition or results of operations and our
ability to meet our capital expenditure obligations and financial commitments.

      The prices we receive for our oil and natural gas production heavily
influence our revenue, profitability, access to capital and future rate of
growth. Oil and natural gas are commodities and, therefore, their prices are
subject to wide fluctuations in response to relatively minor changes in supply
and demand. Historically, the markets for oil and natural gas have been
volatile. These markets will likely continue to be volatile in the future. The
prices we receive for our production, and the levels of our production, depend
on numerous factors beyond our control. These factors include, but are not
limited to, the following:

      o     changes in global supply and demand for oil and natural gas;
      o     the actions of certain foreign states, such as the governments of
            Venezuela or Iran;
      o     the price and quantity of imports of foreign oil and natural gas;
      o     political conditions, including embargoes, in or affecting other oil
            producing activities;
      o     the level of global oil and natural gas exploration and production
            activity;
      o     the level of global oil and natural gas inventories; production or
            pricing decisions made by the Organization of Petroleum Exporting
            Countries (OPEC);
      o     weather conditions;
      o     technological advances affecting energy consumption; and
      o     the price and availability of alternative fuels.

      Lower oil and natural gas prices may not only decrease our revenues on a
per unit basis but also may reduce the amount of oil and natural gas that we can
produce economically. Lower prices will also negatively impact the value of our
proved reserves. A substantial or extended decline in oil or natural gas prices
may materially and adversely affect our future business, financial condition,
results of operations, liquidity or ability to finance planned capital
expenditures.

Drilling for and producing oil and natural gas are high risk activities with
many uncertainties that could adversely affect our business, financial condition
or results of operations.

      Our future success will depend on the success of our exploitation,
exploration, development and production activities. Our oil and natural gas
exploration and production activities are subject to numerous risks beyond our
control, including the risk that drilling will not result in commercially viable
oil or natural gas production. Our decisions to purchase, explore, develop or
otherwise exploit prospects or properties will depend in part on the evaluation
of data obtained through geophysical and geological analyses, production data
and engineering studies, the results of which are often inconclusive or subject
to varying interpretations. Please read "- Reserve estimates depend on many
assumptions that may turn out to be inaccurate" (below) for a discussion of the
uncertainties involved in these processes. Our costs of drilling, completing and
operating wells is often uncertain before drilling commences. Overruns in
budgeted expenditures are common risks that can make a particular project
uneconomical. Further, many factors may curtail, delay or cancel drilling,
including the following:


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<PAGE>

      o     delays imposed by or resulting from compliance with regulatory
            requirements;
      o     pressure or irregularities in geological formations;
      o     shortages of or delays in obtaining equipment and qualified
            personnel;
      o     equipment failures or accidents;
      o     adverse weather conditions;
      o     reductions in oil and natural gas prices;
      o     oil and natural gas property title problems; and
      o     market limitations for oil and natural gas.

If oil and natural gas prices decrease, we may be required to take write-downs
of the carrying values of our oil and natural gas properties, potentially
triggering earlier-than-anticipated repayments of any outstanding debt
obligations and negatively impacting the trading value of our securities.

      Accounting rules require that we review periodically the carrying value of
our oil and natural gas properties for possible impairment. Based on specific
market factors and circumstances at the time of prospective impairment reviews,
and the continuing evaluation of development plans, production data, economics
and other factors, we may be required to write down the carrying value of our
oil and natural gas properties. Because our properties will likely serve as
collateral for advances under our future credit facilities, a write-down in the
carrying values of our properties could require us to repay debt earlier than we
would otherwise be required. A write-down would also constitute a non-cash
charge to earnings. It is likely that the cumulative effect of such a write-down
could also negatively impact the trading price of our securities.

      We account for our oil and gas properties using the successful efforts
method of accounting. Under this method, all development costs and acquisition
costs of proved properties are capitalized and amortized on a
units-of-production basis over the remaining life of proved developed reserves
and proved reserves, respectively. Costs of drilling exploratory wells are
initially capitalized, but charged to expense if and when a well is determined
to be unsuccessful. We evaluate impairment of its proved oil and gas properties
whenever events or changes in circumstances indicate an asset's carrying amount
may not be recoverable. The risk that the company will be required to write down
the carrying value of its oil and natural gas properties increases when oil and
gas prices are low or volatile. In addition, write-downs would occur if we were
to experience sufficient downward adjustments to our estimated proved reserves
or the present value of estimated future net revenues.

Reserve estimates depend on many assumptions that may turn out to be inaccurate.
Any material inaccuracies in these reserve estimates or underlying assumptions
will materially affect the quantities and present value of our reserves.

      The process of estimating oil and natural gas reserves is complex. It
requires interpretations of available technical data and many assumptions,
including assumptions relating to economic factors. Any significant inaccuracies
in these interpretations or assumptions could materially affect the estimated
quantities and present value of our reported reserves. In order to prepare our
estimates, we must project production rates and timing of development
expenditures. We must also analyze available geological, geophysical, production
and engineering data. The extent, quality and reliability of this data can vary.
The process also requires economic assumptions about matters such as oil and
natural gas prices, drilling and operating expenses, capital expenditures, taxes
and availability of funds. Therefore, estimates of oil and natural gas reserves
are inherently imprecise.


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<PAGE>

      Actual future production, oil and natural gas prices, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable oil
and natural gas reserves most likely will vary from our estimates. Any
significant variance could materially affect the estimated quantities and
present value of our reported reserves. In addition, we may adjust estimates of
proved reserves to reflect production history, results of exploration and
development, prevailing oil and natural gas prices and other factors, many of
which are beyond our control.

Prospects that we decide to drill may not yield oil or natural gas in
commercially viable quantities.

      Our prospects are in various stages of evaluation. There is no way to
predict in advance of drilling and testing whether any particular prospect will
yield oil or natural gas in sufficient quantities to recover drilling or
completion costs or to be economically viable. The use of seismic data and other
technologies and the study of producing fields in the same area will not enable
us to know conclusively prior to drilling whether oil or natural gas will be
present or, if present, whether oil or natural gas will be present in commercial
quantities. We cannot assure you that the analogies we draw from available data
from other wells, more fully explored prospects or producing fields will be
applicable to our drilling prospects.

Special geological characteristics of the New Albany Shale area will require us
to use less-common drilling technologies in order for our development efforts to
be economically viable. The near-term focus of our development activities will
be concentrated to a large degree in the New Albany Shale area, which exposes us
to risks associated with prospect concentration.

      Except for our proposed development and production activities in the 4600
acres of the north Texas asset region acquired in the Stephens County
Transaction in April 2007, our development activities are largely concentrated
in the 171,000 acre New Albany Shale area. New Albany Shale reservoirs are
complex, often containing unusual features that are not well understood by
drillers and producers. Successful operations in this area require specialized
technical staff expertise in horizontal drilling, with respect to which we have
limited experience.

      The New Albany Shale contains vertical fractures. Results of past drilling
in the New Albany Shale have been mixed and are generally believed to be related
to whether or not a particular well bore intersects a vertical fracture. While
wells have been drilled into the New Albany Shale for years, most of those wells
have been drilled vertically. Where vertical fractures have been encountered,
production has been better. It is expected that horizontal drilling will allow
us to encounter more fractures by drilling perpendicular to the fracture planes.
While it is believed that the New Albany Shale is subject to some level of
vertical fracturing throughout the Illinois Basin, certain areas will be more
heavily fractured than others. If our area of interest is not subject to the
level of vertical fracturing that we expect, then our plan for horizontal
drilling might not yield our expected results.

      Gas and water are produced together from the New Albany Shale. Water is
often produced in significant quantities, especially early in the producing life
of a well. We plan to dispose of this produced water by means of injecting it
into other porous and permeable formations via disposal wells located adjacent
to producing wells. If we are unable to find such porous and permeable
reservoirs into which to inject this produced water or if we are prohibited from
injecting because of governmental regulation, then our cost to dispose of
produced water could increase significantly, thereby affecting the economic
viability of producing the New Albany Shale wells.


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<PAGE>

      The relative concentration of our near-term activities in the New Albany
Shale means that any impairments or material reductions in the expected size of
the reserves attributable to the Company's wells, any material harm to the
producing reservoirs from which these wells produce or any significant
governmental regulation with respect to any of these wells, including
curtailment of production or interruption of transportation of production, could
have a material adverse effect on the Company's financial condition and results
of operations.

We cannot control activities on properties that we do not operate and are unable
to ensure their proper operation and profitability.

      We will not operate all of the properties in which we will own an
interest. As a result, we have limited ability to exercise influence over, and
control the risks associated with, the operations of these properties. The
failure of an operator of our wells to adequately perform operations, an
operator's breach of the applicable agreements or an operator's failure to act
in ways that are in our best interests could reduce our production and revenues.
The success and timing of our drilling and development activities on properties
operated by others therefore depend upon a number of factors outside of our
control, including the operator's

      o     timing and amount of capital expenditures;
      o     expertise and financial resources;
      o     inclusion of other participants in drilling wells; and
      o     use of technology.

The marketability of our natural gas production depends on facilities that we
typically do not own or control, which could result in a curtailment of
production and revenues.

      The marketability of our production will depend in part upon the
availability, proximity and capacity of natural gas gathering systems, pipelines
and processing facilities. We generally deliver natural gas through gas
gathering systems and gas pipelines that we do not own under interruptible or
short-term transportation agreements. Under the interruptible transportation
agreements, the transportation of our gas may be interrupted due to capacity
constraints on the applicable system, for maintenance or repair of the system,
or for other reasons as dictated by the particular agreements. Our ability to
produce and market natural gas on a commercial basis could be harmed by any
significant change in the cost or availability of such markets, systems or
pipelines.

Our future acquisitions may yield revenues or production that vary significantly
from our projections.

      In acquiring producing properties, we will assess the recoverable
reserves, future natural gas and oil prices, operating costs, potential
liabilities and other factors relating to the properties. Our assessments are
necessarily inexact and their accuracy is inherently uncertain. Our review of a
subject property in connection with our acquisition assessment will not reveal
all existing or potential problems or permit us to become sufficiently familiar
with the property to assess fully its deficiencies and capabilities. We may not
inspect every well, and we may not be able to observe structural and
environmental problems even when we do inspect a well. If problems are
identified, the seller may be unwilling or unable to provide effective
contractual protection against all or part of those problems. Any acquisition of
property interests may not be economically successful, and unsuccessful
acquisitions may have a material adverse effect on our financial condition and
future results of operations.


                                       10
<PAGE>

Our business may suffer if we lose our Chief Executive Officer.

      Our success will be dependent on our ability to continue to employ and
retain experienced skilled personnel. We depend to a large extent on the
services of Thomas Kaetzer, our Chief Executive Officer and Chairman, the loss
of whom could have a material adverse effect on our operations. Although we have
an employment agreement with Mr. Kaetzer which provides for notice before he may
resign and contains non-competition and non-solicitation provisions, we do not,
and likely will not, maintain key-man life insurance with respect to him or any
of our employees.

Hedging activities we engage in may prevent us from benefiting from price
increases and may expose us to other risks.

      Following our entry into a credit facility in April 2007, we executed an
arrangement to use derivative instruments to hedge the impact of market
fluctuations on crude oil and natural gas prices. To the extent that we engage
in hedging activities, it may be prevented from realizing the benefits of price
increases above the levels of the hedges. In addition, we will be subject to
risks associated with differences in prices at different locations, particularly
where transportation constraints restrict our ability to deliver oil and gas
volumes to the delivery point to which the hedging transaction is indexed.

We have had a history of operating losses and we may have losses in the future.

      Since our inception in June 2004, we have had limited operations and
nominal revenues. While we intend to increase our revenues through the New
Albany properties and the Stephens County Transaction properties and other
possible acquisitions, there can be no assurance that we will be successful.

      Our ability to generate net income will be strongly affected by, among
other factors, our ability to successfully drill undeveloped reserves as well as
the market price of crude oil and natural gas. If we are unsuccessful in
drilling productive wells or the market price of crude oil and natural gas
declines, we may report additional losses in the future. Consequently, future
losses may adversely affect our business, prospects, financial condition,
results of operations and cash flows.

      Our common stock is listed on the OTC Bulletin Board. Our common stock is
not quoted on the NASDAQ National Market System or listed on a national
securities exchange. The NASDAQ National Market System and national securities
exchanges require companies to fulfill certain requirements in order for their
shares to be listed and to continue to be listed. The securities of a company
may be ineligible for listing or, if listed, may be considered for delisting if
the company fails to meet certain financial thresholds, including if the company
has sustained losses from continuing operations and/or net losses in recent
fiscal years. There can be no assurance that we will not report additional
losses in the future or that we will be able to list or have quoted our common
stock on the NASDAQ National Market or a national securities exchange. An
inability to list our common stock could adversely affect our ability to raise
capital in the future by issuing common stock or securities convertible into or
exercisable for our common stock.

      Continuing losses may mean that additional funding may not be available on
acceptable terms, if at all. If adequate funds are unavailable from our
operations or additional sources of financing, we might be forced to reduce or
delay acquisitions or capital expenditures, sell assets, reduce operating
expenses, refinance all or a portion of our debt, or delay or reduce important
drilling or enhanced production initiatives.


                                       11
<PAGE>

      In addition, in that instance, we may seek to raise any necessary
additional funds through equity or debt financings, convertible debt financing,
joint ventures with corporate partners or other sources, which may be dilutive
to our existing shareholders and may cause the price of our common stock to
decline.

Our anticipated debt service obligations and cash requirements to fund our
operations could harm our ability to operate our business.

      In April 2007 we entered into term and revolving line of credit facilities
and borrowed approximately $30 million as part of the purchase price for the
Stephens County Transaction completed on April 12, 2007. The line of credit is
be available for borrowings to fund our working capital requirements and capital
requirements, and is secured by substantially all of our oil and natural gas
properties.

      Our degree of leverage may have important consequences to you, including
the following:

      o     we may have difficulty satisfying our obligations under our
            indebtedness and, if we fail to comply with these requirements, an
            event of default could result;
      o     we may be required to dedicate a substantial portion of our cash
            flow from operations to required payments on indebtedness, thereby
            reducing the availability of cash flow for working capital, capital
            expenditures and other general corporate activities;
      o     covenants relating to future debt may limit our ability to obtain
            additional financing for working capital, capital expenditures and
            other general corporate activities;
      o     covenants relating to future debt may limit our flexibility in
            planning for, or reacting to, changes in our business and the
            industry in which we operate;
      o     we may be more vulnerable to the impact of economic downturns and
            adverse developments in our business; and
      o     we may be placed at a competitive disadvantage against any less
            leveraged competitors.

      The occurrence of any one of these events could have a material adverse
effect on our business, financial condition, results of operations and future
business prospects.

The unavailability or high cost of drilling rigs, equipment, supplies, personnel
and oil field services could adversely affect our ability to execute on a timely
basis our exploration and development plans within our budget.

      With the increase in the prices of oil and natural gas, we have
encountered an increase in the cost of securing drilling rigs, equipment and
supplies. Shortages or the high cost of drilling rigs, equipment, supplies and
personnel are expected to continue in the near-term. In addition, larger
producers may be more likely to secure access to such equipment by virtue of
offering drilling companies more lucrative terms. If we are unable to acquire
access to such resources, or can obtain access only at higher prices, not only
would this potentially delay our ability to convert our reserves into cash flow,
but it could also significantly increase the cost of producing those reserves,
thereby negatively impacting anticipated net income.


                                       12
<PAGE>

We may incur substantial losses and be subject to substantial liability claims
as a result of our oil and natural gas operations.

      We are not insured against all risks. Losses and liabilities arising from
uninsured and underinsured events could materially and adversely affect our
business, financial condition or results of operations. Our oil and natural gas
exploration and production activities are subject to all of the operating risks
associated with drilling for and producing oil and natural gas, including the
possibility of:

      o     environmental hazards, such as uncontrollable flows of oil, natural
            gas, brine, well fluids, toxic gas or other pollution into the
            environment, including groundwater and shoreline contamination;
      o     abnormally pressured formations;
      o     mechanical difficulties, such as stuck oil field drilling and
            service tools and casing collapses;
      o     fires and explosions;
      o     personal injuries and death; and
      o     natural disasters.

      Any of these risks could adversely affect our ability to conduct
operations or result in substantial losses to the Company. We may elect not to
obtain insurance if we believe that the cost of available insurance is excessive
relative to the risks presented. In addition, pollution and environmental risks
generally are not fully insurable. If a significant accident or other event
occurs and is not fully covered by insurance, then that accident or other event
could adversely affect our results of operations, financial condition and cash
flows.

We may not have enough insurance to cover all of the risks that we face.

      In accordance with customary industry practices, we maintain insurance
coverage against some, but not all, potential losses in order to protect against
the risks we face. We do not carry business interruption insurance. We may elect
not to carry insurance if our management believes that the cost of available
insurance is excessive relative to the risks presented. In addition, we cannot
insure fully against pollution and environmental risks. The occurrence of an
event not fully covered by insurance could have a material adverse effect on our
financial condition and results of operations.

We are subject to complex laws that can affect the cost, manner or feasibility
of doing business.

      Exploration, development, production and sale of oil and natural gas are
subject to extensive federal, state, local and international regulation. We may
be required to make large expenditures to comply with governmental regulations.
Matters subject to regulation include:

      o     discharge permits for drilling operations;
      o     drilling bonds;
      o     reports concerning operations;
      o     the spacing of wells;
      o     unitization and pooling of properties; and
      o     taxation.

      Under these laws, we could be liable for personal injuries, property
damage and other damages. Failure to comply with these laws also may result in
the suspension or termination of our operations and subject us to
administrative, civil and criminal penalties. Moreover, these laws could change
in ways that substantially increase our costs. Any such liabilities, penalties,
suspensions, terminations or regulatory changes could materially adversely
affect our financial condition and results of operations.


                                       13
<PAGE>

Our operations may cause us to incur substantial liabilities for failure to
comply with environmental laws and regulations.

      Our oil and natural gas operations are subject to stringent federal, state
and local laws and regulations relating to the release or disposal of materials
into the environment or otherwise relating to environmental protection. These
laws and regulations may require the acquisition of a permit before drilling
commences, restrict the types, quantities and concentration of substances that
can be released into the environment in connection with drilling and production
activities, limit or prohibit drilling activities on certain lands lying within
wilderness, wetlands and other protected areas, and impose substantial
liabilities for pollution resulting from our operations. Failure to comply with
these laws and regulations may result in the assessment of administrative, civil
and criminal penalties, incurrence of investigatory or remedial obligations or
the imposition of injunctive relief. Changes in environmental laws and
regulations occur frequently, and any changes that result in more stringent or
costly waste handling, storage, transport, disposal or cleanup requirements
could require us to make significant expenditures to maintain compliance, and
may otherwise have a material adverse effect on our results of operations,
competitive position or financial condition as well as the industry in general.
Under these environmental laws and regulations, we could be held strictly liable
for the removal or remediation of previously released materials or property
contamination regardless of whether we were responsible for the release or if
our operations were standard in the industry at the time they were performed.

We anticipate having substantial capital requirements that, if not met, may
hinder our operations.

      We expect that following completion of the asset acquisition transaction,
we will experience substantial capital needs as a result of our planned
development and acquisition programs. We expect that additional external
financing will be required in the future to fund our growth. We may not be able
to obtain additional financing, and financing under a new credit facility on
acceptable terms may not be available in the future. Without adequate capital
resources, we may be forced to limit our planned oil and natural gas acquisition
and development activities and thereby adversely affect the recoverability and
ultimate value of our oil and natural gas properties. This, in turn, would
negatively affect our business, financial condition and results of operations.

Competition in the oil and natural gas industry is intense, which may adversely
affect our ability to compete.

      We operate in a highly competitive environment for acquiring properties,
marketing oil and natural gas and securing trained personnel. Many of our
competitors possess and employ financial, technical and personnel resources
substantially greater than ours, which can be particularly important in the
areas in which we operate. Those companies may be able to pay more for
productive oil and natural gas properties and exploratory prospects and to
evaluate, bid for and purchase a greater number of properties and prospects than
our financial or personnel resources permit. Our ability to acquire additional
prospects and to find and develop reserves in the future will depend on our
ability to evaluate and select suitable properties and to consummate
transactions in a highly competitive environment. We may not be able to compete
successfully in the future in acquiring prospective reserves, developing
reserves, marketing hydrocarbons, attracting and retaining quality personnel and
raising additional capital.


                                       14
<PAGE>

If our access to markets is restricted, it could negatively impact our
production, our income and ultimately our ability to retain our leases.

      Market conditions or the unavailability of satisfactory oil and natural
gas transportation arrangements may hinder our access to oil and natural gas
markets or delay our production. The availability of a ready market for our oil
and natural gas production depends on a number of factors, including the demand
for and supply of oil and natural gas and the proximity of reserves to pipelines
and terminal facilities. Our ability to market our production depends in
substantial part on the availability and capacity of gathering systems,
pipelines and processing facilities owned and operated by third parties. Our
failure to obtain such services on acceptable terms could materially harm our
business.

      Our productive properties may be located in areas with limited or no
access to pipelines, thereby necessitating delivery by other means, such as
trucking, or requiring compression facilities. Such restrictions on our ability
to sell our oil or natural gas have several adverse affects, including higher
transportation costs, fewer potential purchasers (thereby potentially resulting
in a lower selling price) or, in the event we were unable to market and sustain
production from a particular lease for an extended time, possibly causing us to
lose a lease due to lack of production.

                       Risks Relating to Our Common Stock

You may experience dilution of your ownership interests due to the future
issuance of additional shares of the Company's common stock

      The Company may in the future issue its previously authorized and unissued
securities, which will result in the dilution of the ownership interests of its
present stockholders. The Company is currently authorized to issue 140,000,000
shares of common stock and 10,000,000 shares of preferred stock with such
designations, preferences and rights as determined by our Board of Directors. As
of April 16, 2007, we have issued 31,436,488 shares of our common stock. In
addition, we have outstanding options, warrants and convertible promissory notes
to purchase up to an additional 19,756,590 shares of the Company's common stock.
Issuance of additional shares of common stock may substantially dilute the
ownership interests of the Company's existing stockholders. The potential
issuance of such additional shares of common stock may create downward pressure
on the trading price of our common stock that in turn will require it to issue
additional shares to raise funds through sales of its securities. The Company
may also issue additional shares of its stock in connection with the hiring of
personnel, future acquisitions, future private placements of its securities for
capital raising purposes, or for other business purposes. This will further
dilute the interests of the Company's existing holders.

The market price of our common stock may be affected by low volume float.

      While there has been a public market for our common stock on the OTC
Bulletin Board, our common stock is very thinly traded. Substantial sales of our
common stock, including shares issued upon the exercise of outstanding options
and warrants, in the public market, or the perception that these sales could
occur, may have a depressive effect on the market price of our common stock.
Such sales or the perception of such sales could also impair our ability to
raise capital or make acquisitions through the issuance of our common stock.

We have no plans to, and are currently unable to, pay dividends on our common
stock. You may not receive funds without selling your stock.

      We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. We currently intend to retain future earnings, if any, to
finance the expansion of our business. Our future dividend policy is within the
discretion of our Board of Directors and will depend upon various factors,
including our business, financial condition, results of operations, capital
requirements and investment opportunities. Our accumulated losses and
stockholders' deficits prevent us from being able to declare and pay dividends.
In addition, our proposed credit facility will prohibit us from paying
dividends.


                                       15
<PAGE>

We may issue shares of preferred stock having greater rights than our common
stock.

      Although we have no current plans, arrangements, understandings or
agreements to issue any preferred stock, our certificate of incorporation
authorizes our Board of Directors to issue one or more series of preferred stock
and set the terms of the preferred stock without seeking any further approval
from our shareholders. Any preferred stock that is issued may rank ahead of our
common stock, with respect to dividends, liquidation rights and voting rights,
among other things. Provisions under Nevada law could delay or prevent a change
in control of our company, which could adversely affect the price of our common
stock. While we do not believe that we currently have any provisions in our
organizational documents that could prevent or delay a change in control of our
company (such as provisions calling for a staggered Board of Directors, or the
issuance of stock with super-majority voting rights), the existence of some
provisions under Nevada law could delay or prevent a change in control of our
Company, which could adversely affect the price of our common stock. Nevada law
imposes some restrictions on mergers and other business combinations between us
and any holder of 10% or more of our outstanding common stock.

Item 2. Description of Property.

      Corporate Headquarters. At present, we lease approximately 2500 square
feet of office space in Houston, Texas to house our corporate offices. Our lease
arrangement is month-to-month and provides for rent of $2,600 per month.

      As of our year ended December 31, 2006, we had only an indirect
contractual right (pursuant to our interest in New Albany), in those oil and gas
leases and other rights acquired by New Albany during 2006 in the New Albany
Shale region in southern Indiana.

      Subsequent to our 2006 fiscal year, we completed the following property
transactions:

      Southern Indiana - New Albany Shale. As of March 16, 2007, the date we
redeemed our membership interest in New Albany to acquire a direct working
interest in the oil and gas leases and other properties held by New Albany, we
acquired tracts of land covering approximately 171,000 surface acres in southern
Indiana.

      Although the industry has reported a range of natural gas production rate
reserve potential in the New Albany Shale Play, there is not extensive
production history from horizontal wells completed in the New Albany Shale and
we have no proven reserves booked to its acreage position. Currently available
public information indicates that each horizontal well should drain 160 to 320
acres at a depth of 1500 to 2500 feet. Estimated reserves are in the range of
0.7 bcf to nearly 2 bcf per well, depending on initial production rates. Wells
have had reported test rates of 50 mcfpd to 1,000 mcfpd, and `typical' wells are
expected to produce 300 mcfpd or more.

      North Texas - Stephens County Transaction. As of April 12, 2007, the date
of the Stephens County Transaction, we acquired tracts of land covering
approximately 4600 surface acres in north Texas. The Eliasville field (also
called the Stephens County Regular Field) produces primarily from the Caddo Lime
oil formation at a depth of 3300 feet.


                                       16
<PAGE>

      The Stephens County Regular field was discovered in the 1920's and
produces primarily from the Caddo Lime oil formation at a depth of 3300 feet.
Currently the field produces 660 bopd and 100 mcfpd, resulting in 520 boepd of
net production, with an average net revenue interest of 77%. There are 81 oil
wells producing in the field, and it is an active waterflood with 54 injection
wells. There are eight leases which total approximately 4600 acres and there are
two central operating facilities and three tank batteries. After the waterflood
was initiated in the 1980's, oil production peaked at 1500 bopd from the central
six leases which have produced 18 to 22 million barrels of oil and recovered 25%
to 30% of the original oil in place. The two western leases have not been
incorporated into the waterflood of the central leases and the western leases
have recovered only 12% to 18% of the original oil in place.

      Currently the field produces 660 bopd and 100 mcfpd, resulting in 520
boepd of net production, with an average net revenue interest of 80%. There are
80 oil wells producing in the field, and it is an active waterflood with 54
injection wells. There are 8 leases which total approximately 4600 acres and
there are 2 central operating facilities and 3 tank batteries. After the
waterflood was initiated in the 1980's, oil production peaked at 1500 bopd from
the central 6 leases which have produced 18 to 22 million barrels of oil and
recovered 25 to 30% of the original oil in place. The 2 western leases have not
been incorporated into the waterflood of the central leases and the western
leases have recovered only 12 to 18% of the original oil in place.

      Proved reserves have been estimated by a third party engineering firm to
be 3.6 million boe (net) with a pre-tax PV10 value of $49.9 million at $59/bbl
and $1.77/mcf. Of the proved reserves, 70% are PDP, 10% PDNP and 20% are PUD
reserves. In addition, another 1.7 mmboe (net) reserves are classified as
probable/possible reserves for expanding the waterflood to the west (approximate
$25 million of additional PV10 potential).

Item 3. Legal Proceedings.

      The Company is not currently subject to any litigation.

Item 4. Submission of Matters to a Vote of Security Holders.

      No matters were submitted to the vote or consent of the holders of our
outstanding shares of our common stock during the fourth quarter of 2006.

                                     PART II

Item 5. Market for Common Equity, Related Stockholder Matters and Small Business
        Issuer Purchases of Equity Securities.

      Market Information.

      Our Common Stock is quoted on the OTC Bulletin Board under the trading
symbol "BOGA." Prior to January 17, 2006, our name was College Oak Investments,
Inc. and our symbol was "COKV." The table below sets forth the high and low bid
information for our Common Stock for the last two fiscal years and the interim
quarterly period ended March 31, 2007. These quotations reflect inter-dealer
prices, without retail markup, markdown or SEC and may not represent actual
transactions. There were no trades of our securities on the OTC Bulletin Board
prior to March 3, 2005.


                                       17
<PAGE>

      2007 Quarter Ended            High Bid Price             Low Bid Price
      ------------------            --------------             -------------
           3/31/2007                    $ 0.65                     $ 0.37

      2006 Quarter Ended            High Bid Price             Low Bid Price
      ------------------            --------------             -------------
          12/31/2006                    $ 0.75                     $ 0.35
           9/30/2006                      1.19                       0.67
           6/30/2006                      3.25                       1.10
           3/31/2006                      3.25                       0.85

      2005 Quarter Ended            High Bid Price             Low Bid Price
      ------------------            --------------             -------------
          12/31/2005                    $ 1.40                     $ 0.60
           9/30/2005                      0.90                       0.60
           6/30/2005                      1.01                       0.20
           3/31/2005                      0.90                       0.10

      As of April 16, 2007, we have outstanding options to purchase up to
7,545,000 shares of Common Stock, warrants to purchase up to 7,274,090 shares of
Common Stock and notes convertible into up to 4,937,500 shares of Common Stock.

      Holders of Securities.

      As of April 16, 2007, there were approximately 188 holders of record of
our Common Stock.

      Our Common Stock is covered by a SEC rule that imposes additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors, which are generally
institutions with assets in excess of $5,000,000 or individuals with net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse. For transactions covered by the rule, the broker-dealer must
make a special suitability determination for the purchaser and transaction prior
to the sale. Consequently, the rule may affect the ability of broker-dealers to
sell our securities and also may affect the ability of purchasers of our Common
Stock to sell their shares in the secondary market. It may also cause fewer
broker-dealers to be willing to make a market in our Common Stock, and it may
affect the level of news coverage we receive.

      No equity securities of our Company were purchased by us or any
"affiliated purchaser" of ours during fiscal years 2005 or 2006.

      Dividends.

      We have not declared or paid any cash dividends on our Common Stock since
our inception, and our board of directors currently intends to retain all
earnings for use in the business for the foreseeable future. Any future payment
of dividends will depend upon our results of operations, financial condition,
cash requirements and other factors deemed relevant by our board of directors.
Pursuant to the convertible notes we issued in November 2005, as long as there
is outstanding indebtedness thereunder, we may not declare or pay a cash
dividend on our Common Stock without the consent of the agent to such holders of
the notes.


                                       18
<PAGE>

       Securities Authorized for Issuance Under Equity Compensation Plans.

      The following table provides information as of December 31, 2006 about our
equity compensation arrangements:

<TABLE>
<CAPTION>
                                                                                              Number of securities
                                    Number of securities                                     remaining available for
                                      to be issued upon          Weighted-average         future issuance under equity
                                         exercise of             exercise price of             compensation plans
                                    outstanding options,       outstanding options,           (excluding securities
Plan Category                        warrants and rights        warrants and rights          reflected in column (a)
-------------------------------     ----------------------    ------------------------    ------------------------------
<S>                                      <C>                          <C>                              <C>
Equity compensation plans                     0                          0                             n/a
approved by security holders

Equity compensation plans not            13,985,000                   $ 0.18                           n/a
approved by security holders
(1)

Total (1)                                13,985,000                   $ 0.18                           n/a
</TABLE>

----------

      (1) Consists of warrants and options granted to our employees, officers,
directors and consultants, to the extent vested and exercisable (within the
meaning of Rule 13d-3(d)(1) promulgated by the SEC under the Securities and
Exchange Act of 1934, as amended) as of December 31, 2006.

      Set forth below is a description of the individual compensation
arrangements or equity compensation plans not currently approved by our security
holders pursuant to which the 14,719,090 shares of our Common Stock included in
the chart above were issuable as of December 31, 2006:

      o Option granted April 1, 2005 to a consultant in consideration of
services performed on our behalf, which option expires five years from grant
date and is currently exercisable to purchase up to 500,000 shares of our Common
Stock at an exercise price of $0.30 per share;

      o Options granted April 29, 2005 to directors, officers and consultants in
consideration of services performed on our behalf, which options expire five
years from grant date and, after adjusting for the cancellation of an aggregate
of 8,540,000 shares of Common Stock underlying certain of the option grants, are
currently exercisable to purchase up to an aggregate of 4,160,000 shares of our
Common Stock at an exercise price of $0.05 per share;

      o Options granted December 20, 2005 to third parties in connection with
potential acquisition transaction, which options expire three years from grant
date and are currently exercisable to purchase up to 50,000 shares of our Common
Stock at an exercise price of $1.00 per share;

      o Option granted December 27, 2005 to an officer in consideration of
services performed on our behalf, which option expires five years from grant
date and is currently exercisable to purchase up to 175,000 shares of our Common
Stock at an exercise price of $0.94 per share;


                                       19
<PAGE>

      o Option granted August 15, 2006 to a consultant in consideration of
services performed on our behalf, which option expires five years from grant
date and is currently exercisable to purchase up to 100,000 shares of our Common
Stock at an exercise price of $1.01 per share;

      o Option granted October 20, 2006 to a consultant in consideration of
services performed on our behalf, which option expires five years from grant
date and is currently exercisable to purchase up to 100,000 shares of our Common
Stock at an exercise price of $0.50 per share;

      o Option granted November 14, 2006 to a consultant in consideration of
services performed on our behalf, which option expires five years from grant
date and is currently exercisable to purchase up to 360,000 shares of our Common
Stock at an exercise price of $0.50 per share;

      o Option granted December 20, 2006 to an officer in consideration of
services to be performed on our behalf, which option expires five years from
grant date and, subject to a vesting schedule, is currently exercisable with
respect to 333,333 shares of our Common Stock at an exercise price of $0.50 per
share;

      o Option granted December 20, 2006 to an officer in consideration of
services to be performed on our behalf, which option expires five years from
grant date and, subject to a vesting schedule, is currently exercisable with
respect to 166,666 shares of our Common Stock at an exercise price of $0.60 per
share; and

      o Option granted December 20, 2006 to an officer in consideration of
services to be performed on our behalf, which option expires five years from
grant date and, subject to a vesting schedule, is currently exercisable with
respect to 166,666 shares of our Common Stock at an exercise price of $1.00 per
share.

Item 6. Management's Discussion and Analysis or Plan of Operations.

      We have not had any revenues from operations in each of the last two
fiscal years, as our business operations have consisted principally of oil and
gas exploration activities through our participation in the New Albany joint
venture. We have no operating history upon which our operations plan or future
prospects can be evaluated. Prior to the Stephens County Transaction, our
operating revenue did not cover our operating expenses. Our ability to generate
future revenue, if any, will depend upon whether we can successfully develop and
implement our plan of operation.

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

      o     reservoir performance and natural field decline;

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


                                       20
<PAGE>

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

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

      o     our ability to manage expenses successfully;

      o     regulatory developments, such as de-regulation of certain energy
            markets or restrictions on exploration and production under laws and
            regulations related to environmental or energy security matters; and

      o     changes in oil, gas and petrochemical prices and by changes in
            margins on gasoline and other refined products based upon supply and
            demand for oil and gas affected by general economic growth rates and
            conditions, supply disruptions, new supply sources and the
            competitiveness of alternative hydrocarbon or other energy sources.

Plan of Operation

      Our intended strategy in the next twelve months will be to focus on oil
and gas exploration, development and production within our two asset bases
located in southern Indiana and our recently acquired assets in north Texas. We
believe that the north Texas waterflood can provide us with long life oil
reserves and the southern Indiana resource lay can provide us with long life,
natural gas potential. We also believe that these two fields provide us with
significant organic growth potential.

      We will manage our operations and evaluate our fields from our new office
location in Houston, Texas. While the majority of the effort will be spent on
developing these two asset bases, we will continue to look for additional
incremental acquisitions to make in the vicinity of our current fields.

      New Albany Shale. Giving effect to our redemption in March 2007 of our
previous membership interest in New Albany, we own an 18% to 19% working
interest in approximately 163,000 acres in five counties in the southern Indiana
New Albany Shale formation, of which the remaining 41,000 acres and 122,000
acres are operated under an AMI covering this acreage by Rex Energy and Aurora,
respectively (plus an option on an additional 68,000 gross acres). We understand
that these companies currently plan to drill eight horizontal wells (in which we
have a 18-19% working interest) and one vertical Devonian Reef well (in which we
have a 4-5% working interest) initially this year in the 163,000 acre AMI's.
Additional wells may be drilled, depending on rig availability, results of wells
drilled, and agreement with our partners. Four pilot test wells drilled in 2006
will also be tested this year.

      We also participate in an 8700 acre AMI which is in the same area of the
New Albany Shale. El Paso Energy Inc., is operator of this AMI and Rex Energy,
Aurora and other partners participate with us. Currently one well is drilling,
in which we have just under a 7% working interest in this AMI.

      To date, we have invested $8.1 million in the acquisition of our interest
in the 171,000 acres and the drilling of seven New Albany pilot test wells and
four Devonian Reef wells. As mentioned above, ten new wells are planned for
2007. Of the wells already drilled, the seven New Albany Shale wells are to be
tested for natural gas and water rates, and then tied in for sales. The New
Albany Shale wells produce some water initially and have to be pumped off in
order to achieve steady gas production. Of the four Devonian Reef wells drilled,
two have tested gas (1 at nearly 400mcfpd) and 2 were dry holes.


                                       21
<PAGE>

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

      The industry has reported a range of natural gas production rate reserve
potential in the New Albany Shale Play; however, because there is not extensive
production history from horizontal wells completed in the New Albany Shale, we
have no proven reserves booked to its acreage position. Currently available
public information indicates that each horizontal well should drain 160 to 320
acres at a depth of 1500 to 2500 feet. Estimated reserves are in the range of
0.7 bcf to nearly 2 bcf per well, depending on initial production rates. Wells
have had reported test rates of 50 mcfpd to 1,000 mcfpd, and `typical' wells are
currently expected to produce 300 mcfpd or more.

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

      Stephens County Transaction. The Stephens County Regular field (also
called the Eliasville Field) is located in Stephens County, in north Texas,
roughly ninety miles west of Fort Worth. The field was discovered in the 1920's
and produces primarily from the Caddo Lime oil formation at a depth of 3300
feet. Currently the field produces 660 bopd and 100 mcfpd, resulting in 520
boepd of net production, with an average net revenue interest of 77%.

      In addition to the expected cash flow from the existing production from
the Stephens County Transaction, we expect that the existing waterflood on the
central acreage can be further developed and that the waterflood can be expanded
to the western acreage.

      There are 81 oil wells producing in the field, and it is an active
waterflood with 54 injection wells. There are eight leases which total
approximately 4600 acres and there are two central operating facilities and
three tank batteries. After the waterflood was initiated in the 1980's, oil
production peaked at 1500 bopd from the central six leases which have produced
18 to 22 million barrels of oil and recovered 25% to 30% of the original oil in
place. The two western leases have not been incorporated into the waterflood of
the central leases and the western leases have recovered only 12% to 18% of the
original oil in place.

      We believe the Stephens County Transaction provides immediate development
opportunities. There are 21 idle wells which are workover candidates as future
Caddo oil producers and there is significant infill drilling potential on the
acreage. We anticipate developing the 21 workovers and initially drilling five
wells in this area during 2007. The eastern and central leases have not been
fully developed on well spacing down to 15 to 20 acres and twelve wells are
initially planned on these leases. The western leases are developed on 80 acre
spacing or greater and 42 infill locations and eight re-entries have been
identified on the western leases.

      Proved reserves have been estimated by a third party engineering firm to
be 3.6 million boe (net) with a pre-tax PV10 value of $49.9 million at $59/bbl
and $1.77/mcf. Of the proved reserves, 70% are PDP, 10% PDNP and 20% are PUD
reserves. In addition, another 1.7 mmboe (net) reserves are classified as
probable/possible reserves for expanding the waterflood to the west (approximate
$25 million of additional PV10 potential).


                                       22
<PAGE>

      In addition to the waterflood expansion, we intend to investigate the full
development potential on the 4600 acre lease-hold. We believe the Caddo Lime oil
formation is a good candidate for an Alkaline Surfactant Polymer (ASP) flood,
and this enhanced oil recovery technique will be evaluated in 2007. There also
is shallow gas production in this region, and the natural gas potential for the
Marble Falls and Duffer gas formations will be evaluated during 2007, together
with the identification of additional leases which may be attractive in the
area. In addition, the Barnett Shale is located at approximately 4900 feet in
this area, and the production potential of the Shale in this region has not been
evaluated.

Sources of Capital

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

      As discussed below, we entered into a $75 million revolving credit
commitment and term loan on April 12, 2007, of which approximately $45 million
is available to be drawn down by us, subject to and only in the event that we
satisfy various financial and other covenants contained in the credit agreement.
On April 12, 2007 we drew down approximately $9.7 million as a Revolving Loan
and $20.3 million as a Term Loan in connection with the Stephens County
Transaction and our repayment of the March 2007 Bridge Financing discussed (and
defined) below.

      We also expect to receive proceeds during 2007 from production associated
with those wells operating in north Texas we purchased as part of the Stephen
County Transaction.

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

      April 2007 Credit Facility. By a credit agreement executed April 12, 2007
(the "Credit Agreement"), we acquired a revolving credit commitment of up to
$54.7 million and a Term Loan Commitment of $20.3 million. Unless earlier
payment is required under the Credit Agreement, Revolving Loans must be paid on
or before April 12, 2010 and Term Loans on or before October 12, 2010. Interest
on Revolving Loans accrues at the Prime Rate that is in effect from time to
time, while interest on Term Loans accrues at the Prime Rate in effect from time
to time or 7.5%, whichever is greater, plus 3%. Funds available to us are
subject to our satisfaction of a borrowing base formula and a number of standard
industry conditions precedent and covenants. As security under the Credit
Agreement, we have granted lenders a security interest in and a first lien on,
all of our existing and after-acquired assets including, without limitation, the
Statex Assets that we acquired in the Stephens County Transaction. In addition
to the foregoing, we granted the Lenders an overriding royalty interest ranging
between 2% and 3% in (i) our existing Oil and Gas Properties and (ii) Oil and
Gas Properties that we acquire after the date hereof until the Credit Agreement
is terminated.


                                       23
<PAGE>

      As part of the credit facility, we agreed to pay the administrative agent,
(i) for the account of each Revolving Lender, pro rata in accordance with their
respective commitments, a commitment fee equal to $173,102 in the aggregate,
(ii) for the account of each Term Lender, pro rata in accordance with their
respective commitments, a commitment fee equal to $300,000 in the aggregate, and
(iii) an "Administrative Fee" of $25,000 semi-annually on each August 15 and
February 15 that the credit agreement is in effect.

      Private Placement of Equity and Debt . Prior to entering into the credit
facility, we have financed our current expenses and our business operations
chiefly through private placements of our equity and debt securities, as
follows:

      In November 2005, we completed the offering and sale of a $2.375 million
in units of consisting of 10% convertible promissory note and shares of common
stock in privately negotiated transactions with accredited investors (the
"November 2005 Placement"). Each note matures on May 15, 2007 and bears interest
at the rate of 10% per annum. The holder of a note may elect to receive interest
on the note in cash or in shares of common stock valued at $0.50 per share. At
any time prior to maturity, holders may convert the principal and accrued but
unpaid interest on their note into such number of shares of common stock equal
to the outstanding principal amount plus accrued but unpaid interest, divided by
$0.50, or a total of 4,750,000 shares, excluding interest.

      On February 1, 2006, we completed a private placement to accredited
investors in which we received gross proceeds of $9 million by selling an
aggregate of 8,181,819 shares of our newly-issued Common Stock at $1.10 per
share (the "February 2006 Placement"). We paid aggregate placement agent
commissions of $675,000 (or 7.5% of the gross proceeds) and issued three-year
warrants to our placement agents to purchase an aggregate of 259,090 shares of
Common Stock at an exercise price of $1.32 per share. C.K. Cooper & Company and
Gilford Securities, Incorporated acted as our placement agents. Approximately $4
million of the net proceeds were used to fund our portion of the Aurora and
Source Rock acquisitions by New Albany.

      On March 15, 2007, we borrowed $1.7 million (the "March 2007 Bridge
Financing") from a single accredited investor in the form of a Senior Secured
Debenture, due September 15, 2007, in the principal amount of $1.7 million,
bearing interest at a rate of 16% per annum (the "Debenture"). The investor also
received a common stock purchase warrant to purchase up to 3,000,000 shares of
our common stock at an exercise price of $0.50 per share any time prior to
September 15, 2012. Our obligations under the Debenture were secured by a
mortgage and security interest in the properties located in the New Albany Shale
area of Indiana in which we hold any leasehold and/or working interests and a
continuing security interest in certain of our assets and properties other than
the mortgaged property. The Debenture became payable in full upon our consummate
an equity or debt financing of $15 million or more and, following our entry into
the credit facility on April 12, 2007, we repaid the Debenture in full. We also
paid a closing fee of $170,000 on the date on which the outstanding principal
amount plus accrued interest was repaid. In connection with the March 2007
Bridge Financing, we delivered to Casimir Capital LP, a placement fee of
$170,000 and warrants to purchase up to 340,000 shares of our Common Stock at an
exercise price of $0.50 per share.


                                       24
<PAGE>

Off-Balance-Sheet Arrangements.

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

Item 7. Financial Statements.

      The financial information required by this item is set forth beginning on
page F-1.

Item 8. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure.

      Not Applicable.

Item 8A. Controls and Procedures.

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

      At the end of the period covered by this Annual Report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that, as of December 31, 2006, the disclosure
controls and procedures of the Company were effective to ensure that the
information required to be disclosed in the Company's Exchange Act reports was
recorded, processed, summarized and reported on a timely basis.

      There were no changes in internal controls over financial reporting that
occurred during the fiscal quarter ended December 31, 2006, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

Item 8B. Other Information.

      None.


                                       25
<PAGE>

                                    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 information with respect to the current
directors and executive officers of the Company at April 16, 2007.

    Name                      Age          Position with the Company
    --------------            ---          -------------------------------------

    Thomas Kaetzer            47           Chairman, Chief Executive Officer (1)

    Alan Gaines               51           Vice Chairman and Director

    Richard Cohen             56           Chief Financial Officer

    Richard d'Abo             50           Director

-------------

      (1) Effective March 21, 2007, Barrie Damson, as our former Chairman and
Chief Executive Officer, resigned, as a result of which Mr. Kaetzer was promoted
from President/COO to Chairman/CEO.

      The business experience of each director and named executive officer of
the Company is set forth below:

      Mr. Thomas Kaetzer. Mr. Kaetzer was promoted to our chairman and chief
executive officer on March 21, 2007. He previously was our president and chief
operating officer, titles he held since December 2006. He brings 25 years of
experience in the oil and gas industry. Mr. Kaetzer began his career with Texaco
Inc., where, from 1981 to 1995, he held various positions of increasing
responsibility. Such positions provided him with a solid foundation in the
evaluation, exploitation and management of oil and gas assets. He has both
onshore and offshore experience in operations and production management, asset
acquisition, asset rationalization, development, drilling and workovers in the
continental U.S., Gulf of Mexico, North Sea, Colombia, Saudi Arabia, China and
West Africa. In 1995, Mr. Kaetzer left Texaco and formed Southwest Texas Oil &
Gas Co., which subsequently merged into GulfWest Energy Inc. in 1998. Mr.
Kaetzer served as President/Chief Operating Officer of GulfWest from 1999 to
2004, and as Vice President of Operations for its successor, Crimson Exploration
Inc., from 2005 to July 2006. Since August 2006, Mr. Kaetzer has worked as a
consultant to several companies in the oil and gas industry. Mr. Kaetzer earned
his B.S. from the University of Illinois in 1981 and his M.S. in petroleum
engineering from Tulane University in 1988.

      Mr. Alan Gaines. Mr. Gaines has served as vice chairman and a director of
the Company since April 2005. He is currently the Chairman and CEO of Dune
Energy, Inc., an independent E&P company engaged in the development, exploration
and acquisition of oil and gas properties, with operations presently
concentrated onshore at the Louisiana/Texas Gulf Coast as well as the Fort Worth
Basin Barnett Shale. Mr. Gaines has 25 years of experience as an energy
investment and merchant banker. In 1983, he co-founded Gaines, Berland Inc., an
investment bank and brokerage firm, specializing in global energy markets, with
particular emphasis given to small to medium capitalization companies involved
in exploration and production, pipelines, refining and marketing, and oilfield
services. Mr. Gaines holds a BBA in Finance from Baruch College, and an MBA in
Finance (with distinction) from Zarb School, Hofstra University School of
Graduate Management.

      Mr. Richard Cohen. Mr. Cohen has served as Chief Financial Officer of the
Company since December 2005. Since 2003, Mr. Cohen has served as a director of
Dune Energy, Inc., for which he served as Chief Financial Officer from November
2003 to April 2005. Since 1996, he has been the President of Richard M. Cohen
Consultants, a financial services consulting company that accepts engagements
from public and private companies to assist with their corporate governance and
corporate finance needs. During 1999, Mr. Cohen served as the President of
National Auto Credit, a publicly traded sub-prime auto finance company. From
1992 to 1995, Mr. Cohen was the President of General Media, then a $150 million
international diversified publishing and communications company. Mr. Cohen is a
Certified Public Accountant (New York State). He received a BS from The
University of Pennsylvania (Wharton) and an MBA from Stanford University.


                                       26
<PAGE>

      Mr. Richard d'Abo. Mr. d'Abo has served as a Director of the Company since
January 17, 2006. He is presently a transaction partner at The Yucaipa
Companies, a private equity firm focused on consolidating companies within the
supermarket industry. From 1995 through 2003, Mr. d'Abo was a private investor,
and served as a consultant to numerous companies both public and private
regarding acquisitions and related financings. From 1988 to 1994, Mr. d'Abo was
a partner at The Yucaipa Companies and was instrumental in the creation of
financing structures for a number of acquisitions.

Section 16(a) Beneficial Ownership Reporting Compliance

      The SEC reports and certain other information under the Exchange Act filed
by us during fiscal 2006 were filed pursuant to the rules under Section 15(d) of
the Exchange Act. Accordingly, our directors and officers and holders of 10% or
more of our common stock were not required to file statements of beneficial
ownership with regards to their ownership of our equity securities under Section
16 of the Exchange Act.

      On February 28, 2007, we registered our shares of Common Stock under
Section 12 of the Exchange Act, whereupon our officers, directors and 10% or
more stockholders became subject to the reporting requirements under Sections 16
of the Exchange Act concerning their beneficial ownership. As of this date, all
of our executive officers and directors have timely filed their respective Forms
3 and 4.

Code of Ethics

      We have not adopted a Code of Ethics with respect to our officers because
we have not been an operating company. However, with the completion of the
Stephens County Transaction, we intend to adopt a Code of Ethics in the
reasonably foreseeable future.

Committees

      We do not currently have either an Audit Committee, Nominating Committee
or Compensation Committee. Our board of directors believes that having no
committees was appropriate by reason of (i) the nominal operations and nominal
assets associated with our prior status as a "shell company" and (ii) the lack
of any requirements for such commitees under the regulations of the OTC Bulletin
Board on which our Common Stock is currently traded. However, with the
completion of the Stephens County Transaction, it is our intention to create an
Audit Committee, together with such other committees as our board deems
advisable, in the reasonably foreseeable future.

Item 10. Executive Compensation.

      Prior to hiring Thomas Kaetzer as our President and Chief Operating
Officer, the Company had not paid salaries to any individual, although in
December 2005 we began to pay to Richard M. Cohen, Inc., a company of which
Richard M. Cohen, our Chief Financial Officer, is sole shareholder, officer and
director, a monthly consulting fee of $7,500. In connection with our employment
of Mr. Kaetzer in December 2006, we agreed to pay him a salary and other
compensation pursuant to his employment agreement with us, including restricted
stock award, as described in more detail below in the Summary Compensation Table
and under the sub-heading "Employment Agreement".


                                       27
<PAGE>

      The following table shows the compensation of our executive officers for
the fiscal years ended December 31, 2006 and December 31, 2005:

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                                        Long-Term Compensation
                                                                     ----------------------------
                                                       Annual                  Awards
                                                    Compensation
                                         --------------------------------------------------------
               Name and                                                 Securities Underlying         All Other
          Principal Position              Year       Salary ($)              Options (#)             Compensation
-----------------------------------------------------------------------------------------------------------------
<S>                                       <C>        <C>             <C>                                 <C>
Barrie Damson (Chief Executive            2006            $0                    None                      n/a
Officer) (1)

Thomas Kaetzer (President and Chief       2006       $15,833 (2)     2,000,000 shares of Common           n/a
Operating Officer) (2)                                                          Stock

Richard Cohen                             2006         $90,000                  None                      n/a
(Chief Financial Officer) (3)
                                          2005       $7,500 (3)       175,000 shares of Common            n/a
                                                                                Stock
</TABLE>

      (1) Mr. Damson joined our board of directors and became our Chairman and
Chief Executive Officer as of February 1, 2006. Mr. Damson resigned as Chairman
and Chief Executive Officer, effective March 21, 2007

      (2) Mr. Kaetzer became our President and Chief Operating Officer as of
December 5, 2006. In 2006 he was paid an amount equal to one month's salary at
an annualized salary of $190,000 as provided for in his employment agreement.
See the subsection below entitled "Employment Contracts" in this "Item 6 --
Executive Compensation." Mr. Kaetzer was promoted to Chairman and Chief
Executive Officer on March 21, 2007, upon the resignation of Mr. Damson.

      (3) Mr. Cohen became our Chief Financial Officer in December 2005, a which
time he became the first employee of the Company to receive a salary. Mr.
Cohen's salary is $7,500 per month.

Option Grants in the Last Fiscal Year.

      As shown in the below table, during fiscal year ended December 31, 2006,
the Company granted stock options to our named executive officers, as follows:


                                       28
<PAGE>

                    Option Grants In Last Fiscal Year (2006)

<TABLE>
<CAPTION>
                                                                 % of Total
                                                No. of             Options
                                              Securities         Granted to
                                              Underlying        Employees in
                                                Options          Fiscal Year         Exercise        Expiration Date
Name                            Year          Granted (1)                             Price
----                            ----          -----------        -----------          -----          ---------------
<S>                             <C>          <C>                     <C>              <C>              <C>
Barrie Damson
(Chief Executive Officer)       2006               0                  0%               N/A                 N/A

Thomas Kaetzer
(President and Chief            2006         1,000,000 (1)           50%              $0.50            12/20/2011
Operating Officer)
                                2006          500,000 (1)            25%              $0.60            12/20/2011

                                2006          500,000 (1)            25%              $1.00            12/20/2011
Richard Cohen
(Chief Financial Officer)       2006               0                  0%               N/A                 N/A
</TABLE>

      (1) Each option shall vest and be exercised in whole or in part, as
follows: (i) up to 1/3rd of the underlying Common Stock at any time from and
after December 20, 2006, (ii) up to an additional 1/3rd of the underlying Common
Stock at any time from and after December 20, 2007, and (iii) up to the
remaining 1/3rd of the underlying Common Stock at any time from and after
December 20, 2008; provided, that Mr. Kaetzer's employment has not been
terminated by us for cause or by Mr. Kaetzer without good reason.

                 Aggregated Option Exercises in Last Fiscal Year
                        and Fiscal Year-End Option Values

      During 2006, none of our named executive officers or directors exercised
any options to purchase shares of Common Stock. The following table sets forth,
for each of our named executive officers and directors, the number and value of
vested and unvested options held as of December 31, 2006 and the value of any
in-the-money stock options, vested and unvested, as of such date.

<TABLE>
<CAPTION>
                                    No. of Securities                Value of Unexercised In-The-Money Options at
Name                           Underlying Options Granted                        December 31, 2006 (1)
--------------              ---------------------------------        --------------------------------------------
                            Exercisable         Unexercisable           Exercisable               Unexercisable
                            -----------         -------------           -----------               -------------
<S>                         <C>                  <C>                    <C>                          <C>
Barrie Damson               5,000,000 (2)                0              $ 2,800,000                        --

Alan Gaines                 5,000,000 (2)                0              $ 2,800,000                        --

Thomas Kaetzer                666,665            1,333,335              $    38,333                  $ 76,667

Richard d'Abo                 250,000                    0              $   140,000                        --

Richard Cohen                 175,000                    0                       --                        --
</TABLE>

      (1) The last sale price of the Common Stock on December 29, 2006 (the last
trading date of the fiscal year) was $0.61.

      (2) In 2005, we awarded options to purchase up to 6,000,000 shares of our
Common Stock at an exercise price per share of $0.05 to each of Barrie Damson
and Alan Gaines. However, in connection with our grant of options to Thomas
Kaetzer pursuant to hiring him as our President and Chief Operating Officer, Mr.
Gaines and Mr. Damson each agreed to the cancellation of options to acquire
1,000,000 shares of our Common Stock.


                                       29
<PAGE>

Director Compensation.

      Directors of the Company are not compensated in cash for their services
but are reimbursed for out-of-pocket expenses incurred in furtherance of our
business.

      Our board of directors met four times during fiscal year 2006 (acting once
by unanimous written consent in lieu of a meeting), in which meetings all of our
directors participated.

Employment Agreement.

      Our employment agreement, dated December 20, 2006, with Thomas Kaetzer,
provides that Mr. Kaetzer shall serve as our President and Chief Operating
Officer effective as of December 5, 2006 and ending on December 30, 2008, unless
earlier terminated or extended under the terms of such agreement. In
consideration for such employment, the Company shall, among other things, pay
Mr. Kaetzer an annual salary of $190,000. In addition to his annual salary, if
Mr. Kaetzer remains in our employ on December 5, 2007 he shall be entitled to a
performance bonus of $50,000. In addition, during the second year of his
employment and thereafter (if his employment is extended), he may be entitled to
a performance bonus, solely at the discretion of our board of directors. Mr.
Kaetzer is further eligible under his employment agreement to participate,
subject to any eligibility, co-payment and waiting period requirements, in all
employee health and/or benefit plans offered or made available to our executive
officers. Upon termination by Mr. Kaetzer for specified good reasons in the
event of a merger or acquisition resulting in a diminution of his authority and
duties, the relocation of his offices outside Houston, Texas of residence, or
his termination by us other than for cause, the terminating executive officer
will be entitled to receive from us: (i) a severance payment equal to 12-months
of his then-current base salary plus pro rata bonus and fringe benefits
otherwise due at time of termination; (ii) any unpaid bonus from preceding year
of employment; and (iii) accrued but unused vacation days during the year such
termination occurs.

      In addition, his employment agreement provides for us to issue to him
three non-qualified stock options to purchase up to an aggregate of 2 million
shares of our Common Stock pursuant to three stock option agreements, as
described in more detail elsewhere in this Current Report. Each Option is
exercisable as to one third of the optioned shares on each of the grant date and
the first and second anniversary dates thereafter, and each such agreement
provides that if Mr. Kaetzer's employment is terminated by the Company for cause
or by Mr. Kaetzer without good reason, unvested Options shall immediately be
forfeited, and that if his employment is terminated by the Company without cause
or voluntarily by Mr. Kaetzer with good reason, optioned shares that would have
vested on the next vesting date will immediately vest and become exercisable in
proportion to the number of months he was employed during the 12-month period
following the immediately preceding vesting date.

      Mr. Kaetzer has further agreed under his employment agreement that, during
the respective term of his employment and for a one-year period after his
termination (other than its termination by him for good reason or by us without
cause), not to engage, directly or indirectly, as an owner, employee, consultant
or otherwise, in any business engaged in the exploration, drilling or production
of natural gas or oil within a ten (10) mile radius from any property that we
then have an ownership, leasehold or participation interest. He is further
prohibited during the above time period from soliciting or inducing, directly or
indirectly, any of our then-current employees or customers, or any customers of
ours during the one year preceding the termination of his employment.


                                       30
<PAGE>

      Mr. Kaetzer was promoted to Chairman and Chief Executive Officer on March
21, 2007 and, except for his title, his employment agreement continues to govern
the terms of his employment.

      We have no other employment agreements with any of our other named
executive officers.

Item 11. Security Ownership of Certain Beneficial Owners and Management and
         Related Stockholder Matters.

      As of April 16, 2007, we had 31,436,488 shares of Common Stock
outstanding. The following table sets forth certain information regarding the
beneficial ownership of our Common Stock as of that date by (i) each person who,
to our knowledge, beneficially owns more than 5% of our Common Stock; (ii) each
of our current directors and executive officers; and (iii) all of our current
directors and executive officers as a group:

<TABLE>
<CAPTION>
           Name and Address                       Amount and Nature of               Percent of
        of Beneficial Owner (1)                 Beneficial Ownership (2)        Outstanding Shares (2)
        -----------------------                 ------------------------        ----------------------
<S>                                                 <C>                                 <C>
Thomas Kaetzer                                        666,665  (3)                       2.1 %
(Chairman and  Chief Executive Officer)

Alan Gaines                                         7,624,250  (4)                      23.0 %
(Vice Chairman and  Director)

Richard Cohen                                         475,000  (5)                       1.5 %
(Chief Financial Officer)

Richard d'Abo                                       1,186,000  (6)                       3.7 %
(Director)

Barrie Damson                                       7,624,250  (7)                      23.0 %
     37 Franklin Street
     Westport, CT 06880

Superius Securities Group Inc.  Profit              1,633,637  (8)                       5.1 %
Sharing Plan
     94 Grand Avenue
     Englewood, NJ 07631

Lakewood Group LLC                                  3,000,000  (9)                       8.7 %
     242 4th Street
     Lakewood, NJ 08701

All Officers & Directors as a Group (4              9,951,915  (3)(4)(5)(6)             29.0 %
persons)
</TABLE>

      (*) Less than 1%

      (1) Unless otherwise indicated, the address of each beneficial owner
reported above is 11811 N. Freeway (I-45), Suite 200, Houston, Texas 77060.

      (2) A person is deemed to be the beneficial owner of securities that can
be acquired within 60 days from March 31, 2007. Each beneficial owner's
percentage is determined by assuming that options that are held by such person
(but not any other person), and which are exercisable within 60 days from March
31, 2007, have been exercised.


                                       31
<PAGE>

      (3) Refers to options to purchase (i) up to 1,000,000 shares of Common
Stock at an exercise price of $0.50 per share, of which 333,333 underlying
shares are currently vested, (ii) up to 500,000 shares of Common Stock at an
exercise price of $0.60 per share, of which 166,666 shares are currently vested,
and (iii) up to 500,000 shares of Common Stock at an exercise price of $1.00 per
share, of which 166,666 shares are currently vested. Each option is subject to a
vesting schedule, as follows: (i) up to 1/3rd of the underlying Common Stock
exercisable at any time from and after December 20, 2006, (ii) up to an
additional 1/3rd of the underlying Common Stock exercisable at any time from and
after December 20, 2007, and (iii) up to the remaining 1/3rd of the underlying
Common Stock exercisable at any time from and after December 20, 2008; provided,
that Mr. Kaetzer's employment has not been terminated by us for cause or by Mr.
Kaetzer without good reason.

      (4) Includes options currently exercisable to purchase up to 1,730,000
shares of Common Stock at an exercise price of $0.05 per share. Excluded are
1,670,000 and 1,600,000 shares of Common Stock underlying stock options
previously outstanding, which stock options Mr. Gaines surrendered for
cancellation on March 15, 2007 and April 12, 2007, respectively.

      (5) Includes 175,000 shares of Common Stock underlying a stock option
exercisable at $0.94 per share, and 100,000 shares of Common Stock underlying a
stock option exercisable at $0.56 per share.

      (6) Includes 250,000 shares underlying a stock option exercisable at $.05
per share.

      (7) Includes options currently exercisable to purchase up to 1,730,000
shares of Common Stock at an exercise price of $0.05 per share. Excluded are
1,670,000 and 1,600,000 shares of Common Stock underlying stock options
previously outstanding, which stock options Mr. Damson surrendered for
cancellation on March 15, 2007 and April 12, 2007, respectively.

      (8) Includes 525,000 shares of Common Stock underlying a convertible note
in the aggregate principal amount of $250,000 from our November 2005 financing.

      (9) Represents 3,000,000 shares of Common Stock underlying warrants
exercisable at $0.50 per share granted in connection with our March 2007 Bridge
Financing.

Item 12. Certain Relationships and Related Transactions, and Director
         Independence.

Relationships and Related Transactions.

      As previously disclosed on our Current Report on Form 8-K filed with the
SEC on January 29, 2007, on January 26, 2007 then Chairman and Chief Executive
Officer Barrie Damson and Vice Chairman and director Alan Gaines each made a
loan of $50,000 to us to be used for our short-term working capital needs and
evidenced by promissory notes. The notes bear interest at an annual rate of six
percent (6%) and matures, as extended by amendment dated April 10, 2007, on the
earlier to occur of (i) the date on which we close an equity offering in which
we obtain gross proceeds in excess of three million dollars ($3,000,000) or (ii)
October 13, 2010.

Director Independence.

      The OTC Bulletin Board, on which our common stock is currently traded,
does not maintain director independence standards. However, our board of
directors has determined that Richard d'Abo and Alan Gaines are "independent"
within the meaning of The Nasdaq Stock Market's director independence standards.
In particular, our board of directors has determined that neither Mr. d'Abo nor
Mr. Gaines has a material relationship with us (either directly or as a partner,
shareholder or officer of an organization that has a relationship with us) that
would interfere with the exercise of independent judgment.

Certain Matters Involving Promoters

      Immediately prior to our merger with Coastal in April 2005, 47.3% of our
then outstanding shares of common stock were held by Mr. David Loev. Mr. Loev is
an attorney residing in the State of Texas who performed legal services for the
Company prior to its merger with Coastal.


                                       32
<PAGE>

      At no time was Mr. Loev an officer or a director of the Company.

      In November 2005, the SEC filed a civil lawsuit in the Houston Federal
court against certain parties unrelated to the Company, and sued Mr. Loev for
allegedly violating certain registration provisions of the Federal Securities
laws (SEC Litigation Release No. 19476; November 29, 2005). Mr. Loev settled the
lawsuit with the SEC by consenting to the entry of an order permanently
enjoining him from violating the securities registration provisions, ordering
him to disgorge $25,785.50, plus interest, and imposing a $25,000 civil penalty.
The order also prohibits Mr. Loev from issuing any legal opinions that the
securities of any issuer are exempt from the securities registration provisions
of the Federal Securities laws pursuant to Rule 504 of Regulation D and from
accepting securities of any issuer whose securities are quoted on the Pink
Sheets in consideration for legal or consulting services rendered.

      As previously stated, since April of 2005, Mr. Loev has had no dealings
with the Company.

Item 13. Exhibits.

      (A)   Documents Filed as Part of this Report:

            (I)   Financial Statements:

                                                                        Page No.

      Report of Independent Registered Public Accounting Firm........ F-

      Balance Sheet at December 31, 2006............................. F-

      Statement of Expenses for years ended December 31, 2006
      and 2005 and for the period from June 29, 2004 (Inception)
      through December 31, 2006...................................... F-

      Statement of Cash Flows for years ended December 31, 2006
      and 2005 and for the period from June 29, 2004 (Inception)
      through December 31, 2006...................................... F-

      Statement of Changes in Stockholders' Equity (Deficit) for
      the period from June 29, 2004 (Inception) through
      December 31, 2006.............................................. F-

      Notes to Financial Statements ................................. F-


                                       33
<PAGE>

      (II)  Exhibits

Exhibit Nos.     Description of Exhibit

2.1            Plan and Agreement of Merger, dated April 6, 2005, by and between
               the Registrant and Coastal Energy Services, Inc. (incorporated
               herein by reference to Exhibit 2.1 of Registrant's Form 8-K
               report, filed April 7, 2005).

3.1            Registrant's Amended and Restated Articles of Incorporation
               (incorporated herein by reference to Exhibit 3.1 to registrant's
               Form 8-K report, filed January 19, 2006).

3.2            By-Laws of the Registrant (incorporated herein by reference to
               Exhibit 3.2 of Registrant's registration statement on Form SB-2,
               filed June 25, 2004).

4.1            Form of 10% Convertible Promissory Note, issued by the Registrant
               in November 2005 (incorporated herein by reference to Exhibit
               99.1 of Registrant's Form 8-K report, filed November 16, 2005).

4.2            Form of Warrant to Purchase Shares of common stock, issued by the
               Registrant to the placement agent in November 2005 (incorporated
               herein by reference to Exhibit 99.2 of Registrant's Form 8-K
               report, filed November 16, 2005).

4.3            Form of Warrant to Purchase Shares of common stock, issued by the
               Registrant to the placement agents in February 2006.

4.4            Promissory Note in favor of Barrie Damson, dated January 26, 2007
               (incorporated herein by reference to Exhibit 99.1 of Registrant's
               Form 8-K report, filed January 29, 2007).

4.5            Promissory Note in favor of Alan Gaines, dated January 26, 2007
               (incorporated herein by reference to Exhibit 99.2 of Registrant's
               Form 8-K report, filed January 29, 2007).

4.6            Form of Senior Secured Debenture, dated March 15, 2007, in the
               principal amount of $1,700,000 issued to the Investor
               (incorporated herein by reference to Exhibit 99.1 of Registrant's
               Form 8-K report, filed March 19, 2007).

4.7            Form of Warrant to Purchase 3,000,000 shares of common stock,
               dated March 15, 2007, issued by the Registrant to the Investor
               (incorporated herein by reference to Exhibit 99.2 of Registrant's
               Form 8-K report, filed March 19, 2007).

10.1           Limited Liability Company Agreement of New Albany-Indiana, LLC,
               dated as of November 25, 2005, by and among the Registrant, Rex
               Energy Operating Corp. and Rex Energy Wabash, LLC.

10.1.1         Form of Membership Interest Redemption Agreement, dated as of
               March 16, 2007, by and between the Company and New
               Albany-Indiana, LLC (incorporated herein by reference to Exhibit
               99.5 of Registrant's Form 8-K report, filed March 19, 2007)


                                       34
<PAGE>

10.1.2         Form of Assignment, Bill of Sale, and Conveyance, dated March 16,
               2007, from New Albany-Indiana, to the Company (incorporated
               herein by reference to Exhibit 99.6 of Registrant's Form 8-K
               report, filed March 19, 2007)

10.2           Purchase and Sale Agreement, dated as of November 15, 2005,
               between New Albany-Indiana, LLC and Aurora Energy Ltd.

10.3           Form of Stock Option Agreement issued in April 2005 by the
               Registrant to Barrie Damson and Alan Gaines (incorporated herein
               by reference to Exhibit 99.1 of Registrant's Form 8-K report,
               filed May 3, 2005).

10.4           Purchase Agreement, dated as of January 16, 2006, by and among
               the Registrant, Rex Energy Operating Corp. and other sellers,
               including form of employment agreement for Rex Designees
               (incorporated herein by reference to Exhibit 10.1 to Registrant's
               Form 8-K report, filed January 17, 2006).

10.5           Stock Agreement, dated as of January 16, 2006, by and among the
               Registrant, Barrie Damson, Alan Gaines and certain individuals
               affiliated with Rex Energy Operating Corp. (incorporated herein
               by reference to Exhibit 10.2 to Registrant's Form 8-K report,
               filed January 17, 2006).

10.6           Amendment to Stock Agreement dated March 10, 2006.

10.7           Purchase Agreement with Source Rock Resources, Inc.

10.8           Mutual Termination Agreement dated June 8, 2006 (incorporated
               herein by reference to Exhibit 99.1 of Registrant's Form 8-K
               report, filed June 8, 2006)

10.9           Mutual Release Agreement dated June 8, 2006 (incorporated herein
               by reference to Exhibit 99.2 of Registrant's Form 8-K report,
               filed June 8, 2006)

10.10          Mutual Non-Disparagement Agreement dated June 8, 2006
               (incorporated herein by reference to Exhibit 99.3 of Registrant's
               Form 8-K report, filed June 8, 2006)

10.11          Purchase and Sale Agreement, dated December 20, 2006, by and
               among the Company, Statex Petroleum I, L.P. and Charles W.
               Gleeson LP (incorporated herein by reference to Exhibit 10.1 of
               Registrant's Form 8-K report, filed December 21, 2006)

10.11.1        Second Amendment to Purchase and Sale Agreement, as of March 9,
               2007, among the Company, Petroleum I, L.P. and Charles W. LP
               (incorporated herein by reference to Exhibit 10.1 of Registrant's
               Form 8-K report, filed March 15, 2007)

10.12          Employment Agreement, dated December 5, 2006, by and between the
               Company and Thomas Kaetzer. (incorporated herein by reference to
               Exhibit 10.2 of Registrant's Form 8-K report, filed December 31,
               2007)


                                       35
<PAGE>

10.13          Stock Option Agreement, dated December 20, 2006, by and between
               the Company and Thomas Kaetzer (incorporated herein by reference
               to Exhibit 10.3 of Registrant's Form 8-K report, filed December
               31, 2007)

10.14          Stock Option Agreement, dated December 20, 2006, by and between
               the Company and Thomas Kaetzer (incorporated herein by reference
               to Exhibit 10.4 of Registrant's Form 8-K report, filed December
               31, 2007)

10.15          Stock Option Agreement, dated December 20, 2006, by and between
               the Company and Thomas Kaetzer (incorporated herein by reference
               to Exhibit 10.1 of Registrant's Form 8-K report, filed December
               31, 2007)

10.16          Form of Security Agreement, dated March 15, , by and between the
               Company and the Investor (incorporated herein by reference to
               Exhibit 99.3 of Registrant's Form 8-K report, filed March 19,
               2007)

10.17          Form of Mortgage, Security Agreement, Assignment and Financing
               Statement, dated as of March 15, 2007, by the Company for the
               benefit of the Investor (incorporated herein by reference to
               Exhibit 99.4 of Registrant's Form 8-K report, filed March 19,
               2007)

31.1*          Certification of Chief Executive Officer required by Rule
               13a-14(a) under the Exchange Act.

31.2*          Certification of Chief Financial Officer required by Rule
               13a-14(a) under the Exchange Act.

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

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

----------

Numbers with (*) indicate exhibits that are filed herewith


                                       36
<PAGE>

Item 14. Principal Accountant Fees and Services.

      For fiscal years ended December 31, 2006 and 2005, the aggregate fees
billed by Malone & Bailey, PC, our principal independent accounting firm, for
professional services were as follows:

                                                     Fiscal Year Ended
                                       December 31, 2006       December 31, 2005
Audit Fees (1)                             $131,498                  $69,705
Audit-Related Fees (2)                       $1,995                   $7,680
Tax Fees (3)                                 $5,321                   $3,950
All Other Fees                                  N/A                      N/A

(1)   Fees for audit services include fees associated with the annual audit and
      the review of the Company's quarterly reports on Form 10-QSB. Also
      includes fees associated with SEC registration statements, comfort letters
      and consents.

(2)   Audit-Related services consist primarily of accounting consultations.

(3)   Tax services consist primarily of the preparation of Company federal
      income tax returns.

      As of December 31, 2006, we did not have a formal documented pre-approval
policy for the fees of our principal accounting firm.


                                       37
<PAGE>

                                   SIGNATURES

      In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                                  BASELINE OIL & GAS CORP.


Date: April 17, 2007                              By: /s/ Thomas Kaetzer
                                                      --------------------------
                                                      Thomas Kaetzer
                                                      Chief Executive Officer

      In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

Signature                                                              Date
---------                                                              ----


/s/  Richard Cohen                                                April 17, 2007
--------------------------------------------
Richard Cohen
Chief Financial Officer
(Principal Financial and Accounting Officer)


/s/  Alan Gaines                                                  April 17, 2007
--------------------------------------------
Alan Gaines
Vice Chairman and Director


/s/ Richard d'Abo                                                 April 17, 2007
--------------------------------------------
Richard d'Abo
Director


                                       36
<PAGE>

                          INDEX TO FINANCIAL STATEMENTS

                                                                        Page No.

Report of Independent Registered Public Accounting Firm...............     F-2

Balance Sheet at December 31, 2006....................................     F-3

Statement of Expenses for years ended December 31, 2006
and 2005 and for the period from June 29, 2004 (Inception)
through December 31, 2006.............................................     F-4

Statement of Cash Flows for years ended December 31, 2006
and 2005 and for the period from June 29, 2004 (Inception)
through December 31, 2006.............................................     F-5

Statement of Changes in Stockholders' Equity (Deficit) for
the period from June 29, 2004 (Inception) through
December 31, 2006.....................................................     F-6

Notes to Financial Statements ........................................     F-7

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
   Baseline Oil & Gas Corp.
   (A Development Stage Company)
   Houston, Texas

We have audited the accompanying balance sheet of Baseline Oil & Gas Corp.
("Baseline") as of December 31, 2006, and the related statements of expenses,
cash flows and changes in stockholders' equity (deficit)for the two year period
then ended and for the period from June 29, 2004 (Inception) through December
31, 2006. These financial statements are the responsibility of Baseline's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with 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 financial statements referred to above present fairly, in
all material respects, the financial position of Baseline, as of December 31,
2006, and the results of its operations and its cash flows for the periods
described in conformity with accounting principles generally accepted in the
United States of America.


/s/ Malone & Bailey, PC
-----------------------
Malone & Bailey, PC
www.malone-bailey.com
Houston, Texas

April 12, 2007


                                       F-2
<PAGE>

                            BASELINE OIL & GAS CORP.
                          (A Development Stage Company)
                                  BALANCE SHEET
                                December 31, 2006

<TABLE>
<S>                                                                             <C>
ASSETS
  Cash and marketable securities                                                $    123,678
  Prepaid and other current assets                                                   125,000
                                                                                ------------
     Total current assets                                                            248,678

  Deferred debt issuance costs, net of
     amortization of $237,192                                                         88,947
  Deferred financing costs                                                            99,631
  Property acquisition - deposit                                                   1,000,000
  Unproven leasehold acquisition costs                                             7,810,135
                                                                                ------------
     Total assets                                                               $  9,247,391
                                                                                ============
LIABILITIES & STOCKHOLDERS' EQUITY
  Accounts payable                                                              $     82,873
  Other payables                                                                      50,029
  Accrued liabilities                                                                171,471
  Derivative liability                                                               104,896
  Short term debt and current portion of long term debt, net of discount           1,948,001
                                                                                ------------
     Total current liabilities                                                     2,357,270

  Commitments and contingencies                                                           --

STOCKHOLDERS' EQUITY
  Preferred stock, $.001 par value,
    10,000,000 shares authorized,
    none issued and outstanding                                                           --

  Common stock, $.001 par value, 140,000,000 shares authorized,
  31,342,738 shares issued and outstanding                                            31,343

  Additional paid-in-capital                                                      28,423,418

  Deficit accumulated during the development stage                               (21,564,640)
                                                                                ------------
     Total stockholders' equity                                                    6,890,121
      Total liabilities & stockholders' equity                                  $  9,247,391
                                                                                ============
                 See accompanying summary of accounting policies
                       and notes to financial statements.
</TABLE>


                                       F-3
<PAGE>

                            BASELINE OIL & GAS CORP.
                          (A Development Stage Company)
                             STATEMENTS OF EXPENSES
                 Years Ended December 31, 2006 and 2005 and the
         Period from June 29, 2004 (Inception) through December 31, 2006

<TABLE>
<CAPTION>
                                                                                           Inception
                                             Year Ended            Year Ended               Through
                                            December 31,          December 31,           December 31,
                                                2006                  2005                   2006
                                            ----------------------------------------------------------
<S>                                         <C>                   <C>                  <C>
Selling, general
and administrative                          $   2,386,364         $  17,305,279        $    19,781,452

Interest (income)                                (117,630)                    --              (117,630)

Interest expense                                1,691,788               392,565              2,085,197

(Gain) on derivative liability                   (400,775)                    --              (400,775)

Other expense                                     213,137                 1,605                216,396
                                            ----------------------------------------------------------
Total expense                                   3,772,884            17,699,449             21,564,640
                                            ----------------------------------------------------------
Net loss                                    $  (3,772,884)        $ (17,699,449)        $  (21,564,640)
                                            ==========================================================

Basic and diluted loss per share            $       (0.11)        $       (1.20)

Weighted average common shares
outstanding                                    33,989,119            14,777,299
</TABLE>

                 See accompanying summary of accounting policies
                       and notes to financial statements.


                                       F-4
<PAGE>

                            BASELINE OIL & GAS CORP.
                          (A Development Stage Company)
                            STATEMENTS OF CASH FLOWS
                 Years Ended December 31, 2006 and 2005 and the
         Period from June 29, 2004 (Inception) through December 31, 2006

<TABLE>
<CAPTION>
                                                                         Year                 Year             Inception
                                                                         Ended                Ended             Through
                                                                      December 31,         December 31,       December 31,
                                                                          2006                 2005               2006
                                                                   ---------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                  <C>               <C>                  <C>
Net loss                                                             $   (3,772,884)   $   (17,699,449)     $   (21,564,640)
Adjustments to reconcile net loss to
 cash used in operating activities:
 Share based compensation                                                   720,874         16,499,670           17,220,544
 Unrealized gain on derivative liability                                   (400,775)                --             (400,775)
 Amortization of debt discount                                            1,206,577            305,825            1,512,402
 Stock issued as penalty for delayed registration                           594,000                 --              594,000
 Stock issued in lieu of cash interest                                      187,500                 --              187,500
 Amortization of debt issuance costs                                        237,192             29,649              266,841
Changes in:
 Prepaid and other assets                                                  (125,000)                --             (125,000)
 Accounts payable and accruals                                              158,467             79,204              313,482
                                                                     --------------    ---------------      ---------------
NET CASH USED IN OPERATING ACTIVITIES                                    (1,194,049)          (785,101)          (1,995,646)
                                                                     --------------    ---------------      ---------------

CASH FLOWS FROM INVESTING ACTIVITIES
 Deposit on acquisition                                                  (1,000,000)                --           (1,000,000)
 Deferred acquisition costs                                                 (99,631)                --              (99,631)
 Property acquisition costs                                              (6,060,135)        (1,750,000)          (7,810,135)
                                                                     --------------    ---------------      ---------------
NET CASH FLOWS USED IN INVESTING
  ACTIVITIES                                                             (7,159,766)        (1,750,000)          (8,909,766)
                                                                     --------------    ---------------      ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
 Payment of note payable                                                    (16,496)                --              (16,496)
 Proceeds from sale of common stock, net                                  8,275,000             16,590            8,291,590
Proceeds from exercise of options                                            12,500                 --               12,500
 Proceeds from convertible notes                                                  -          2,725,000            2,741,496
                                                                     --------------    ---------------      ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                 8,271,004          2,741,590           11,029,090
                                                                     --------------    ---------------      ---------------
NET CHANGE IN CASH                                                          (82,811)           206,489              123,678
  Cash balance, beginning of period                                         206,489                 --                   --
                                                                     --------------    ---------------      ---------------

  Cash balance, end of period                                        $      123,678    $       206,489      $       123,678
                                                                     ==============    ===============      ===============
SUPPLEMENTAL DISCLOSURES:
  Cash paid for interest                                             $       50,000    $            --      $        50,000
  Cash paid for income taxes                                         $           --    $            --      $            --
NON-CASH INVESTING AND FINANCING ACTIVITIES:
  Warrants issued in connection with
  issuance of stock
                                                                     $      505,671    $            --      $       505,671
</TABLE>

                 See accompanying summary of accounting policies
                       and notes to financial statements.


                                       F-5
<PAGE>

                            BASELINE OIL & GAS CORP.
                          (A Development Stage Company)
             STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY/(DEFICIT)
     For the Period from June 29, 2004 (Inception) through December 31, 2006

<TABLE>
<CAPTION>
                                                                                                       Deficit
                                                                                                     Accumulated
                                                                                   Additional         During the
                                                             Common                 Paid In          Development
                                                      Shares         Stock          Capital             Stage              Totals
                                               -------------------------------------------------------------------------------------
<S>                                                <C>             <C>          <C>                <C>                <C>
Balances, June 29, 2004                                     --     $     --     $          --      $          --      $          --
Shares issued to founders at inception
  for $0.00 per share                                  200,000          200              (200)                --                 --
Net loss                                                                                                (92,307)           (92,307)
                                               -------------------------------------------------------------------------------------
Balances, December 31, 2004                                                                             (92,307)
                                                       200,000          200              (200)                              (92,307)
Proceeds from issuance of common stock              17,006,000       17,006                --                 --             17,006
Debt discount related to shares issued
  with convertible notes                               950,000          950                --                 --                950
Shares issued in connection with merger              2,114,000        2,114            (3,480)                --             (1,366)

Stock based compensation                                    --           --        16,499,670                 --         16,499,670

Debt discount                                               --           --         1,939,401                 --          1,939,401

Debt issuance cost                                          --           --           355,788                 --            355,788
Net loss                                                    --           --                --        (17,699,449)       (17,699,449)
                                               -------------------------------------------------------------------------------------
Balances, December 31, 2005                         20,270,000       20,270        18,791,179        (17,791,756)         1,019,693

Shares issued in connection with merger             12,069,250       12,069         1,194,856                 --          1,206,925
Proceeds from issuance of common stock               8,181,818        8,182         8,991,818                 --          9,000,000

Equity issuance costs                                       --           --       (1,230,671)                 --         (1,230,671)
Shares issued on conversion of debt                  1,820,000        1,820           357,289                 --            359,109
Return of shares issued in connection with
  merger                                           (12,069,250)     (12,069)       (1,194,856)                --         (1,206,925)
Shares issued to pay interest                          375,000          375           187,125                 --            187,500

Shares based compensation                                   --           --           720,874                 --            720,874
Shares issued as penalty for delayed
registration                                           445,920          446           593,554                 --            594,000
Option exercise                                        250,000          250            12,250                 --             12,500

Net loss                                                    --           --                --         (3,772,884)        (3,772,884)
                                               -------------------------------------------------------------------------------------
Balances, December 31, 2006                         31,342,738     $ 31,343     $  28,423,418      $ (21,564,640)     $   6,890,121
                                               =====================================================================================
</TABLE>

                 See accompanying summary of accounting policies
                       and notes to financial statements.


                                       F-6
<PAGE>

                            BASELINE OIL & GAS CORP.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Organization

Baseline Oil & Gas Corp. ("Baseline" or the "Company") is an independent
exploration and production company, with operations presently focused in the
Illinois Basin New Albany Shale play. Pursuant to a definitive purchase
agreement and subject to the satisfaction of certain terms and conditions, on
April 12, 2007 Baseline acquired significant oil and natural gas assets from
Statex Petroleum I, L.P. and Charles W. Gleeson LP. Such assets consist of
operated and non-operated working interests in leases located in Stephens County
Texas, and approximately 81 gross producing oil and natural gas wells.

Use of Estimates

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

Cash and Cash Equivalents

For purposes of the statement of cash flows, Baseline considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents. There were no cash equivalents as of December 31, 2006.

Properties and Equipment

The Company uses the successful efforts method of accounting for oil and gas
producing activities. Under this method, acquisition costs for proved and
unproved properties are capitalized when incurred. Exploration costs, including
geological and geophysical costs, the costs of carrying and retaining unproved
properties and exploratory dry hole drilling costs, are expensed. Development
costs, including the costs to drill and equip development wells, and successful
exploratory drilling costs to locate proved reserves are capitalized.

Exploratory drilling costs are capitalized when incurred pending the
determination of whether a well has found proved reserves. A determination of
whether a well has found proved reserves is made shortly after drilling is
completed. The determination is based on a process that relies on
interpretations of available geologic, geophysic, and engineering data. If a
well is determined to be successful, the capitalized drilling costs will be
reclassified as part of the cost of the well. If a well is determined to be
unsuccessful, the capitalized drilling costs will be charged to expense in the
period the determination is made. If an exploratory well requires a major
capital expenditure before production can begin, the cost of drilling the
exploratory well will continue to be carried as an asset pending determination
of whether proved reserves have been found only as long as: i) the well has
found a sufficient quantity of reserves to justify its completion as a producing
well if the required capital expenditure is made and ii) drilling of the
additional exploratory wells is under way or firmly planned for the near future.
If drilling in the area is not under way or firmly planned, or if the well has
not found a commercially producible quantity of reserves, the exploratory well
is assumed to be impaired, and its costs are charged to expense.

In the absence of a determination as to whether the reserves that have been
found can be classified as proved, the costs of drilling such an exploratory
well is not carried as an asset for more than one year following completion of
drilling. If, after that year has passed, a determination that proved reserves
exist cannot be made, the well is assumed to be impaired, and its costs are
charged to expense. Its costs can, however, continue to be capitalized if a
sufficient quantity of reserves are discovered in the well to justify its
completion as a producing well and sufficient progress is made in assessing the
reserves and the well's economic and operating feasibility.


                                       F-7
<PAGE>

The impairment of unamortized capital costs is measured at a lease level and is
reduced to fair value if it is determined that the sum of expected future net
cash flows is less than the net book value. The Company determines if impairment
has occurred through either adverse changes or as a result of the annual review
of all fields.

Development costs of proved oil and gas properties, including estimated
dismantlement, restoration and abandonment costs and acquisition costs, are
depreciated and depleted on a field basis by the units-of-production method
using proved developed and proved reserves, respectively. The costs of unproved
oil and gas properties are generally combined and impaired over a period that is
based on the average holding period for such properties and the Company's
experience of successful drilling.

Investments in Oil and Gas Joint Ventures

The Company accounts for its investments in oil and gas joint ventures pursuant
to the provisions of AICPA Accounting Interpretation No. 2 to APB No. 18. As
such, the Company includes in its financial statements its pro rata share of the
assets, liabilities, revenues, and expenses of the venture.

Loss Per Share

The basic net loss per common share is computed by dividing the net loss by the
weighted average number of common shares outstanding. Diluted net loss per
common share is computed by dividing the net loss adjusted on an "as if
converted" basis, by the weighted average number of common shares outstanding
plus potential dilutive securities. For the years ended December 31, 2006 and
2005, there were no dilutive securities outstanding.

Income Taxes

Baseline recognizes deferred tax assets and liabilities based on differences
between the financial reporting and tax bases of assets and liabilities using
the enacted tax rates and laws that are expected to be in effect when the
differences are expected to be recovered. Baseline provides a valuation
allowance for deferred tax assets for which it does not consider realization of
such assets to be more likely than not.

Stock Compensation

On January 1, 2006, Baseline adopted SFAS No. 123 (R), "Share-Based Payment."
SFAS 123(R) replaced SFAS No. 123 and supersedes APB Opinion No. 25. SFAS 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values. The pro forma disclosures previously permitted under SFAS 123 are no
longer an alternative to financial statement recognition. Baseline adopted SFAS
123(R) using the modified prospective method which requires the application of
the accounting standard as of January 1, 2006. The consolidated financial
statements as of and for the year ended December 31, 2006 reflect the impact of
adopting SFAS 123(R). In accordance with the modified prospective method, the
consolidated financial statements for prior periods have not been restated to
reflect, and do not include, the impact of SFAS 123(R).

During the fiscal year ended December 31, 2005, Baseline granted 13,675,000
options to purchase common stock to employees. All options are currently vested,
have a weighted average exercise price of $0.07 per share and expire 5 years
from the date of grant. Baseline recorded compensation expense of $10,080,000
under the intrinsic value method during the fiscal year ended December 31, 2005.

The following table illustrates the effect on net loss and net loss per share if
Baseline had applied the fair value provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.


                                       F-8
<PAGE>

                                                                      Year
                                                                     Ended
                                                               December 31, 2005
--------------------------------------------------------------------------------
Net loss as reported                                             $(17,699,449)

Add: stock based compensation determined under
intrinsic value based method                                       10,080,000

Less: stock based compensation determined under
fair value based method                                           (10,874,173)

Pro forma net loss                                               $(18,493,622)
                                                                 =============
Basic and diluted net loss per common share:

As reported                                                      $      (1.20)
                                                                 =============
Pro forma                                                        $      (1.25)
                                                                 =============

The weighted average fair value of the stock options granted during 2005 was
$0.77. Variables used in the Black-Scholes option-pricing model include (1) a
range of 3.9% - 4.41% for the risk-free interest rate, (2) expected option life
is the actual remaining life of the options as of each period end, (3) expected
volatility was 274% - 672%, and (4) zero expected dividends.

NOTE 2 - INCOME TAXES

Deferred tax assets - NOLs                                       $    969,241
Less: valuation allowance                                            (969,241)
                                                                 ------------
Net deferred tax asset                                           $         --
                                                                 ============

Baseline has net operating loss carry-forwards of approximately $2,850,000 at
December 31, 2006, which begin expiring in 2024.

NOTE 3 - CONVERTIBLE NOTES

On April 6, 2005 (the effective date), Baseline acquired Coastal in exchange for
17,206,000 shares of Baseline common stock. Coastal was merged with and into
Baseline with Baseline continuing as the surviving entity.

Upon the effective date of the Coastal merger, Baseline assumed the obligations
with respect to $350,000 of convertible promissory notes. The notes, issued in
April 2005, were convertible at any time into shares of Baseline's common stock
at a rate of $0.25 per share, accrued interest at the rate of 10% per annum and
matured in April 2006 (twelve months from the date of issuance). Upon
conversion, each holder of these convertible promissory notes is entitled to
receive an additional number of shares equal to 20% of the face amount of the
convertible promissory notes. The impact of these additional shares results in
an effective conversion rate of $0.21 per share. Based on the effective
conversion rate of $0.21 per share, Baseline has recognized a beneficial
conversion feature on the notes of $231,401 which was recorded as a debt
discount. The discount was amortized over the life of the notes. On April 6,
2006, holders of Baseline's convertible promissory notes issued in April of 2005
in the aggregate principal amount of $350,000, converted all of such notes plus
accrued interest into 1,820,000 shares of Baseline's common stock.


                                       F-9
<PAGE>

During November of 2005, Baseline sold $2,375,000 in aggregate of its units.
Each Unit consisted of (i) a $50,000 principal amount in an 18 month 10%
convertible promissory note ("November Note"), and (ii) such number of shares of
common stock equal to the quotient of (1) the aggregate principal amount of each
Note purchased, multiplied by 20% and (2) $0.50. The notes are convertible at
any time at a conversion price of $0.50 per share. Interest is payable in cash
or shares (at the conversion price) at the option of the Company. Purchasers of
the Units received in the aggregate 950,000 shares and, upon conversion of the
Notes, will receive an additional 4,750,000 Shares. Each quarter Baseline pays
interest of $59,380 to the holders in the form of $12,500 in cash and 93,750
shares of Baseline common. Baseline recorded a debt discount of $680,500 in
connection with the initial issuance 950,000 shares based on the stock prices of
$0.71 and $0.75 on the dates of issuance. Based on the effective conversion rate
of $0.50, Baseline recognized a beneficial conversion feature of $1,027,500 as a
debt discount on the additional 4,750,000 shares to be issued upon conversion of
the principal amount of the note. The total discount, $1,708,000, is being
amortized over the life of the November Note using the effective interest
method. As of December 31, 2006, $1,281,001 of the discount had been amortized
resulting in a net balance for the November Note of $1,948,001.

In connection with the note issuance, Baseline granted to Gilford Securities,
the placement agent, a five year warrant to purchase 475,000 shares of Common
Stock at an exercise of $0.50 per share.

Baseline evaluated the application of Statement of Financial Accounting Standard
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities"
and Emerging Issues Task Force ("EITF") 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock" for the 10% convertible promissory notes and the warrants issued in
connection with the note issuance. Based on the guidance of SFAS No. 133 and
EITF 00-19, Baseline concluded that these instruments were not required to be
accounted for as derivatives.

NOTE 4 - ISSUANCE OF COMMON STOCK

On March 28, 2005, Baseline issued 17,006,000 shares as follows:

      o     100,000 shares of common stock for services valued at $35,000 and is
            included in share based compensation; and

      o     16,906,000 shares of common stock valued at $5,917,100 for cash
            proceeds of $16,590. The $5,900,194 of value in excess of the cash
            proceeds received has been charged to expense as share based
            compensation;

The services were provided by the founders in connection with non-specific
research into oil and gas business opportunities. The value of the shares issued
was determined by reference to the closing price of Baseline's stock on the date
of issuance.

On January 16, 2006, Baseline entered into a definitive Purchase Agreement
("Purchase Agreement") to purchase certain assets from Rex Energy Operating
Corp. ("Rex Energy") and its affiliates (collectively the "Rex Parties"), and
the 50% membership in the New Albany -Indiana, LLC ("New Albany") that we did
not already own. Concurrently with the execution of the Purchase Agreement, we
entered into a Stock Agreement with certain individuals designated by Rex
Energy, pursuant to which we issued a total of 12,069,250 common shares of our
Common Stock valued at $1,206,925 or $0.10 per share. The issuance of such
shares was subject to our right of first refusal to repurchase all such shares
at a price $ 1.00 below any bona fide purchase offer for such shares made by a
third party. We accounted for the aforementioned shares as a stock subscription
receivable.


                                      F-10
<PAGE>

On June 8, 2006, Baseline entered into a Mutual Termination Agreement
("Termination Agreement") and Mutual Release Agreement ("Release Agreement")
with the Rex Parties pursuant to which we and the Rex Parties mutually
terminated (i) that certain purchase agreement between us dated January 16, 2006
and (ii) that certain stock agreement dated January 16, 2006 (as amended on
March 10, 2006).

Pursuant to the termination agreement, the Rex Parties surrendered for
cancellation of the aforementioned, 12,069,250 shares of our common stock,
previously issued to them pursuant to the Stock Agreement. In connection with
the surrender of these shares, the $1,206,925 of stock subscription receivable
relating to the shares was eliminated as an adjustment to equity. After giving
effect to the cancellation of such shares, we have 31,342,730 shares of common
stock and options, warrants and convertible promissory notes to purchase up to
an additional 19,562,840 shares of common stock outstanding as of December 31,
2006. Pursuant to the Release Agreement, we and the Rex Parties have agreed to
release and hold each other harmless from all Claims stemming from Controversies
(each as defined in the Release Agreement) arising out of our dealings with one
another.

On February 1, 2006 Baseline completed a private placement of $9,000,000 by
selling an aggregate of 8,181,818 shares of newly-issued Common Stock at $ 1.10
per share. As part of the transaction, Baseline issued warrants to the placement
agents ("Placement Warrants") to purchase an aggregate of 204,546 shares of
Common Stock at an exercise price of $1.32 per share. These warrants have a
three year term. Baseline agreed to register the resale of the shares of common
stock issuable upon exercise of the Placement Warrants. Based on the guidance in
SFAS 133 "Accounting for Derivative Instruments and Hedging Activities" and EITF
00-19 "Accounting for Derivative Financial Instruments Indexed to and
Potentially Settled in a Company's Own Stock", Baseline concluded the Placement
Warrants qualified for derivative accounting. Baseline determined the Placement
Warrants had the attributes of a liability and therefore recorded the fair value
of the Placement Warrants on day one as a current liability and a reduction of
additional paid in capital as a cost of equity issuance. Baseline is required to
record the unrealized changes in fair value in subsequent periods of the
Placement Warrants as an adjustment to the current liability with unrealized
changes in the fair value of the derivative reflected in the statement of
expenses as "(Gain)/loss on derivative liability." The fair value of the
Placement Warrants was $505,671 at February 1, 2006. The fair value of the
Placement Warrants was determined utilizing the Black-Scholes stock option
valuation model. The significant assumptions used in the valuation were: the
exercise price as noted above; the market value of Baseline's common stock on
February 1, 2006, $2.50; expected volatility of 268%; risk free interest rate of
approximately 4.54%; and a term of three years. The fair value of the Placement
Warrants was $104,896 at December 31, 2006. The fair value of the Placement
Warrants was determined utilizing the Black-Scholes stock option valuation
model. The significant assumptions used in the valuation were: the exercise
price as noted above; the market value of Baseline's common stock on December
31, 2006, $0.761 expected volatility of 224%; risk free interest rate of
approximately 4.82%; and a term of two years and four months. The resulting
unrealized change in fair value of $400,775 from February 1, 2006 was recorded
in the statement of expenses as a gain on derivative liability.

On April 6, 2006, holders of Baseline's convertible promissory notes issued in
April of 2005 in the aggregate principal amount of $350,000, converted all of
such notes into 1,820,000 shares of Baseline's common stock.

On October 20, 2006, Baseline's registration statement was declared effective.

In November 2006, Baseline issued an aggregate of 445,920 shares of Common Stock
with a value of $594,000 to investors in our February 2006 private offering.
Such shares were issued as a result of Baseline's failure to timely register the
shares purchased in the private offering.

On November 15, 2006, Baseline issued an aggregate of 375,000 shares of Common
Stock with a value of $187,500 to holders of November Notes in payment of
accrued interest through November 15, 2006.

On November 16, 2006, Wayne Brannan exercised an option to purchase 250,000
shares of Common Stock at $0.05 per share. Baseline issued 250,000 shares to Mr.
Brannan in exchange for $12,500.


                                      F-11
<PAGE>

NOTE 5 - STOCK OPTION GRANTS

On April 1, 2005, Baseline granted a stock option to a non-employee consultant
to purchase up to 500,000 shares of common stock at an exercise price of $0.30
per share. The option shall terminate no later than March 31, 2010 and may be
exercised in whole or in part, at any time from and after October 1, 2005. The
fair value of the option was $150,000 and has been fully expensed as share based
compensation. As of the effective date of the Coastal merger noted above, see
Note 3, the shares available in connection with the option converted into an
equal number of Baseline shares.

On April 29, 2005, Baseline granted stock options to seven persons, five of
which are company directors and/or officers and two of which are non-employees,
to acquire up to 12,950,000 shares of Baseline's common stock. The options are
immediately exercisable at $0.05 per share and will expire on April 28, 2010.
The options were granted as an inducement to retain management and for services
rendered to Baseline. The intrinsic value of the options granted to the
employees was $10,080,000 and has been expensed as share based compensation. The
fair value of the options granted to the non-employees was $297,500 and has been
expensed as share based compensation.

Mr. Alan Gaines ("Gaines") and Mr. Barrie Damson ("Damson"), two of the seven
persons mentioned above, have options which are cancelable under certain
conditions. Specifically, the agreement with Rex Energy Operating Corp. (see
Note 4) provides that each of Damson and Gaines, who presently each beneficially
owns 5,894,250 shares of our outstanding Common Stock and options to acquire an
additional 6,000,000 shares of Common Stock, will, upon the earlier to occur of
(i) the Closing Date or, (ii) if the Closing shall not have occurred as a result
of the Baseline's breach of a material provision of the Purchase Agreement, June
30, 2006, cancel such number of shares underlying their respective stock
options, such that on such date, each of Messrs. Gaines and Damson shall
beneficially own no more than 9.99% of the Company's outstanding shares of
Common Stock on a fully-diluted basis. As is discussed in Note 4, on June 8,
2006, Baseline terminated the Purchase Agreement with Rex Energy.

On December 20, 2005, Baseline issued to six Rex Management designees as
described in stock options, exercisable for up to an aggregate of 50,000 shares
of common stock at an exercise price of $1.00 per share. The options are fully
vested, immediately exercisable and will expire on December 20, 2008.

On December 27, 2005, Baseline issued to Mr. Richard Cohen, CFO, a stock option,
exercisable for up to 175,000 shares of common stock at an exercise price of
$0.94 per share. The option is fully vested, immediately exercisable and will
expire on December 26, 2010.

During 2006, Baseline's Board of Directors granted the following stock options,
which are immediately exercisable with the exception of the options issued to
Thomas Kaetzer as detailed below:

On August 15, 2006, Baseline granted a stock option to The Wall Street Group, a
consultant, exercisable for up to 100,000 shares of Common Stock at an exercise
price of $1.01 per share.

On October 20, 2006, Baseline granted a stock option to Carey Birmingham, its
former president, exercisable for up to 75,000 shares of Common Stock at an
exercise price of $0.50 per share.

On October 20, 2006, Baseline granted a stock option to David Loev, exercisable
for up to 25,000 shares of Common Stock at an exercise price of $0.50 per share.

On November 14, 2006, Baseline granted a stock option to Masstar Inc., a
consultant, exercisable for up to 360,000 shares of Common Stock at an exercise
price of $0.50 per share.

On November 16, 2006 Wayne Brannan exercised an option to purchase 250,000
shares at $0.05 share.


                                      F-12
<PAGE>

On December 16, 2006, Baseline granted stock options to Thomas Kaetzer, then
COO, now CEO, exercisable for up to 1,000,000, 500,000 and 500,000 shares of
Common Stock exercisable at $0.50, $0.60 and $1.00 per share respectively. Mr.
Kaetzer's options vest in three equal parts on; 1) the date of grant, 2) the 1st
anniversary the date of grant, and 3) 2nd anniversary of the date of grant.
Coinciding with the issue of Mr. Kaetzer's options, Messers Gaines and Damson
agreed to cancel in aggregate options to purchase 2,000,000 shares with an
exercise price of $0.05 per share.

The following table summarizes stock option activity:

                                                                      Weighted
                                                                       Average
                                                      Options           Price
                                                      -------           -----
Outstanding as of January 1, 2004                            --        $   --
Granted during 2004                                          --            --
Cancelled or expired                                         --            --
Exercised                                                    --            --
                                                     ----------
Outstanding as of December 31, 2004                          --            --

Granted during 2005                                  13,675,000        $ 0.07
Cancelled or expired                                         --            --
Exercised                                                    --            --
                                                     ----------
Outstanding as of December 31, 2005                  13,675,000        $ 0.07

Granted during 2006                                   2,560,000        $ 0.64
Cancelled or expired                                 (2,000,000)         0.05
Exercised                                              (250,000)         0.05
                                                     ----------
Outstanding as of December 31, 2006                  13,985,000        $ 0.18
                                                     ----------
Exercisable as of December 31, 2006                  13,985,000        $ 0.18
                                                     ----------

Options Outstanding and exercisable at December 31, 2006:

                                                                  Exercisable
                                      Number        Remaining      Number of
Exercise Price                      of Shares          Life         Shares
                                   ------------------------------------------
             $0.05                  10,700,000          3.3        10,700,000
             $0.30                     500,000          3.3           500,000
          0.50 - $1.01               2,785,000          4.8         1,451,667
                                    ----------                     -----------
                                    13,985,000                     12,651,667
                                    ==========                     ===========

NOTE 6 - INVESTMENT IN JOINT VENTURE

On November 25, 2005, Baseline entered into a joint venture with Rex Energy, a
privately held company, for the purpose of acquiring a working interest in
certain leasehold interests located in the Illinois Basin, Indiana. The joint
venture will be conducted through New Albany, a Delaware limited liability
company. Pursuant to a Limited Liability Company Agreement, Baseline has a 50%
economic/voting interest in New Albany and Rex Energy and its affiliates has a
50% economic/voting interest in New Albany. Rex Energy Wabash, LLC, an affiliate
of Rex, is the Managing Member of New Albany and manages the day to day
operations of New Albany.

On November 15, 2005, New Albany entered into a Purchase and Sale Agreement with
Aurora Energy Ltd ("Aurora"), pursuant to which New Albany has agreed to
purchase from Aurora an undivided 48.75% working interest (40.7% net revenue
interest) in (i) certain oil, gas and mineral leases covering acreage in several
counties in Indiana and (ii) all of Aurora's rights under a certain Farmout and
Participation Agreement with a third party ("Farmout Agreement"). In addition,
at the closing of the transaction, New Albany was granted an option from Aurora,
exercisable by New Albany for a period of eighteen (18) months thereafter, to
acquire a fifty percent (50%) working interest in any and all acreage leased or
acquired by Aurora or its affiliates within certain other counties located in
Indiana, at a fixed price per acre.


                                      F-13
<PAGE>

On February 1, 2006, New Albany completed its acquisition of certain oil and gas
leases and other rights from Aurora pursuant to the November 15, 2005 Purchase
and Sale Agreement mentioned above. The total purchase price under the Aurora
Purchase Agreement and the grant of the Aurora Option was $10,500,000 of which
Baseline paid $5,250,000.

On February 28, 2006, New Albany acquired a 45% working interest (37.125% net
revenue interest) in certain oil, gas and mineral leases covering approximately
21,000 acres of prospective New Albany Shale acreage in Knox and Sullivan
Counties, Indiana. New Albany acquired its 45% working interest from Source Rock
Resources, Inc., for a total consideration of $735,000 (of which Baseline paid
half).

On July 21, 2006 Baseline transferred $88,714 to New Albany to fund the purchase
of working interests in additional acreage acquired from Source Rock Resources,
Inc.

On July 31, 2006 Baseline transferred $200,938 to New Albany to fund the
purchase of working interests in additional acreage acquired from Aurora.

On October 26, 2006, Baseline transferred $680,643 to New Albany to fund its
share of the pilot drilling program on the acreage acquired from Aurora and the
acquisition of additional acreage from Source Rock Resources, Inc.

On November 8, 2006 Baseline transferred $250,105 to New Albany to fund its
share of the pilot drilling program on the acreage acquired from Aurora

On November 17, 2006 Baseline transferred $175,013 to New Albany to fund its
share of the pilot drilling program on the acreage acquired from Aurora

NOTE 7 - REGISTRATION STATEMENT-PENALTY INTEREST SHARES

As part of its Common Stock Offering in February 2006 (see Note 4), Baseline was
subject to a Registration Rights Agreement requiring it to file a registration
statement under the Securities Act by April 2, 2006. The company did not file by
April 2, but did so on June 13, 2006. As a result, Baseline incurred a $540,000
penalty, which was paid by issuing 445,920 common shares in November 2006.

NOTE 8 - SUBSEQUENT EVENTS

On December 20, 2006 Baseline Oil & Gas entered into a Purchase and Sale
Agreement ( "agreement") with Statex Petroleum I, L.P. and Charles W Gleeson LP
for a number of oil and gas producing properties in Stephens County in West
Texas. The purchase price was $ 28,000,000 plus interest from January 15, 2007
until date of closing. Upon execution of the agreement we paid a $1,000,000
non-refundable deposit to be credited against the purchase price at the closing
scheduled to take place on or before March 9, 2007. On March 9, 2007 we entered
into an amendment to the agreement whereby for an additional deposit of $300,000
paid by March 16, 2007 the deadline to close on the purchase of the Stephens
County assets was extended until April 16, 2007 and the effective date for the
transfer of the assets was changed from December 1, 2006 to February 1, 2007.
Baseline closed this acquisition on April 12, 2007.

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

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


                                      F-14
<PAGE>

On February 15, 2007, Baseline issued an aggregate of 93,750 shares of Common
Stock to holders of November Notes in payment of interest for the three months
ended February 15, 2007.

On March 15, 2007 Baseline closed a private bridge financing whereby we borrowed
$1,700,000 from a single accredited investor, Lakewood Capital ("Lakewood"). The
Company issued to Lakewood a Senior Secured Debenture ("Debenture") bearing
interest at 16%, a common stock purchase warrant to purchase up to 3,000,000
shares of our common stock at an exercise price of $0.50 per share, and entered
into a security agreement collateralized by the assets of the New Albany LLC. In
addition we are required to pay Lakewood a closing fee of $170,000 on the date
when the outstanding principal and accrued interest are paid. If Baseline
consummates a debt or equity financing of $15,000,000 or more the Debenture must
be paid in full. The proceeds from the Lakewood financing were used to pay the
additional deposit of $300,000 on the Stephens County property, satisfy a
capital call of $300,000 payable to Rex to maintain an interest in the New
Albany LLC, pay existing payables on Stephens County, and pay a $170,000 fee to
Casamir Capital, the placement agent. Additionally, The Company issued Casamir
Capital a warrant exercisable for up to 340,000 shares of Common Stock at an
exercise price of $0.50 per share. Concurrently with the closing of the Lakewood
financing, Barrie Damson and Alan Gaines each cancelled stock options to
purchase 1,670,000 shares of the company's common stock at an exercise of $0.05.

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

Effective March 21, 2007, Barrie Damson resigned as Chairman and CEO of Baseline
Oil and Gas Corp. As a result of Mr. Damson's departure, the Company appointed
Mr. Thomas Kaetzer to fill the vacancy on the Board and promoted Mr. Kaetzer
from President/COO to Chairman/CEO.


                                      F-15
<PAGE>

                                INDEX TO EXHIBITS

Exhibit No.    Description
-----------    -----------

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

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

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

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