SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-KSB/A

|X|   Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
      Act of 1934 for the fiscal year ended December 31, 2005

|_|   Transition Report under Section 13 of 15(d) of the Securities Exchange Act
      of 1934

For the transition period from ___________ to __________

                       Commission 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)

20022 Creek Farm, San Antonio, Texas                                    78259
(Address of principal executive offices)                              (Zip code)

         Issuer's telephone number, including area code: (210) 481-5177

       Securities registered under Section 12(b) of the Exchange Act: None

       Securities registered under Section 12(g) of the Exchange Act: None

      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 |X| NO |_|

      The issuer's revenues for its most recent fiscal year were $0.

      As of March 14, 2006, the aggregate market value of the issuer's common
equity held by non-affiliates was $44,298,142, based on the closing price of
$2.52 per share for its common stock on the OTC Bulletin Board on March 14,
2006. As of March 14, 2006, 40,521,068 shares of the issuer's common stock were
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None

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

<PAGE>

Introductory Note

      This amendment is being filed in response to certain comments received
from the Securities and Exchange Commission in connection with the filing of our
registration statement on Form SB-2 on June 13, 2006.

                                     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.

      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.
See " - Development of Business" below.

      We are 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 Exchange Commission (SEC)
applicable to shell companies. To date, we have only conducted nominal
operations and have only nominal assets. We expect that upon completion of the
Rex Energy asset acquisition transaction described below, we will exit "shell


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<PAGE>

company" status and file a Current Report on Form 8-K disclosing the transaction
and our terminating shell company status. We also plan, after the filing of this
Form 10-KSB, to file a Form 10-SB to register our common stock under Section
12(g) of the Exchange Act. When our Form 10-SB is filed and becomes effective,
we will be subject to the proxy rules under Section 14 under the Exchange Act
and our officers, directors and 10% shareholders will obligated to comply with
the provisions of Sections 13 and 16 of the Exchange Act, requiring them to file
statements of beneficial ownership of our equity securities and changes in that
ownership on a current basis.

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. 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 becomes due and payable on April 6, 2006. In
addition, on the effective date of the merger, Coastal delivered the sum of
$125,000 to the Company 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, current
officers and directors of the Company, each became beneficial owners of 27.9% of
our then-outstanding shares of common stock. Mr. Damson became chairman of the
board, chief executive officer and a director, and Mr. Gaines became vice
chairman and a director. See Item 9 "Directors, Executive Officers, Promoters
and Control Persons; Compliance with Section 16(a) of the Exchange Act," Item 10
"Executive Compensation," Item 11 "Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters" and Item 12 "Certain
Relationships and Related Transactions" of this Form 10-KSB.

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

      The merger transaction with Coastal resulted in the Coastal stockholders
controlling approximately 89% of our issued and outstanding shares of common
stock immediately following its completion. Consequently, the transaction was
accounted for as a reverse merger with Coastal being deemed the acquiring entity
for financial accounting purposes. See Item 6 "Management's Discussion and
Analysis or Plan of Operations" and Note 2 of Notes to Financial Statements of
Baseline Oil & Gas Corp. included elsewhere herein.


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<PAGE>

      Post-Merger Activities. On April 29, 2005, our board of directors granted
stock options to purchase up to 12,950,000 shares of our common stock, $0.001
par value, to seven individuals, including five of our officers and directors.
The stock options were immediately exercisable at an exercise price of $.05 per
share, and expire on April 28, 2010.

      Prior to the merger, on March 28, 2005 Coastal had issued (i) 100,000
shares of its common stock for services valued at $35,000, and 16,906,000 shares
of its common stock for $16,590 in cash. The value deemed in excess of the cash
proceeds ($5,900,194) received by Coastal was charged to expense as share based
compensation. On April 1, 2005, Coastal granted stock options to a consultant to
purchase up to 500,000 shares of common stock at an exercise price of $0.30 per
share. The term of this option expires March 31, 2010 and is fully exercisable
at any time after October 1, 2005. During 2005, the Company granted additional
stock options to purchase up to a total of 14,500,000 shares of common stock to
its officers, directors, consultants and other individuals. See Note 5 of Notes
to Financial Statements contained in Item 7 "Financial Statements."

      In June 2005, our board of directors determined to change our fiscal year
from a 12-month period ending April 30 of each year to a 12-month period to end
on December 31 of each year.

      In November 2005, we completed the offering and sale of a $2.375 million
in units of our notes and shares of common stock in privately negotiated
transactions with accredited investors. For each $50,000 invested, an investor
received (i) a $50,000 principal amount 10% convertible promissory note, and
(ii) 20,000 shares of our common stock. 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. At the
time of their initial investment, the purchasers of the units received in the
aggregate 950,000 shares of common stock. Upon conversion of the notes, holders
will receive up to an additional 5,462,000 shares of common stock, assuming that
all holders elect to receive shares of common stock in lieu of cash for interest
through the maturity date.

      We issued the placement agent for this transaction a five-year warrant to
purchase up to 475,000 shares of our common stock at an exercise price of $0.50
per share. We also granted to purchasers of the units certain "piggy-back"
registration rights for the shares acquired, the shares underlying the
convertible notes (including those which may be issued as interest payments) and
the shares underlying the warrant. If no such filing is made, then at any time
after November 15, 2006, the holders will have the right to demand that we file,
no later than 45 days following the date of the demand, a registration statement
covering the resale of their shares.

New Albany - Rex Energy Relationships.

      New Albany - Indiana, LLC and Source Rock Transactions. On November 25,
2005, we entered into a joint venture with Rex Energy Operating Corp. ("Rex
Energy"), a privately held Delaware corporation, for the purpose of acquiring
working interests in leasehold interests in leasehold acreage in the Illinois
Basin located in Southern Indiana known to contain New Albany Shale formations.
Under this joint venture, we and Rex Energy formed New Albany-Indiana, LLC, a
Delaware limited liability company (the "LLC" or "New Albany"). Pursuant to a
Limited Liability Company Agreement (the "LLC Agreement"), we have a 50%
economic/voting interest in the LLC and certain affiliates of Rex Energy have a
50% economic/voting interest in the LLC. Rex Energy had originally been a member
of the LLC but, on January 30, 2006, Rex Energy withdrew as a member and
assigned its membership interests to several of its affiliates, namely Lance T.


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Shaner, Shaner & Hulburt Capital Partners Limited Partnership, Rex Energy II
Limited Partnership, Douglas Oil & Gas and Rex Energy Wabash, LLC (collectively,
the "LLC Assignees"). Rex Energy Wabash, LLC ("Rex Wabash"), a Delaware limited
liability company and an affiliate of Rex Energy, is the Managing Member of the
LLC and manages its day-to-day operations.

      On February 1, 2006, the LLC completed its acquisition of certain oil and
gas leases and other rights from Aurora Energy Ltd., a Nevada corporation
("Aurora"), pursuant to a Purchase and Sale Agreement dated November 15, 2005
(the "Aurora Agreement"). Pursuant to the Aurora Agreement, the LLC purchased
from Aurora 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 (the "Leases") and (ii) all of Aurora's rights under
a certain Farmout and Participation Agreement with a third party ("Farmout
Agreement"). In addition, the LLC was granted an option from Aurora (the
"Option"), exercisable by the LLC until August 1, 2007, 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
(currently estimated to be 50,000 acres), at a fixed price of $25 per net acre.
The total purchase price for the acquisition of the working interests in the
Leases and the Farmout Agreement, together with the grant of the Option, was
$10,500,000. Of the total purchase price, we paid an aggregate of $5,250,000. We
obtained funding to pay our share of the LLC's purchase price for this
acquisition through private placements of (i) the convertible notes and stock in
November 2005 and (ii) shares of our common stock in February 2006. See Item 6
"Management's Discussion and Analysis or Plan of Operations". As described
above, on January 30, 2006, Rex Energy withdrew as a member from the LLC and
assigned its membership interests to the LLC Assignees.

      On March 6, 2006, the LLC 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 the Company believes contain New Albany Shale formation stratum. The
purchase price paid by the LLC was $735,000 (of which we paid half). Rex Energy
will be the operator for wells drilled on the acreage.

      Execution of Definitive Agreements to Purchase Oil and Gas Assets for
$73.2 million. On January 16, 2006, the Company signed a definitive Purchase
Agreement (the "Purchase Agreement") with Rex Energy, Rex Energy Royalties
Limited Partnership ("Rex Royalties"), PennTex Resources, L.P. ("PennTex
Resources"), PennTex Resources Illinois, Inc. ("PennTex Illinois"), Douglas Oil
& Gas Limited Partnership ("Douglas O&G"), Douglas Westmoreland Limited
Partnership ("Douglas Westmoreland"), Midland Exploration Limited Partnership
("Midland"), Rex Wabash, Lance T. Shaner and Benjamin W. Hulburt (each sometimes
referred to as a "Rex Seller" and collectively, the "Rex Sellers"). Pursuant to
the Purchase Agreement, subject to the satisfaction of various terms and
conditions, the Company has agreed to purchase the following assets (the "Rex
Assets") from the Rex Sellers: (i) all of the assets of Douglas O&G, Midland,
Douglas Westmoreland, PennTex Resources, Rex Royalties and Rex Wabash, together
with 100% of the outstanding capital stock of Rex Energy and PennTex Illinois
(which own 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) and (ii) Rex Sellers' 50% membership
interest (the "New Albany Membership Interest") in the LLC, together with all
rights of the LLC in the Aurora Agreement.

      Additionally, the Company agreed to assume certain liabilities of the Rex
Sellers, including post-closing obligations related to the day-to-day ownership
and operation of the Rex Assets to be conveyed, pre-closing and post-closing
environmental liabilities and personal injury and property damage liabilities
incurred on or with respect to such properties, and liabilities of the Rex


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Sellers under (i) the Rex Sellers' employee benefit plans, (ii) the Rex Sellers'
obligations to indemnify their respective directors, officers, partners and
employees under their charters, bylaws, agreements or under law, (iii) sales and
use taxes arising out of the transactions contemplated under the Purchase
Agreement and (iv) all liabilities of the Rex Sellers under contracts, leases
and other agreements relating to the Rex Assets to be conveyed by the Rex
Sellers under the Purchase Agreement. Certain assets that the Company will
acquire from the Rex Sellers are subject to claims in connection with material
outstanding litigation. See "Item 3. Legal Proceedings."

      The closing of the Company's purchase of the Rex Assets (the "Closing") is
scheduled to occur on or before May 1, 2006 or on such other date as the Company
and the Rex Sellers may agree (the "Closing Date"). The purchase price which the
Company has agreed to pay for the Rex Assets (other than the New Albany
Membership Interest) is $73,169,999 in cash, subject to certain adjustments as
set forth in the Purchase Agreement. The purchase price the Company has agreed
to pay for the New Albany Membership Interest is payable in shares of our common
stock to be determined by dividing:

      the Rex Sellers' total capital contributions made to the LLC from its
inception through the Closing Date (approximately $5,614,000 as of March 15,
2006), by

      $1.10, which was the price per share of our common stock that we issued
under our private financing transaction that we completed on February 1, 2006.

      Thus, if the Closing occurred as of March 15, 2006, we would be required
to issue a total of 5,103,636 shares of our common stock to Lance T. Shaner,
Shaner & Hulburt Capital Partners Limited Partnership, Rex Energy II Limited
Partnership and Douglas O&G in respect of the New Albany Membership Interest.

      The recipients of such shares of common stock will receive "piggy-back"
registration rights effective upon the Closing Date. The Company intends to
finance the cash portion of the purchase price for the Rex Assets through a
combination of senior debt and the sale of shares of its common stock.

      As part of the Company's due diligence, Ralph E. Davis Associates, Inc.,
an independent engineering firm retained by the Company, conducted an audit of
the June 1, 2005 reserve report of Netherland Sewell & Associates, Inc. (the "NS
Report"). The NS Report, which was commissioned by the Rex Sellers, reflected
total proved reserves of 6.4 million barrels of oil equivalent together with
total probable reserves of 370,000 barrels of oil equivalent, with respect to
the Rex Assets (other than the New Albany Membership Interest). The NS Report
was prepared using a NYMEX-based barrel-of-oil equivalent price for oil and
natural gas as of June 1, 2005. The Purchase Agreement had provided for certain
purchase price adjustments in the event that the total proved reserves for the
Rex Assets according to the audit performed by Ralph E. Davis Associates, Inc.
deviated by more than 10% from that set forth in the NS Report. Since the audit
conducted by our independent engineering firm concluded that total proved
reserves with respect to the Rex Assets did not deviate from the total proved
reserves in the NS Report by more than 10%, there will be no adjustment to the
purchase price based upon any deviation in reserves.

      The Purchase Agreement requires that substantially all of the hedging
arrangements of the Rex Sellers that are existing as of the date of the Purchase
Agreement with respect to the oil and gas properties to be conveyed, and all
future hedging arrangements that the Rex Sellers enter into with respect to
those oil and gas properties prior to Closing, must be terminated at the Rex
Sellers' sole cost and expense on or before the Closing Date. If the costs to
terminate those hedging arrangements exceed $6.0 million, then at the Company's
option, either (i) the purchase price will be increased by the amount by which
those total costs exceed $6.0 million, or (ii) the Company will assume the Rex
Sellers' obligations under those hedging arrangements and the purchase price


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will be decreased by $5.0 million. Under an amendment to the Purchase Agreement
dated March 10, 2006, the Company agreed to assume the Rex Sellers' obligations
under certain natural gas hedges covering approximately 55% of its gas
production through December 31, 2006 at an average floor price of $8.50 per Mcf
and ceiling price of $13.40 per Mcf.

      The Purchase Agreement contains cross-indemnification provisions whereby
the Company and the Sellers have agreed to indemnify each other for breaches and
violations of the Purchase Agreement and for the operation and ownership of the
subject oil and natural gas properties before and after the effective date of
their conveyance to the Company.

      Concurrently with the execution of the Purchase Agreement, the Company
entered into a Stock Agreement (the "Stock Agreement") with Lance T. Shaner,
Benjamin W. Hulburt, Thomas F. Shields, Michael S. Carlson, Christopher K.
Hulburt and Thomas C. Stabley, individuals affiliated in various respects with
Rex Energy (the "Rex Designees"), under which the Company issued a total of
12,069,250 shares of its common stock to the Rex Designees. These shares are
subject to the Company's right of first refusal to repurchase such shares at a
price $1.00 below any bona-fide purchase offer for the shares made by a third
party. Similarly, in the event that the Company does not purchase the Rex Assets
as a result of (i) a material breach by any of the Rex Sellers of their
representations or covenants contained in the Purchase Agreement or (ii) the
failure by Rex Sellers to satisfy a required condition to Closing as set forth
in the Purchase Agreement, then all shares delivered to such Rex Designees shall
be immediately subject to a three (3) year "lock-up" period during which the
shares could not be sold or transferred except under certain specified
circumstances. The right of first refusal would not apply to any sale of shares
pursuant to an underwritten offering of the Company's securities. The Stock
Agreement also provides that the right of first refusal and the three-year
"lock-up" restrictions will not apply to transfers of shares (i) by way of gift,
descent or distribution, to trusts or pursuant to a will or any other estate
planning or estate administration actions (so long as the transferee agrees to
be bound by the restrictions on transfer to the same extent as the transferor),
or (iii) by operation of law, court order or judicial process.

      The issuance of these shares to the Rex Designees resulted in a
compensation expense to the Company for financial accounting purposes during the
first quarter of 2006. See Item 7. "Financial Statements."

      The Company had previously granted, as of December 20, 2005, options to
the Rex Designees to purchase an aggregate of 50,000 shares of common stock,
which options are exercisable for a period of three years from the date of grant
at the exercise price of $1.00 per share.

      The Stock Agreement, as amended on March 10, 2006, provides that (A)
Barrie Damson and Alan Gaines, who each presently beneficially own 5,894,250
shares of the Company's 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 Company's breach of a material provision of the Purchase Agreement, June
30, 2006, each cancel 3,894,250 shares underlying their respective stock options
and (B) upon the Closing, the Company shall issue to certain Rex Designees or
their designees, options to acquire an aggregate of up to 3,930,750 shares of
the Company's common stock, at an exercise price equal to the price per share to
be paid by investors in the Company's private offering of securities to
accredited investors which commenced in March 2006 and is expected to close at
the same time as our purchase of the Rex Assets (the "March Offering"). See Item
6. "Management's Discussion and Analysis or Plan of Operations." Lance T.
Shaner, Benjamin W. Hulburt and Thomas F. Shields, affiliates of the Rex
Sellers, have agreed with the Company to purchase a number of shares in an
amount equal to 10% of the gross proceeds raised by the Company (inclusive of
their investment) in the March Offering.


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<PAGE>

      The Purchase Agreement further contemplates that concurrently with the
Closing, the Company will enter into employment agreements with the six Rex
Designees, which agreements will provide for annual base salaries not to exceed
$1,030,000 in the aggregate. These employment agreements will contain customary
terms relating to severance, benefits and vacation. Each of the employment
agreements will provide for an initial term of three (3) years, except that the
employment agreement of Lance T. Shaner, who will be appointed the Company's
interim Chief Executive Officer at the Closing, will be for an initial term of
one (1) year. The form of employment agreement to be used for the Rex Designees
(except Lance T. Shaner) was filed in Exhibit 10.1 to our Current Report on Form
8-K filed with the SEC on January 17, 2006. The form of employment agreement
contains provisions whereby the Rex Designees would be entitled to:

      o     severance payments upon termination of employment;

      o     payments upon termination of employment in connection with certain
            change in control events affecting the Company;

      o     eligibility for annual bonuses;

      o     participation in the Company's (or Rex Energy's) health and medical
            benefit plans, pension, profit sharing and retirement plans and
            insurance made generally available to executive officers of the
            Company;

      o     fringe benefits made available to executive officers of the Company
            (or Rex Energy) from time to time; and

      o     long-term incentive or equity-based compensation awards having terms
            and conditions substantially similar to those made to other senior
            executive officers of the Company (or Rex Energy) and commensurate
            with awards normally granted to similarly situated executive
            officers of other public companies similar in size and nature to the
            Company.

      Following the Closing, it is anticipated that the six Rex Designees will
hold the positions with the Company as described below:

Name                            Age       Position
----                            ---       --------
Lance T. Shaner ............... 52        Chairman of the Board and Interim
                                          Chief Executive Officer

Benjamin W. Hulburt ........... 32        President and Director

Thomas F. Shields ............. 48        Chief Operating Officer and Director

Thomas C. Stabley ............. 35        Chief Financial Officer

Michael S. Carlson ............ 50        Senior Vice President of Operations

Christopher K. Hulburt ........ 35        Senior Vice President and General
                                          Counsel

      For additional information regarding Rex Energy and its historical
operations, see Item 6 "Management's Discussion and Analysis or Plan of
Operations."

      Following the Closing, it is expected that the Company will increase the
size of its Board of Directors to ten persons, consisting of (i) three designees
of Mr. Shaner (Lance T. Shaner, Thomas F. Shields, and Benjamin W. Hulburt),
(ii) three designees of Messrs. Gaines and Damson (Barrie Damson, Alan Gaines
and Richard d'Abo), (iii) three individuals mutually chosen by Messrs. Shaner,
Hulburt, Shields, Damson, Gaines and d'Abo and (iv) a tenth director to be added


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<PAGE>

shortly before, or following the closing. The three individuals described in
clause (iii) of the previous sentence will be required to qualify as
"independent directors" for purposes of the Sarbanes-Oxley Act of 2002. Pursuant
to the Purchase Agreement, as soon as practicable following the Closing, it is
contemplated that the Company will change its name to Rex Energy Corporation.
The Purchase Agreement further provides that following the Closing, the Company
will (i) relocate its headquarters to State College, Pennsylvania and (ii) amend
its Bylaws to provide that the headquarters of the Company will remain in State
College, Pennsylvania for a minimum of five years, unless decided otherwise by
an affirmative vote of not less than 75% of the members of the entire Board of
Directors of the Company at such time. See Item 2. "Description of Property."

      Upon completion of the Closing, a change in control of the Company will be
deemed to have occurred.

Employees

      We do not have any employees other than our four officers. See Item 6
"Management's Discussion and Analysis or Plan of Operations".

Risk Factors

      The reader should carefully consider each of the risks described below. If
any of the following risks develop into actual events, our business, financial
condition or results of operations could be materially adversely affected and
the trading price of our common stock could decline significantly.

Risks Relating to the Proposed Rex Energy Asset Acquisition Transaction

A failure to complete the Rex Energy asset acquisition transaction could
negatively impact our future business prospects and our future financial
condition and results of operations. Such a failure would also likely adversely
affect the price for our common stock. If an asset acquisition transaction with
Rex Energy is completed, it may be on terms different than those described
herein. In addition, if completed, we may not realize the anticipated benefits
of the proposed transaction or be successful in integrating the operations,
personnel or technology of Rex Energy.

      Although we and the Rex Sellers have entered into a binding Purchase
Agreement for the proposed asset acquisition, the completion of the transactions
contemplated under the Purchase Agreement is subject to a number of conditions,
some of which may not be satisfied. There can be no assurance that the
transactions contemplated in the Purchase Agreement will be completed. If the
acquisition transaction is not completed, then we will be subject to several
risks, including the following:

      o     If the asset acquisition transaction is not completed, then we would
            own only passive equity interests in a joint venture and the
            prospects for the growth of our business and increasing our revenues
            would be impaired. Also, we would likely lose access to capital
            resources to finance our operations and expected growth. In this
            event, we would continue to face the risks that we currently face as
            a small, independent company owning limited assets.


                                       8
<PAGE>

      o     Certain costs relating to the asset acquisition transaction (such as
            legal, reserve engineering, accounting and financial advisory fees)
            will be payable by us whether or not the transaction is completed.

      o     The current market price of our common stock may reflect an
            assumption that the asset acquisition transaction will occur.
            Therefore, a failure to complete the transaction would likely result
            in a negative perception by the stock market of the Company
            generally and a resulting decline in the market price of our common
            stock.

      o     Pending the completion of the acquisition, there may be substantial
            disruption to the businesses of the Company and Rex Energy and a
            distraction of their respective management teams and employees from
            their day-to-day operations because matters related to the asset
            acquisition transaction and related financing transactions may
            require substantial commitments of time and resources.

      There can be no assurance that, if completed, the anticipated benefits of
the Rex Energy asset acquisition transaction will be realized or that our
integration of the operations, personnel and technology of Rex Energy will be
successful. The successful integration of Rex Energy's operations into our
organization will require the experience and expertise of certain managers and
key employees of Rex Energy, who are expected to be retained by us. However,
there can be no assurance that all of the Rex Energy managers and key employees
retained by us will remain with us in the future.

Upon completion of the asset acquisition transaction, the Rex Energy management
team will assume the executive leadership of our company. Very few of these
individuals have had experience managing a publicly-held corporation.

      The members of the current Rex Energy senior management team who will be
assuming the management of the Company following the asset acquisition
transaction have previously worked together and have a demonstrated track record
in managing a privately-held oil and natural gas exploration and production
company. However, together they have limited experience in managing a
publicly-held company. The ability of the Rex Energy management team to attract
and retain qualified personnel will have an important effect on the Company's
future growth and success.

Conflicts of interests for the Rex Energy management team will exist upon their
joining the Company, and conflicts of interest for certain members of the
present management exist, with regards to their obligations to the Company and
their obligations to businesses in which they continue to own interests and
manage, and which are not parties to the asset acquisition transaction.
Following the acquisition of the assets from Rex Energy, the Company will enter
into transactions with entities owned and controlled by Lance T. Shaner.

      Members of the Rex Energy management team are associated with Rex Energy
II Limited Partnership, as well as its sister partnership, Rex Energy II Alpha
Limited Partnership (collectively, the "Rex II partnerships). The Rex II
partnerships are Delaware limited partnerships engaged in oil and gas
exploration and development and other business activities similar to those to be
conducted by the Company. The assets of the Rex II partnerships are not included
in the sale of the Rex Assets to the Company. The general partner of the Rex II
partnerships is Rex Energy II LLC, a Delaware limited liability company which is
owned by certain persons on the Rex Energy management team namely, Lance T.
Shaner, Benjamin W. Hulburt, Thomas F. Shields, Michael S. Carlson, Thomas C.
Stabley, Christopher K. Hulburt, Andrew Joyner, and one other individual. Rex
Energy II LLC, as general partner, is responsible for the day-to-day management
of the partnerships. In addition, Lance T. Shaner, Benjamin W. Hulburt, Thomas
C. Stabley and Christopher K. Hulburt are limited partners of Rex Energy II
Limited Partnership.


                                       9
<PAGE>

      The operations of the Company may compete with those of the Rex II
partnerships. The conduct of certain activities may lead to conflicts of
interests when it is difficult to secure competent drillers, available drilling
equipment, other machinery and supplies. The Rex II partnerships may participate
with the Company in the development of the same properties and the drilling and
completion of wells on the same properties. The sharing of costs and revenues in
these activities may differ between the two entities and often result in
decisions being made that may appear to be more advantageous to the Rex II
partnerships than the Company. These financial interests of the Rex II
partnerships may be different from and conflict with the interests of the
Company in certain respects.

      Following the closing of the asset acquisition from Rex Energy, direct
conflicts of interests may arise in the future with respect to the same
individuals acting on behalf of the Company and the Rex II partnerships. While
the management of Rex Energy has informed the Company that the Rex II
partnerships have completed the asset acquisition phase of their development, it
is still possible that conflicts may arise with respect to opportunities which
come to the attention of the Rex Energy management team in the performance of
their duties for the Company and the Rex II partnerships. As of March 2006, the
Company does not have a written policy regarding procedures to handle these
potential conflicts with the Rex II partnerships, nor does it have a contractual
right of first refusal pertaining to opportunities that come to the attention of
the Rex Energy management team insofar as such opportunities may relate to the
Company's proposed business operations.

      As previously stated herein, Mr. Gaines is the Chairman and Chief
Executive Officer of Dune Energy, Inc. and his employment with Dune is governed
by an Employment Agreement dated as of May 12, 2005 (the "Gaines Employment
Agreement"). The Gaines Employment Agreement is currently scheduled to expire on
June 30, 2007. Pursuant to the terms of the Gaines Employment Agreement, Mr.
Gaines is required to devote substantially all of his business time and efforts
to the business of Dune. Furthermore, the Gaines Employment Agreement provides
that during its term and for one year thereafter, Mr. Gaines may not directly or
indirectly engage in any business involved in the exploration, drilling, or
production of natural gas or oil, within any area owned by the Welder family of
Victoria County, Texas. There can be no guarantee that Mr. Gaines will be able
to devote adequate time to the affairs of the Company given his fiduciary and
contractual obligations to Dune.

      Following the closing, the officers and directors of the Company will be
subject to the certain duties imposed on them under the Nevada law, including a
general requirement that certain opportunities within the scope of the Company's
proposed business operations which come to their attention may be considered
opportunities that should be made available to the Company and the companies
that they are affiliated with on an equal basis. A breach of this requirement
will be a breach of the fiduciary duties of the officer and director. If the
Company or any of the other companies with which that officer or director is
affiliated both desire to take advantage of an opportunity, then those officers
and directors would abstain from negotiating and voting upon the business
opportunity. Even in the event these procedures are followed, we cannot assure
you that conflicts of interests among the Company, its officers and directors,
the Rex II partnerships and Dune Energy will not develop.

      Following the closing of the asset acquisition from Rex Energy, Rex Energy
will continue to lease approximately 3,725 square feet of office space from
Shaner Brothers, LLC, a Pennsylvania limited liability company which is owned by
Lance T. Shaner and his brother, Fredrick J. Shaner ("Shaner Brothers"). This
office space is located at Rex Energy's current headquarters at 1965 Waddle
Road, State College, Pennsylvania. We expect that this office space will become
the headquarters of the Company following the Closing. We also expect to later
move our headquarters to a new office building currently being constructed by


                                       10
<PAGE>

Shaner Brothers. In addition, Rex Energy will continue to obtain certain
administrative services (such as human resources, tax services and payroll) from
Shaner Solutions Limited Partnership, a Delaware limited partnership controlled
by Lance Shaner ("Shaner Solutions").

      In the proposed transaction with Rex Energy and its affiliates, the
Company is acquiring all of the outstanding capital stock of Rex Energy.
Therefore, Rex Energy will become the Company's wholly-owned subsidiary. We
expect that, following the Closing, Rex Energy will continue to lease office
space from Shaner Brothers and obtain services from Shaner Solutions. Following
the Closing, Lance T. Shaner will become the Company's Chairman of the Board and
Interim Chief Executive Officer and a significant shareholder of the Company.
Mr. Shaner's ownership and association with Shaner Brothers, Shaner Solutions
and the Company could create a possible conflict of interest between the
interests of those entities and Mr. Shaner's duties and obligations to the
Company. For more information, see "Certain Relationships and Related Party
Transactions Following the Closing."

Following the closing of the asset acquisition transaction with Rex Energy,
Lance T. Shaner will continue to serve as an officer and director of several
other companies.

      If the closing of the asset acquisition transaction with Rex Energy
occurs, Lance T. Shaner will become the Company's Chairman and Interim Chief
Executive Officer. Following the Closing, Mr. Shaner will also continue to serve
as Chairman and Chief Executive officer of, among others, Shaner Hotel Group
Limited Partnership, a privately-held limited partnership engaged in the
ownership and management of hotel and lodging properties, Shaner Energy, Inc., a
privately-held heating oil company, and Shaner Solutions Limited Partnership, a
privately-held company engaged in the business of providing accounting, tax,
human resources, payroll and other administrative services. Mr. Shaner is also
the controlling owner of these entities. Mr. Shaner is required to devote his
time to the business and affairs of each of these entities, and his
responsibilities to these other entities may have the effect of diverting his
time and attention that he might have otherwise had available to devote solely
to the business and operations of the Company.

Our Purchase Agreement with the Rex Sellers requires us to assume certain
liabilities of the Rex Sellers. Following the Closing, our operations will be
subject to various litigation and administrative claims, which could have an
adverse effect on our business.

      Our Purchase Agreement with the Rex Sellers provides that the Company will
assume certain liabilities of the Rex Sellers, including (i) post-closing
obligations related to the day-to-day ownership and operation of the properties
to be transferred, (ii) both pre-closing and post-closing environmental
liabilities and personal injury and property damage liabilities incurred on or
with respect to those properties and (iii) all liabilities of the Rex Sellers
under contracts, leases and other agreements relating to the assets to be
transferred and conveyed by the Rex Sellers under the Purchase Agreement. The
Purchase Agreement also will require us to assume a number of contingent
liabilities of the Rex Sellers, including liabilities of the Rex Sellers as
defendants in various litigation matters and exposure to other legal claims. See
Item 3. "Legal Proceedings". The nature of our anticipated operations will
expose us to further possible litigation claims in the future.

      In addition, because we will purchase all of the outstanding capital stock
of PennTex Illinois, we will, in effect, be subject to certain liabilities,
expenses and costs of PennTex Illinois associated with the Tsar Litigation and
certain environmental complaints regarding H2S gas emissions. See "Description
of Business -- About Rex Energy & its Affiliated Companies -- Legal Proceedings
and Matters of PennTex Illinois." If, following the Closing, PennTex Illinois
should not be successful in the Tsar Litigation, or if substantial penalties,
damages or other monetary remedies are assessed against it, this could have a
material adverse effect on the results of operations, financial condition and
cash flows of PennTex Illinois, and, in turn, on the Company.


                                       11
<PAGE>

      There is a risk that any matter in litigation could be adversely decided
against us, regardless of our position in that litigation, which could have a
material adverse effect on our financial condition and results of operations.
Litigation is costly and the costs associated with defending litigation could
also have a material adverse effect on our financial condition.

Following the asset acquisition transaction with Rex Energy, current principals
and affiliates of Rex Energy will own a significant amount of our outstanding
common stock and will exercise significant control over us.

      As of March 1, 2006, Lance T. Shaner, Benjamin W. Hulburt, Thomas F.
Shields, Michael S. Carlson, Christopher K. Hulburt and Thomas C. Stabley
together beneficially owned approximately 29.9% of the outstanding shares of our
common stock. Following the March Offering, it is currently estimated that these
individuals and other Rex Energy affiliates would together beneficially own
approximately 34.1% of the outstanding shares of our common stock. As such
significant owners, these individuals and certain other Rex Energy affiliates
are in a position to significantly influence decisions with respect to:

      o     our direction and policies, including the election and removal of
            directors;

      o     mergers or other business combinations;

      o     the acquisition or disposition of assets;

      o     future issuances of our common stock or other securities;

      o     our incurrence of debt;

      o     the payment of dividends, if any, on our common stock; and

      o     amendments to our certificate of incorporation and bylaws.

      This concentration of ownership may also have the effect of delaying,
deferring or preventing a future change of control of the Company.

      In addition, the Purchase Agreement provides that following the Closing,
the Company will relocate its headquarters to State College, Pennsylvania and
will amend its Bylaws to provide that its headquarters will remain in State
College for a minimum of five years, unless decided otherwise by the affirmative
vote of not less than 75% of the total number of directors then serving on the
board.

Risks Relating to Our Business, the Business of Rex Energy and the Oil and
Natural Gas Industry.

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.

      Following the Rex Energy asset acquisition transaction, our development
activities will, in part, be concentrated in the 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.


                                       12
<PAGE>

      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.

      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.

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


                                       13
<PAGE>

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:

      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 and the Rex Energy entities account for their 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. Rex Energy evaluates 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.


                                       14
<PAGE>

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.

      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.

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


                                       15
<PAGE>

      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.

Our business may suffer if we lose key personnel.

      Our success will be dependent on our ability to continue to employ and
retain skilled technical personnel. Upon completion of the asset acquisition
transaction, our success will depend to a large extent on the services of
certain Rex Energy key management personnel who will join the Company, including
their current executive officers and other key employees, the loss of any of
whom could have a material adverse effect on our operations. Upon completion of
the transaction, we will enter into employment agreements with Lance T. Shaner,
Benjamin W. Hulburt, Thomas F. Shields, Michael S. Carlson, Christopher K.
Hulburt and Thomas C. Stabley. These employment agreements will contain terms
relating to severance, benefits and vacation. Each of the employment agreements
will provide for an initial term of three (3) years, except that the employment
agreement of Lance T. Shaner, who will be appointed the Company's interim Chief
Executive Officer at the Closing, will be for an initial term of one (1) year.
We do not, and likely will not, maintain key-man life insurance with respect to
any of our employees.


                                       16
<PAGE>

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

      It is anticipated that following the completion of the asset purchase
transaction, the Company will, from time to time, use derivative instruments to
hedge the impact of market fluctuations on crude oil and natural gas prices. To
the extent that the Company engages in hedging activities, it may be prevented
from realizing the benefits of price increases above the levels of the hedges.
In addition, the Company will be subject to risks associated with differences in
prices at different locations, particularly where transportation constraints
restrict the Company's ability to deliver oil and gas volumes to the delivery
point to which the hedging transaction is indexed.

      The Purchase Agreement with the Rex Sellers provides that substantially
all of the hedging arrangements of the Rex Sellers existing as of the date of
the Purchase Agreement with respect to the Rex Sellers' oil and natural gas
properties to be conveyed to the Company, and all future hedging arrangements
that the Rex Sellers may enter into with respect to those properties prior to
the Closing, must be terminated by the Rex Sellers at the Rex Sellers' sole cost
and expense on or before the Closing Date, unless their termination costs exceed
$6.0 million. See Item 6 "Management's Discussion and Analysis or Plan of
Operations - Proposed Acquisition of Rex Energy & its Affiliated Companies'
Assets - Commodity Price Hedging Strategy", below.

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 Rex
Energy asset acquisition transaction 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.


                                       17
<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 connection with the Rex Energy asset acquisition transaction and the
March Offering, we also plan to enter into a revolving line of credit with a
syndicate of commercial banks, led by Wachovia Securities and Manufacturer and
Traders Trust Company, and borrow approximately $33 million as part of the
purchase price for the Rex Assets. The closings of the March Offering and the
Rex Energy asset acquisition transaction are subject to our ability to secure
such a line of credit. The line of credit would be available for borrowings to
fund our working capital requirements and capital requirements, and would be
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.


                                       18
<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.


                                       19
<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.

      In addition, PennTex Illinois has received several complaints from
residents in Lawrence County, Illinois regarding odors and corrosion damages
they allege are caused by hydrogen sulfide (H2S) gas emissions from a nearby
storage facility and from oil production wells. The complaints have been
investigated by the United States Environmental Protection Agency and the
Illinois Environmental Protection Agency. If the closing of the Rex Assets
occurs, the Company will acquire all of the outstanding capital stock of PennTex
Illinois and it will become a wholly-owned subsidiary of the Company, and
therefore, the results of these complaints and investigations may have a
material adverse effect on the Company's results of operations, financial
condition and cash flows. See Part II, Item 3 below.

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


                                       20
<PAGE>

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.

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 the date hereof, the Company has issued 40,521,068 shares of common stock. In
addition, we have outstanding options, warrants and convertible promissory notes
to purchase up to an additional 21,691,590 shares of the Company's common stock.
Of this amount, 7,788,500 shares underlying options granted to Messrs. Gaines
and Damson are subject to cancellation in certain events as set forth in "The
Rex Energy and New Albany Transactions." Issuance of additional shares of common
stock (including those to be issued in the March Offering and those to be issued
as consideration for our purchase of the New Albany Membership Interest) 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.


                                       21
<PAGE>

If we, or our stockholders holding registration rights, sell additional shares
of our common stock, the market price of our common stock could decline.

      The market price of our common stock could decline as a result of sales of
a large number of shares of common stock in the market after the March Offering,
or the perception that such sales could occur. These sales, or the possibility
that these sales may occur, could make it more difficult for us to sell equity
securities in the future at a time and at a price that we deem appropriate.

      Approximately 30,000,000 of our shares of common stock (including shares
of common stock underlying securities that may be converted into shares of
common stock) are currently subject to registration rights held by certain of
our stockholders, which include the right to require us to register the sale of
their shares or the right to include their shares in secondary public offerings
we undertake in the future. Following the completion of the March Offering, we
estimate that holders of approximately 22 million additional shares will also
have registration rights, which shares may be resold under a registration
statement that we will file. We also may enter into additional registration
rights agreements in the future in connection with any subsequent acquisitions
we may undertake. Any sales of our common stock under these registration rights
arrangements with these stockholders could be negatively perceived in the
trading markets and negatively affect the price of our common stock. Sales of a
substantial number of our shares of common stock in the public market under
these arrangements, or the expectation of such sales, could cause the market
price of our common stock to decline, even precipitously. Our current market
float is very limited and our stock is thinly traded, which may tend to
aggravate the downward pressures on our stock price.

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. We also estimate that up
to 2,000,000 additional shares of common stock that are currently restricted as
to transfers, will be capable of being resold under Rule 144 in April 2006.

      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.

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


                                       22
<PAGE>

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.

      Presently, our corporate office is located at 20022 Creek Farm, San
Antonio, Texas 78259.

      Following the Closing of the acquisition of the assets from Rex Energy and
the other Rex Sellers, we expect that Rex Energy will continue to lease
approximately 3,725 square feet of office space from Shaner Brothers. This
office space is located at Rex Energy's current headquarters at 1965 Waddle
Road, State College, Pennsylvania. We expect this office space will become the
headquarters of the Company following the Closing. This office space is
currently leased by Rex Energy pursuant to an oral month-to-month agreement with
Shaner Brothers at a monthly rental rate of $5,000 per month. The Company
believes that the terms of this lease are comparable to terms that could be
obtained at an arm's length basis in the State College, Pennsylvania area for
similar leases for similar space.

      Following the Closing, the Company will move its headquarters to 1975
Waddle Road, State College, Pennsylvania upon the completion of the construction
of a new office building at that location. It is expected that construction of
the building will be completed during or before August 2006. The building will
be approximately 5,270 square feet and will be owned by Shaner Brothers. Rex
Energy intends to negotiate a written lease agreement with Shaner Brothers for
the new office space before the Closing of the acquisition of the assets of Rex
Energy occurs. Rex Energy has informed the Company that it believes that the
lease agreement with Shaner Brothers will provide for rental payments in the
amount of approximately $8,000 per month and will be for an initial term of up
to three (3) years. The Company believes that the terms of the proposed lease
agreement with Shaner Brothers for the new office space are comparable to terms
that could be obtained at an arm's length basis in the State College,
Pennsylvania area for similar leases for similar space. There can be no
assurance that the final terms of the new lease agreement will be the same terms
as described above when the written lease agreement is negotiated and actually
entered into by Rex Energy and Shaner Brothers.

      As of December 31, 2005, we had only an indirect contractual right
(pursuant to our interest in the LLC), for the LLC to acquire interests in oil
and gas leases and other rights from Aurora Energy Ltd., in the New Albany Shale
area in Indiana. Therefore, we did not own any interests in any oil and gas
properties at that time. As of February 1, 2006, the date the LLC acquired the
oil and gas leases and other properties from Aurora, the LLC owned interests in
80,000 gross undeveloped acres. We own 50% of the membership interests in the
LLC.

      We expect that following Closing and for the remainder of 2006, a
significant part of our development activities will be concentrated in the New
Albany Shale area of southern Indiana.

      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,


                                       23
<PAGE>

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.

Item 3. Legal Proceedings.

      The Company is not currently subject to any litigation. We will be
acquiring, as part of the Rex Assets, 100% of the outstanding shares of common
stock of PennTex Illinois, which is involved in the following litigation and
legal proceedings:

      Lawsuit with Tsar Energy II, LLC. PennTex Illinois is currently involved
in an ongoing lawsuit with Tsar Energy II, LLC ("Tsar") and Richard A. Cheatham
in the 334th Judicial District Court of Harris County, Texas. The dispute
centers around overhead fees charged by PennTex Illinois as operator of certain
jointly-owned oil producing properties located in Illinois and Indiana.
Currently, PennTex Illinois owns a 26% working interest, as operator, and Tsar
owns a 49% non-operator working interest in the subject properties. In addition,
PennTex Resources, a Rex Seller in the proposed acquisition of the Rex Assets,
owns a 25% non-operator working interest in the subject properties, but it is
not a party to this lawsuit. Lance T. Shaner, a Rex Seller in the proposed
acquisition, purchased all of the outstanding capital stock of PennTex Illinois
in January 2005. The events leading to this lawsuit occurred prior to Mr.
Shaner's acquisition of the stock of PennTex Illinois.

      PennTex Illinois (then known as ERG Illinois, Inc.) and its former owner,
Scott Y. Wood ("Wood"), commenced this litigation in July 2004, by filing a
petition against Tsar and its president, Richard M. Cheatham, seeking, among
other things, a declaratory judgment that PennTex Illinois, as the operator of
the subject properties, is entitled to charge Tsar and the other non-operators
their proportionate shares of a fixed monthly overhead charge of $300 for each
producing well located within the North Lawrence Unit portion of the properties
pursuant to the terms of that certain North Lawrence Unit Operating Agreement
(the "NLU Agreement"). The NLU Agreement is adopted by reference into a joint
operating agreement that was executed by PennTex Illinois, PennTex Resources,
and Tsar in April 2004 (the "Joint Operating Agreement").

      Tsar has filed a counterclaim against PennTex Illinois asserting breach of
contract and declaratory judgment claims. Tsar is seeking an unspecified amount
of actual damages along with declaratory relief based on its allegations that
PennTex Illinois breached both the Joint Operating Agreement and a March 2004
letter of intent that preceded it by charging Tsar its proportionate share of a
fixed monthly overhead charge of $300 for each producing well located in the
North Lawrence Unit portion of the subject properties. Tsar has also filed a
breach of contract claim against PennTex Illinois seeking $100,000 in actual
damages based on Tsar's allegation that PennTex Illinois breached a verbal
agreement between the parties ("Tsar's $100,000.00 Contract Claim"). Tsar
alleges that this verbal agreement provided that PennTex Illinois and Tsar would


                                       24
<PAGE>

each pay one-half of a $200,000 extension fee that had been previously imposed
on PennTex Illinois in connection with a short delay that occurred in connection
with the acquisition of the stock of PennTex Illinois from its prior owners in
March of 2004. Tsar paid PennTex Illinois one-half of the $200,000 extension
fee, but when Tsar declined to pay the remaining balance, PennTex Illinois (then
owned by Wood) netted that sum out of Tsar's share of the March 2004 production
revenues.

      Tsar has also asserted two tort counterclaims against PennTex Illinois.
The first tort counterclaim ("Tsar's Fraud In The Inducement Claim") seeks an
unspecified amount of actual and punitive damages based on Tsar's assertion that
PennTex Illinois was guilty of fraud in the inducement in connection with Tsar's
acquisition on March 16, 2004 of its 49% non-operating working interest in the
subject properties by allegedly making false representations prior to and in the
letter of intent executed by PennTex Illinois and Tsar; Tsar alleges that
PennTex Illinois represented that it would charge only the "actual costs of
operations" to the joint account. Tsar's second tort counterclaim ("Tsar's
$100,000 Conversion Claim") seeks actual damages of $100,000 plus an unspecified
amount of punitive damages based on Tsar's allegations that PennTex Illinois'
netting out of the sum of $100,000 from what PennTex had distributed to Tsar as
its share of the March 2004 production revenues, constituted a willful
conversion of Tsar's property. Tsar's $100,000 Contract Claim and Tsar's
$100,000 Conversion Claim are referred to herein collectively as the "Tsar's
Extension Fee Claims."

      On December 22, 2005, PennTex Illinois filed motions for summary judgment
asking the court to rule in its favor on the principal contract claims at issue,
and in its favor with respect to all of the tort counterclaims that have been
asserted against it by Tsar. By order signed February 8, 2006, the court granted
PennTex Illinois' motion for summary judgment sustaining its right to charge the
non-operators of the subject properties their proportionate shares of a fixed
monthly overhead charge of $300 for each producing well located within the North
Lawrence Unit. This ruling has the effect of granting summary declaratory relief
sustaining PennTex Illinois' declaratory judgment claim against Tsar and Mr.
Cheatham, and dismissing Tsar's counterclaim seeking declaratory relief and
breach of contract damages in connection with its claims that PennTex Illinois
did not have a contractual right to impose the fixed monthly overhead charge of
$300. By the same order, the court denied PennTex Illinois' motions for summary
judgment seeking dismissal of Tsar's fraud in the inducement and conversion
counterclaims.

      On March 3, 2006, PennTex Illinois and Tsar responded to the court's
issuance of its summary judgment ruling described above by jointly moving to
sever into a separate action the claims and counterclaims relating to PennTex
Illinois' charging of fixed monthly overhead on producing wells in the North
Lawrence Unit so that the court will be able to sign a final, appealable
judgment in PennTex Illinois' favor on the issues resolved by the court's
summary judgment ruling. The court granted this joint motion on March 3, 2006.
On March 7, 2006, the parties filed in the severed action an agreed form of
proposed final judgment incorporating the summary judgment ruling favorable to
PennTex Illinois. While PennTex Illinois believes that the court will sign this
final judgment, there can be no assurance that the court will do so. Tsar is
expected to appeal this final judgment.

      As a result of the summary judgment rulings and severance described above,
the original, non-severed action now consists solely of Wood's tortious
interference claims against Tsar and Mr. Cheatham, and Tsar's Fraud In The
Inducement Claim and Tsar's Extension Fee Claims against PennTex Illinois.
PennTex Illinois and Tsar have agreed to move to abate all further proceedings
in the non-severed action pending the outcome of all appeals taken from the
judgment favorable to PennTex Illinois in the severed action. PennTex Illinois
and Tsar have also agreed that in the event that PennTex Illinois prevails in
the appeals in the severed action, Tsar will dismiss and release Tsar's Fraud In
The Inducement Claim against PennTex Illinois, and will allow PennTex Illinois
to obtain a release and dismissal of Tsar's Extension Fee Claims upon payment of
$100,000, plus pre-judgment interest. On March 17, 2006, the court reset the
trial date for the non-served action to the two week period beginning on
September 25, 2006.


                                       25
<PAGE>

      The Company understands that PennTex Illinois intends to vigorously
prosecute the severed action until all appeals have been exhausted. PennTex
Illinois believes that the non-severed action, in which all discovery has been
completed, will be abated (and the trial date reset) pending completion of all
appeals in the severed action; however, there can be no assurances that this
will occur. In the event that the non-severed action is ever revived, the
Company understands that PennTex Illinois currently intends to vigorously defend
the claims that have been asserted against it in that action.

      In addition to the proceedings in the lawsuit described above, PennTex
Illinois was served on February 1, 2006 with a draft audit report prepared by an
outside auditor retained by Tsar to audit the charges that had been made to the
joint account by PennTex Illinois as operator of the subject properties. The
time period covered by this audit report is March 1, 2004, through June 30,
2005. The audit report purports to identify potential audit exception claims
totaling $17,269,955.92 in "gross," plus additional unspecified amounts "to be
determined." However, the audit report identifies only $334,179.89 of audit
exception claims that are "net to Tsar," and of this amount $100,000 is
attributable to the Tsar's Extension Fee Claims described above. In addition,
$2,510,853 of the "gross" amount of the audit exception claims described in the
audit report is attributable to the fixed monthly overhead charges of $300 per
producing well in the North Lawrence Unit portion of the subject properties that
was upheld as a matter of law by the court's summary judgment ruling rendered on
February 8, 2006.

      The underlying issues relating to the appropriateness of the charges that
have been made to the joint account for the subject properties that are
discussed in the audit report have previously been made the subject of one of
Tsar's breach of contract counterclaims in the lawsuit described above. Tsar
filed a formal non-suit without prejudice to the re-filing of its breach of
contract counterclaim that had sought to recover damages if an accounting of the
charges to the joint account revealed that they were inaccurate. Tsar's non-suit
papers stated that it was "premature" for Tsar to continue to litigate those
claims in light of Tsar having invoked its contractual rights under a joint
operating agreement to audit the jointly-owned properties, and the contractual
audit process would likely not be completed prior to 180 days after Tsar's
service on PennTex Illinois of its audit report and audit exception claims.

      The Company understands that PennTex Illinois intends to complete the
contractually-required audit resolution process as it relates to all of Tsar's
audit exception claims identified in the audit report, and will grant or deny
those claims based on their perceived merit or lack thereof. In addition, the
Company has been informed that the preliminary reaction of PennTex Illinois to
Tsar's audit report is that most of the audit exception claims discussed therein
are without merit, and will be vigorously defended if they are ever made the
basis of future litigation.

      If the Closing of the Rex Assets occurs, the Company will acquire all of
the outstanding capital stock of PennTex Illinois from Mr. Shaner and PennTex
Illinois will become a wholly-owned subsidiary of the Company. If, following the
Closing, PennTex Illinois should not be successful in the appeal of the severed
action or in the proceedings in the non-severed action, or if substantial
penalties, damages or other monetary remedies are assessed against it, this
could have a material adverse effect on the results of operations, financial
condition and cash flows of PennTex Illinois, and, by implication, on the
Company.

      Hydrogen Sulfide Gas Emission Complaints

      Beginning in 2002, a predecessor of PennTex Illinois (known as Plains
Illinois, Inc.) received complaints from two residents located near its Newell
Production Facility 15 in Lawrence County, Illinois concerning odors emanating
from an intermittently used emergency pit at the facility. The complainants


                                       26
<PAGE>

alleged that the odors were caused by hydrogen sulfide (H2S) gas, a colorless
gas with a distinctive "rotten egg" odor. H2S is produced from a variety of
sources, such as wastewater treatment plants, agricultural operations, paper
mills, manufacturing processes and oil and gas development. The complainants
alleged that H2S gas emissions from the Newell facility also caused corrosion
damages to HVAC systems and other personal property at each of their residences.
Each complainant requested compensation for the repair or replacement of
personal items located at their residences they alleged were damaged by H2S gas
emissions from the Newell Facility.

      In March 2004, ERG Illinois, Inc., a Delaware corporation, acquired the
outstanding capital stock of Plains Illinois, Inc., and thereafter, merged
Plains Illinois, Inc. into itself through a parent/subsidiary merger. In April
2004, the company received additional complaints from the same two complainants
concerning odor and corrosion damages they alleged were caused by H2S emissions
from the Newell Facility. In August 2004, the complainants filed complaints
regarding the H2S emissions with the Illinois Environmental Protection Agency
(the "Illinois EPA"), the Illinois Attorney General's office and the United
States Environmental Protection Agency (the "EPA"). The Illinois EPA conducted
site visits to the Newell Facility on two occasions in the summer of 2004.

      On October 7, 2004, ERG Illinois, Inc. received a Violation Notice dated
October 6, 2004 pursuant to Section 31(a)(1) of the Illinois Environmental
Protection Act from the Illinois EPA regarding odors allegedly emanating from
the Newell Facility emergency pit or in the general vicinity of the emergency
pit. On December 6, 2004, representatives of the company met with the Illinois
Environmental Protection Agency personnel to review and discuss the Violation
Notice. On December 16, 2004, the company received a letter entitled "Request to
Provide Information Pursuant to the Clean Air Act" from the EPA. The EPA
requested certain information necessary to determine whether the Newell Facility
was complying with the Illinois State Implementation Plan and the Clean Air Act.
On December 27, 2004, the company submitted to the Illinois EPA a proposed
Compliance Commitment Agreement ("CCA") in response to the Violation Notice
issued by the Illinois EPA on October 6, 2004 that denied the alleged violations
but proposed to periodically clean the emergency pit. On January 26, 2005, the
Illinois EPA provided a letter to the company indicating that the submitted CCA
had been accepted, thus resolving the Violation Notice.

      On January 12, 2005, Lance T. Shaner acquired the outstanding capital
stock of ERG Illinois, Inc. and changed the company's name to PennTex Illinois.
On January 26, 2005, representatives of the company appeared at the request of
the Bridgeport, Illinois City Council at the City Council meeting. Three
residents of the City of Bridgeport also spoke at the City Council Meeting to
voice complaints regarding their claims of odor and corrosion issues they
alleged were cause by H2S emissions from PennTex Illinois' facilities. On
January 28, 2005, PennTex Illinois submitted to the EPA a Clean Air Act
Information Request Response. On the same date, PennTex Illinois installed H2S
scavenger drums and flares on four wells near the complainant's residences.

      On February 9, 2005, the EPA requested certain additional data from
PennTex Illinois regarding the quantity of H2S emissions from various sources at
the Newell Facility and the wells in and around Bridgeport, Illinois. In March
2005, PennTex Illinois engaged ELM Consulting LLC to prepare a Preliminary
Action Plan ("PAP") designed to identify and analyze emissions from PennTex
Illinois' operations and to propose recommendations to address any identified
concerns. A report of ELM Consulting entitled "PAP/Odor Investigation Results"
with recommendations and a cover letter was sent to the EPA on July 18, 2005
(the "ELM Report"). The ELM Report concluded that, for all wells monitored,
PennTex Illinois was in compliance with 62 Ill. Adm. Code 240.600 - Well
Construction, Operating and Reporting Requirements for Production Wells. The ELM
Report stated that this rule requires that concentrations of H2S shall not be
greater than 20 parts per million at or within a radial distance of 5 feet from


                                       27
<PAGE>

any oil production well. The ELM Report also stated that the information
gathered during the odor investigation indicated the company's compliance with
all known federal, state and local rules and regulations in regard to H2S
emissions and exposures. The ELM Report recommended that additional H2S
controls, such as scavenger drums, be taken with respect to two of the monitored
wells. The ELM Report stated that high and low instrument data in the vicinity
of the Newell Facility indicated average H2S concentrations and that no
additional operational controls or modifications appeared to be necessary or
feasible to further reduce H2S concentrations in the vicinity of the Newell
Facility. The ELM Report stated that the low level instrument data indicated
that average H2S concentrations in the vicinity of the complainants' residences
were low. The ELM Report stated that H2S concentrations in the vicinity of the
complainants' residences did not appear to be directly correlated with recorded
H2S levels at nearby wells or the Newell Facility.

      On August 17, 2005, PennTex Illinois received a letter from another
resident of Bridgeport, Illinois seeking $16,656 for damages allegedly caused as
a result of H2S emissions from the Newell Facility and nearby wells. By letter
dated September 9, 2005, the company denied any responsibility for the claimed
damages, citing the ELM Report. On September 9, 2005, PennTex Illinois sent a
copy of the ELM Report to the Mayor of the City of Bridgeport following his
request for additional information regarding alleged H2S emissions. On December
20, 2005, the Illinois EPA contacted PennTex Illinois by telephone regarding the
status of its efforts to clean the Newell Facility emergency pit. The company
sent to the Illinois EPA copies of invoices and pictures documenting that
efforts had been made to clean the emergency pit in accordance with the
recommendations made by ELM Consulting.

      On March 13, 2006, PennTex Illinois received an additional information
request from EPA related to odor complaints. The EPA has requested additional
information relating to, among other matters, the company's installation of
flares to control H2S emissions. The letter from the EPA requested a response
from PennTex Illinois within 14 days of receipt of the letter. On March 27,
2005, PennTex Illinois submitted a written response to the EPA and provided
available documents and data requested in the March 13, 2006 information
request. Management of PennTex Illinois has informed the Company that it intends
to continue to cooperate with the EPA in responding to any additional
information requests and concerns. PennTex Illinois intends to continue to
vigorously defend any claims of property damage alleged to be caused by H2S
emissions that may be asserted against it by local residents in Lawrence County,
Illinois.

If the Closing of the Rex Assets occurs, the Company will acquire all of the
outstanding capital stock of PennTex Illinois and that company will become its
wholly-owned subsidiary. Following the Closing of the Rex Assets, the Illinois
EPA, the EPA or other government agencies may determine that additional
investigations or remedial actions relating to the H2S emission complaints are
warranted. If this occurs, PennTex Illinois may incur additional costs and
expenses responding to those inquiries. In addition, if violations of
environmental laws are later found to exist as a result of those investigations,
penalties and fines may be imposed and the Company may incur additional
remediation costs.

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

      On December 13, 2005, shareholders holding 12,581,500 shares
(approximately 62.1%) of the 20,270,000 shares of our common stock outstanding
as of such date consented in writing, without a meeting, to change our Company's
name from College Oak Investments, Inc. to Baseline Oil & Gas Corp. and to amend
and restate our Articles of Incorporation, with the only modification to such
Articles of Incorporation being the name change. On or about December 27, 2005,
we mailed to our shareholders an information statement on Schedule 14C with
respect to those matters and, on January 17, 2006, we filed amended and restated
Articles of Incorporation with the State of Nevada.


                                       28
<PAGE>

                                     PART II

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

      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 prices set forth below reflect the quarterly
high and low sale information for shares of our common stock during the period
since the common stock began trading. These quotations reflect inter-dealer
prices, without retail markup, markdown or commission, and may not represent
actual transactions. There were no trades of our securities on the OTC Bulletin
Board prior to March 3, 2005.

2005 Quarter Ended                    High Price                       Low 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 March 14, 2006, there were approximately 127 holders of record of
our common stock.

      Our common stock is covered by an 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.

      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. The terms of the proposed revolving line of credit facility that we
are seeking to obtain will also contain provisions prohibiting us from paying
dividends on our common stock. See Item 6. "Management's Discussion and Analysis
or Plan of Operations."

      No equity securities of the Company were purchased by the Company or any
"affiliated purchaser" of the Company during 2005.

      We have outstanding as of March 15, 2006, stock options to purchase
13,675,000 shares of common stock (of which 7,788,500 will be canceled upon the
Closing of the Rex Assets purchase transaction), warrants to purchase 734,090
shares of common stock and notes convertible into 7,282,500 shares of common
stock.


                                       29
<PAGE>

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

      Plan of Operations. We have not had any revenues from operations since we
commenced business in June 2004. See Item 7 "Financial Statements." Accordingly,
the information provided in this Item 6 is a plan of operation pursuant to
Regulation S-B Item 303(a) promulgated by the SEC.

      The merger transaction with Coastal in April 2005 resulted in the Coastal
stockholders controlling approximately 89% of our issued and outstanding shares
of common stock immediately following its completion. Consequently, the
transaction was accounted for as a reverse merger with Coastal being deemed the
acquiring entity for financial accounting purposes. Since the transaction
involved the merger of a private company (Coastal) into a public shell company,
it was considered to be a capital transaction rather than a purchase business
combination for financial accounting purposes. Thus, for financial accounting
and reporting purposes, the historical financial statements of the Company prior
to the effective date of the Coastal merger have been restated to be those of
Coastal.

      As discussed in Item 1 "Business" of Part I of this Form 10-KSB, we
presently hold a 50% economic/voting membership interest in New Albany-Indiana
LLC, which holds working interests in leases covering approximately 101,000
acres in the New Albany Shale area of the Illinois Basin located in Southern
Indiana. These properties were acquired by the LLC from (i) Aurora Energy in
February 2006 and (ii) Source Rock Resources Inc. in March 2006. We anticipate
that, subject to rig availability, the LLC will commence drilling an initial
10-well pilot program during the second quarter of 2006. The anticipated cost to
the LLC of the pilot program is estimated to be $4.6 million. With respect to
the properties acquired from Source Rock Resources, we anticipate that the LLC
will commence drilling these properties by December 2006.

      Under our Purchase Agreement with Rex Energy and its affiliates, we will
acquire the Rex Energy assets for a consideration of approximately $73.2 million
in cash, subject to adjustment. The Purchase Agreement anticipates our acquiring
the New Albany Membership Interest in exchange for shares of our common stock
that we will issue to certain affiliates of Rex Energy. We estimate that the
number of shares we would issue if the transactions under the Purchase Agreement
were completed on March 15, 2006, is a total of 5,151,818 shares. See Item 1.
"Description of Business."

      Upon the completion of the transactions contemplated under the Purchase
Agreement, we will experience a change of control of our Company, and Messrs.
Shaner, Shields, Carlson, Stabley and Benjamin and Christopher Hulburt will
become our officers.

      Rex Energy currently has approximately 85 employees and we expect that
substantially all of them will become our employees when we complete the assets
purchase from Rex Energy and its affiliates.

      Capital Resources. During 2005, we raised funds by issuances of our debt
and equity securities to pay current expenses and funds for our proposed
operations. See Item 1. "Description of Business" and Item 7. "Financial
Statements" - Notes 3 and 4 of Notes to Audited Financial Statements of Baseline
Oil and Gas Corp.

      In February 2006, we completed the sale of 8,181,818 shares of our common
stock at a price of $1.10 per share in privately-negotiated transactions with
accredited investors, raising $9.0 million in gross proceeds. We also entered
into a registration rights agreement with the purchasers whereby we agreed to
use our best efforts to file a registration statement covering re-sales of the
shares acquired in that offering within 60 days of its closing. C. K. Cooper &


                                       30
<PAGE>

Company and Gilford Securities, Incorporated acted as placement agents for the
private sale. Because it is now unlikely that the registration statement will be
filed on or before April 2, 2006 (the 60th day following the closing of the
February private placement), the Company will be required, at its sole election,
(i) to issue to holders of such common stock additional shares having a market
value equal to $90,000 (1% of the $9 million raised) or (ii) $90,000 cash, for
each 30 day period until filed.

      The $8,185,000 in net proceeds raised by the Company in the February
Placement was applied, or will be applied, as follows:

      o     $3,500,000 was applied to pay our share of the costs to fund the
            LLC's purchase price obligations under the Aurora Agreement;

      o     $367,500 was applied to pay our share of the costs to fund the LLC's
            purchase price for the Source Rock purchase described in Item 1
            "Description of Business"; and

      o     $4,317,500 will be applied for our working capital purposes.

      The Company is in the process of seeking funding to complete the asset
acquisition transactions under the Purchase Agreement. It is proposing to (i)
seek approximately $39.4 million from privately-negotiated sales of its common
stock and (ii) obtain a new secured revolving line of credit and borrow up to
approximately $35.0 million, to pay the $73.2 million cash purchase price under
the Purchase Agreement, and have approximately $1.25 million in cash to be
applied to our working capital.

      As of March 23, 2006, we received a commitment from Wachovia Capital
Markets, LLC, as sole underwriter and joint lead arranger, to provide our
company, along with M&T Bank as joint lead arranger, with a senior secured
revolving credit facility, subject to the execution of definitive loan
documentation and to the satisfaction of various terms and conditions. The
maximum debt that may be borrowed and outstanding under the credit facility will
be the lesser of $150.0 million or a borrowing base amount as determined from
time to time. The credit facility would mature on the date that is five years
from the date of the closing of the initial borrowing transaction. Initial
(borrowing base) availability under the credit facility is anticipated to be
$41.0 million. We intend to finance the cash purchase price for the Rex Assets
under the Purchase Agreement through a combination of borrowings under the
credit facility as well as through the private sale of our common stock. There
can be no assurances that we will be successful in our efforts to raise the
necessary capital to permit us to purchase the Rex Energy assets.

      As collateral, we would pledge all of our personal property assets,
including the stock of our wholly-owned direct or indirect subsidiaries,
accounts receivable, inventory, contract rights and general intangibles along
with first priority mortgages on at least 80% of the aggregate value of our oil
and gas properties. We would be required to maintain a ratio of current assets
to current liabilities of not less than 1.0 to 1.0 at the end of any quarter and
our total consolidated indebtedness divided by our EBITDA must not be more than
3.50 to 1.00. The credit agreement would restrict us from, among other things,
paying dividends on our common stock, incurring liens, amending our
organizational agreements, selling significant assets, acquiring other
businesses and merging with other entities without the consent of the lenders.

      The credit agreement will also provide that the borrowing base may be
reduced if we fail to enter into certain hedge agreements with the lenders.
Usual and customary events of default will be applicable to us under the credit
agreement, including events such as a change of control. Also, one of the
negative covenants would require us to subordinate the debt of our outstanding
convertible notes to that of the credit facility. The commitment letter does not
constitute a binding agreement on the part of any lender to advance any sums to
us and the terms and conditions are subject to change until a binding agreement
is executed.


                                       31
<PAGE>

      Assuming the Rex Energy asset acquisition transaction is completed, we
currently believe, based upon our forecasts and our liquidity and capital
requirements for the near-term future, that the combination of our projected
internally-generated cash, the borrowings under our secured revolving line of
credit and our working capital, will be adequate to meet our anticipated capital
and liquidity requirements for the next twelve months.

      In the event that we do not purchase the assets from Rex Energy and its
affiliates, we believe that we would have sufficient capital to satisfy our cash
requirements over the next twelve months. However, assuming in that instance
that proceeds from the private sale of our common stock would not be obtained,
our activities would be significantly curtailed from what is planned, and our
sources for liquidity and capital resources in that event would not be known.

Proposed Acquisition of Rex Energy & its Affiliated Companies' Assets

      Cautionary Note: While the Company currently proposes to purchase all of
the assets (and in the case of Rex Energy and PennTex Illinois, all of its
outstanding capital stock), and assume certain liabilities of Rex Energy and its
affiliates, and has an agreement in effect to do so, no assurances can be made
that the actual purchase transaction involving Rex Energy and its affiliates
will occur, or if so, whether on the same terms and conditions as described in
this document. See Item 1. "Description of Business --- "Risk Factors ---Risks
Related to the Proposed Rex Energy Asset Acquisition Transaction." The term "Rex
Energy" when used in the following discussion refers to Rex Energy and its
affiliated entities, except where the context otherwise requires.

      Rex Energy is a private, independent energy company that is focused on
acquiring, finding and developing conventional and unconventional sources of
energy in the United States. Rex Energy pursues a diversified strategy of
acquiring and developing lower risk energy resources, including fractured shale
gas, coalmine methane gas, conventional natural gas, secondary and tertiary
recovery projects, as well as exploring for onshore oil and gas. Rex Energy
currently has oil and gas production in Pennsylvania, West Virginia, Indiana,
Illinois, Texas, Virginia, Kentucky and New Mexico. Rex Energy's management team
has managed a series of oil and gas investment partnerships since 1997. Rex
Energy is headquartered in State College, Pennsylvania with operating offices in
Pittsburgh, Pennsylvania (Appalachian Basin); Midland, Texas (Permian Basin);
and Bridgeport, Illinois (Illinois Basin). Rex Energy currently has a total of
85 employees located in offices in each of the basins in which it operates,


                                       32
<PAGE>

providing Rex Energy with market presence in those areas necessary to operate
its properties and to provide for acquisition and growth opportunities. Since
1997, the management team of Rex Energy has maintained a consistent investment
philosophy of identifying and acquiring under-performing oil and gas wells with
significant upside potential. As a result it has acquired and developed over
2,500 oil and gas wells, growing its proved reserve asset base to 6.68 Million
Barrels of Oil Equivalent, as of December 31, 2005.

<TABLE>
<S>                                         <C>                                   <C>
                                             ---------------------------
               |---------------------------- State College, Pennsylvania -----------------------
               |                               Rex Energy Headquarters                          |
               |                             ------------|--------------                        |
               |                                         |                                      |
              \/                                        \/                                     \/
---------------------------------           ------------------------------        --------------------------------
      Bridgeport Illinois                      Pittsburgh, Pennsylvanic                   Midland, Texas
Illinois Basin Operations Offices           Appalachian Operations Offices        Permian Basic Operations Offices
---------------------------------           ------------------------------        --------------------------------
</TABLE>

      Growth Strategy. Rex Energy expects to continue to acquire oil and gas
assets for their potential for further development. In realizing this potential,
Rex Energy will invest capital in the continued development of properties after
they are acquired, which will include projects such as: 1) surface facility work
such as installing compressors; repairing or replacing valves and flow lines;
building gathering systems; installing or replacing artificial lift equipment;
2) subsurface work in existing well bores such as cleanouts; treatment for salt,
scale, or paraffin; installing, repairing or replacing subsurface production
equipment; working over existing zones; recompleting to uphole behind-pipe
intervals; drilling out packers and plugs to re-establish production from
prematurely abandoned zones; deepening wells to test deeper horizons; 3) infill
drilling; increased density drilling; horizontal drilling within existing field
boundaries; drilling field extension wells; drilling water disposal wells; 4)
acquiring prospective acreage through leasing, farm-outs or term assignments; 5)
acquiring existing and/or shooting new 2-D and 3-D seismic; development of
unconventional resources such as coalmine methane and fractured shale gas; and
6) developing and/or expanding secondary and tertiary recovery operations.

      During the past 25 years, the oil and gas industry has experienced
numerous mergers and consolidations as companies have reacted to volatile
product prices. As a result, assets were transferred from company to company
while many of the key personnel familiar with those assets were either downsized
or reassigned to "core" properties. Smaller technical staffs have required
companies to focus on these larger "core" properties while neglecting a majority
of the smaller assets in their portfolios. During the same time, operators have
concentrated heavily on reducing expenses in the field. This has often been
detrimental to well performance since it has caused reductions in maintenance
work. In an effort to improve efficiency, companies are selling interests in
properties in which they own minor portions or are divesting properties in
specific areas. Many of the major oil and gas companies in the world have moved
out of the on-shore U.S. in favor of higher impact off-shore projects. The
effect of this exodus from the U.S. on-shore oil and gas industry creates an
opportunity for small and mid-sized oil and gas companies focusing on
acquisitions. While U.S. on-shore oil and gas reserves have now largely declined
to a point where they are too small for the majors, they have left behind
significant amounts of oil and gas in producing fields capable of sustained
production and significant returns for investors for many years to come.

      Commodity Price Hedging Strategy. Rex Energy employs hedging strategies to
reduce its exposure to the risks of oil and gas pricing movements, while not
eliminating its ability to participate in upward price swings. Rex Energy will
employ an actively managed hedging program designed to attempt to lock in
acceptable yields from producing property acquisitions, while permitting the
company to maintain exposure to upside in its developmental and exploratory
drilling projects. See Item 1 "Description of Business - Risk Factors - Hedging
activities we engage in may prevent us from benefiting from price increases and
may expose us to other risks", above.


                                       33
<PAGE>

      Use of Leverage. The use of leverage in investments and acquisitions can
increase the cash on cash yield for investors. However, the misuse of debt in
the oil and gas industry is a leading cause of company failures. In an industry
whose asset base is constantly declining, the use of leverage must be done in a
prudent manner with the ability to repay all debt within a short period of time
to ensure comfortable debt coverage. When making acquisitions using leverage,
Rex Energy internally models all acquisitions to test the ability to pay all
debt within a five-year holding period. This relatively short amortization
period combined with its hedging strategy helps to ensure predictable cash on
cash yield at an acceptable risk level.

      Acquisition Strategy. Rex Energy utilizes a process that employs a number
of "screens" to target acquisition candidates and accelerate the evaluation
process. These screens are intended to ensure that acquisitions meet the
criteria necessary to accomplish Rex Energy's objectives. This strategy
includes:

      o     Utilizing public oil and gas production data to identify slow
            decline, underdeveloped fields with the potential for further
            development, and to eliminate rapidly declining properties.

      o     Utilizing analogous properties to that of the target acquisition in
            which similar development work has been done to provide a basis for
            our analysis.

      o     Utilizing industry professionals intimate with local geological and
            engineering conditions to accelerate our investment analysis
            process.

      o     Developing detailed pro forma projections using conservative
            assumptions and sensitivity analysis to test the ability of the
            investment to meet the Partnership's minimum target return of 15%
            from proven reserves.

      Rex Energy Operating Corp. Rex Energy manages partnerships and companies
and provides well operating services. Rex Energy operates and manages several
oil and gas partnerships and companies, including:

      o     PennTex Illinois. Lance T. Shaner acquired all of the outstanding
            capital stock of PennTex Illinois in January of 2005. PennTex
            Illinois owns a 26% operating working interest in certain
            jointly-owned oil producing properties located in Illinois and
            Indiana containing over 1600 active and inactive wells.

      o     PennTex Resources. PennTex Resources was formed in 1997 to acquire
            producing oil and gas assets. Since its inception it has acquired
            over 2,500 producing oil and gas wells in Texas, Oklahoma, Illinois,
            Indiana, and New Mexico. It sold all of its oil and gas properties
            located outside of the states of Illinois and Indiana in October
            2005. It currently owns a 25% non-operating working interest in the
            jointly-owned oil producing properties in Illinois and Indiana
            described above.

      o     Douglas O&G and Douglas Westmoreland. Douglas O&G, a Delaware
            limited partnership, was formed in 2003 by the management and
            principals of Douglas Oil & Gas, Inc. and Rex Energy with a
            preferred equity investment from Rex Energy Limited Partnership. In
            2004, Douglas O&G acquired a producing gas field in Westmoreland
            County, Pennsylvania and formed a subsidiary, Douglas Westmoreland,
            a Delaware limited partnership. On March 22, 2004, Douglas
            Westmoreland sold a royalty interest in the properties to Rex
            Royalties for $1.5 million, resulting in a net capitalization to
            Douglas Westmoreland of $2.5 million.


                                       34
<PAGE>

      o     Rex Energy Limited Partnership. Rex Energy Limited Partnership, a
            Delaware limited partnership, was formed in 2002 as an investment
            partnership to acquire or invest in producing oil and gas
            properties. In 2003, the partnership acquired a controlling interest
            in Douglas O&G. The only asset owned by this partnership is its
            general and limited partnership interests in Douglas Oil & Gas.

      o     Rex Royalties. Rex Royalties was formed as a Delaware limited
            partnership in March 2004 to acquire royalty interests from Douglas
            Westmoreland in approximately 89 producing natural gas wells in
            Westmoreland County, Pennsylvania for $1.4 million. The partnership
            was capitalized at $1.54 million.

      o     Midland. Midland Exploration Limited Partnership was formed as a
            Delaware limited partnership in October of 2004 for the purpose of
            evaluating, generating and/or acquiring oil and gas prospects or
            producing properties in various locations throughout the Permian
            Basin of Texas and New Mexico. It was capitalized at approximately
            $1.3 million and currently owns interests in leases in Eddy, Lea and
            Roosevelt Counties, New Mexico and Glassrock, Loving and Winkler
            Counties, Texas.

      o     New Albany-Indiana, LLC. New Albany was formed as a Delaware limited
            liability company in November 2005 as a joint venture between the
            Company and Rex Energy for the purpose of acquiring working
            interests in leasehold interests in the New Albany shale play
            located in the Illinois Basin. The Company currently owns a 50%
            membership interest and certain affiliates of Rex Energy own the
            other 50% membership interests. The managing member of New Albany is
            Rex Wabash. For more information regarding New Albany-Indiana, LLC,
            see "The Rex Energy And New Albany Transactions -- New
            Albany-Indiana, LLC Transactions."

      o     Rex Energy II Limited Partnership/Rex Energy II Alpha Limited
            Partnership. Rex Energy II Limited Partnership (and its sister
            partnership, Rex Energy II Alpha Limited Partnership, collectively
            "Rex II") was formed as Delaware limited partnerships in 2004. Rex
            II completed its capital raising activities in January 2006 with a
            final equity capitalization of $24.5 million. Rex II began making
            investments for its own account in October 2004, and has since
            closed on a series of acquisitions in the Illinois and Permian
            Basins. The assets of Rex II are not included in the sale of the Rex
            Assets to the Company. For more information about Rex II, see "Risk
            Factors - Conflicts of interests for the Rex Energy management team
            will exist upon their joining the Company, with regards to their
            obligations to the Company and their obligations to businesses in
            which they continue to own interests and manage, and which are not
            parties to the asset acquisition transaction." Properties owned by
            these partnerships are not being conveyed to the Company under the
            Purchase Agreement.

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.


                                       35
<PAGE>

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, 2005, the disclosure
controls and procedures of the Company were not as 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.

      In connection with the completion of its audit of, and the issuance of its
report on the financial statements of the Company for the year ended December
31, 2005, Malone & Bailey, PC identified deficiencies in our internal controls
related to accounting for debt discounts, the corresponding debt discount
accretion and debt issuance costs all relating to issuances of convertible debt
instruments. The adjustments relating to these items were detected in the audit
process and have been appropriately recorded and disclosed in this Form 10-KSB.
As of the end of the period covered by this Annual Report, the Company had not
yet taken any specific steps to remediate the identified deficiencies discussed
above and as such has concluded that the identified deficiencies still existed.
Additional effort is needed to fully remedy these deficiencies and we are
continuing our efforts to improve and strengthen our control processes and
procedures. Our management and directors will continue to work with our auditors
and other outside advisors to ensure that our controls and procedures are
adequate and effective.

      There were no changes in internal controls over financial reporting that
occurred during the fiscal quarter ended December 31, 2005, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

Item 8B. Other Information.

      None.


                                       36
<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.

<TABLE>
Name of Individual                      Age            Position with the Company
------------------                    -------          ------------------------------------
<S>                                     <C>            <C>
Barrie Damson                           70             Chairman and Chief Executive Officer
Alan Gaines                             50             Vice Chairman and Director
Richard Cohen                           54             Chief Financial Officer
Carey Birmingham                        50             President
Richard d'Abo                           49             Director
</TABLE>

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

      Mr. Barrie Damson: Mr. Damson joined the Board of Directors and became
Chairman/CEO of the Company as of February 1, 2006. Since 1988, Mr. Damson has
been the President and Chairman of Damson Financial Resources, Inc., a company
specializing in oil and gas, real estate and venture capital investments. Prior
to forming Damson Financial, he was President and Chairman of Damson Oil
Corporation, a publicly traded oil and gas exploration, development and
production company that also served as the general partner of private and
publicly traded oil and gas and real estate limited partnerships. Mr. Damson
also served as President and Chairman of Bronco Oil Corp and Delta Minerals
Corp. He has also served as a director of the Independent Petroleum Association
of America, the Domestic Petroleum Council and Viking Resources International.
Mr. Damson was a founding member and Vice Chairman of the American Business
Conference. He also served as chairman of the New York City Economic Development
Corporation. He currently serves on the Dean's Council of the Harvard School of
Public Health and the Board of Trustees of the Hospital for Special Surgery in
New York. He has also served as a Governor of the American Stock Exchange and a
member of its executive committee and chairman of its audit committee. Mr.
Damson received his Bachelor's degree from Harvard University, and his Juris
Doctorate from New York University.

      Following the acquisition of the Rex Assets, Mr. Damson will resign as
Chairman and Chief Executive Officer of the Company. Mr. Damson will continue to
serve as director of the Company following the Closing.

      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 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. Prior to selling his interest in Gaines, Berland, the Firm managed or
co-managed, and participated in $4 billion of equity and debt financings during
a three year period. He has acted as an advisor to financier Carl Icahn during
such corporate takeovers as USX Corporation (Marathon Oil) and Texaco. Mr.
Gaines has provided funding and/or advisory services to Parker & Parsley (now -
NYSE listed Pioneer Natural Resources), Lomak Petroleum (now NYSE - listed Range


                                       37
<PAGE>

Resources), Devon Energy (now NYSE - listed), and Comstock Resources (now NYSE -
listed). 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. Gaines will continue to serve as director of the Company following the
acquisition of the Rex Assets.

      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.

      Following the acquisition of the Rex Assets, Mr. Cohen will resign as
Chief Financial Officer of the Company.

      Mr. Carey Birmingham: Mr. Birmingham has served as the President of the
Company since its formation in February 2004 and as a director from February
2004 to January 2006. Mr. Birmingham has 20 years of experience in all aspects
of commercial real estate in assisting clients and negotiating contracts. From
September 1999 through September 2003, Mr. Birmingham served as President,
Executive Vice President and a Director of International Test Systems, Inc.
(ITS). Mr. Birmingham resigned as a Director of ITS in September 2003 and
resigned as Executive Vice President of ITS in March 2004.

      Following the acquisition of the Rex Assets, Mr. Birmingham will resign as
President and as a director of the Company.

      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.

      Mr. d'Abo will continue to serve as director of the Company following the
acquisition of the Rex Assets.


                                       38
<PAGE>

      Upon the Closing of the Company's acquisition of Rex Assets from Rex
Energy and its affiliates, the following individuals will become directors,
executive officers and key employees of the Company:

Name                            Age       Position
----                            ---       --------

Lance T. Shaner ............... 52        Chairman of the Board and Interim
                                          Chief Executive Officer

Benjamin W. Hulburt ........... 32        President and Director

Thomas F. Shields ............. 48        Chief Operating Officer and Director

Thomas C. Stabley ............. 35        Chief Financial Officer

Michael S. Carlson ............ 50        Senior Vice President of Operations

Christopher K. Hulburt ........ 35        Senior Vice President and General
                                          Counsel

Sam McDonald .................. 46        Vice President of Operations -
                                          Southwest Region

Jack S. Shawver ............... 48        Vice President of Operations -
                                          Illinois Basin Region

Michael R. Raven .............. 37        Director of Land Administration

Andrew M. Joyner .............. 33        Vice President - Marketing and
                                          Investor Relations

Section 16(a) Beneficial Ownership Reporting Compliance

      We file with the SEC reports and certain other information under the
Exchange Act pursuant to the rules under Section 15(d) of the Exchange. Our
directors and officers and holders of 10% or more of our common stock are not
currently required to file statements of beneficial ownership with regards to
their ownership of our equity securities under Sections 13 or 16 of the Exchange
Act. At such time as our shares are registered under Section 12 of the Exchange
Act, our officers, directors and 10% or more stockholders will be required to
file such statements of beneficial ownership.

Code of Ethics

      We have not adopted a Code of Ethics with respect to our officers because
we have not been an operating company. We intend to adopt a Code of Ethics after
the completion of our acquisition of the Rex Assets.

Audit Committee

      Presently we do not have an Audit Committee. We intend to establish an
Audit Committee and such other committees as may be required upon the completion
of our acquisition of the Rex Assets.

Certain Matters Involving Promoters

      Immediately prior to our merger with Coastal in April 2005, 47.3% of the
Company's 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. At no time was Mr.
Loev an officer or a director of the Company.


                                       39
<PAGE>

      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 10. Executive Compensation.

      Prior to December 2005, the Company had not paid salaries to any
individual. Commencing December 2005, the Company agreed to pay Richard Cohen a
monthly salary of $7,500. During 2005, the Company granted stock options to the
following officers/directors as follows: Alan Gaines - options for 6,000,000
shares; Barrie Damson - options for 6,000,000 shares; Carey Birmingham - options
for 100,000 shares; Richard Cohen - options for 175,000 shares; Steven
Barrenechea (a former director of the Company) - options for 250,000 shares.

Incentive Plans

      During 2004, we did not grant any options to purchase shares of our common
stock. Pursuant to approval by our Board of Directors, but not our shareholders,
we granted contractual stock options during 2005 as described below.

      On April 1, 2005, Coastal granted a stock option to a non-employee to
purchase up to 500,000 shares of Coastal common stock at $0.30 per share. This
option is exercisable until March 31, 2010 and became exercisable on October 1,
2005. The fair value of this option was $150,000 and it has been fully expensed
as share-based compensation. As of the effective date of the Merger, this option
became an option to purchase 500,000 shares of our common stock, exercisable
until March 31, 2010 at the price of $0.30 per share.

      On April 29, 2005, we granted stock options to seven persons to purchase
an aggregate of 12,950,000 shares of our common stock. These options are
exercisable at any time at $0.05 per share and will expire on April 28, 2010.
These options were granted as an inducement to retain management and for
services rendered to the Company. Among the options described in this paragraph,
the fair value of the options granted to the five individuals who were our
employees (or expected at the time of grant to become our employees or
directors) was $10,080,000 and this amount has been expensed as share-based
compensation, and the fair value of the options granted to the two non-employees
was $297,500 and this amount has been expensed as share-based compensation.

      On December 27, 2005, we granted to Richard Cohen, our CFO, options to
purchase 175,000 shares of common stock, exercisable immediately and until the
fifth anniversary of the date of grant at the price of $0.94 per share.

      As of December 20, 2005, we issued stock options to Rex Designees (who are
not yet our employees) to purchase an aggregate of 50,000 shares of common stock
at the exercise price of $1.00 per share. These options expire on December 20,
2008.


                                       40
<PAGE>

                    Option Grants In Last Fiscal Year (2005)

<TABLE>
<CAPTION>
                                                   Number of        % of
                                                  Securities     Total Options
                                                  Underlying      Granted to
                                                    Options      Employees in     Exercise         Expiration
                                          Year     Granted(1)     Fiscal Year       Price             Date
                                          ----   ------------    -------------    -------          ----------
<S>                                       <C>    <C>                <C>             <C>             <C>
Alan Gaines .........................     2005   6,000,000(2)       47.9%           $.05             4/28/10
Carey Birmingham.....................     2005     100,000            .8%           $.05             4/28/10
Richard Cohen  ......................     2005     175,000           1.4%           $.94            12/26/10
Richard d'Abo .......................     2005     250,000           2.0%           $.05             4/28/10
Barrie Damson .......................     2005   6,000,000(2)       47.9%           $.05             4/28/10
</TABLE>

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

(1) All of the shares of common stock underlying such options were fully vested
and exercisable in full at the time of grant.

(2) Holder has agreed that, upon Closing of the Rex Assets, the number of shares
underlying such option will be reduced to 2,105,750.


                                       41
<PAGE>

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

      During 2005, none of our officers or directors exercised any options to
purchase shares of common stock. The following table sets forth, for each of our
officers and directors, the number and value of vested and unvested options held
as of December 31, 2005 and the value of any in-the-money stock options, vested
and unvested, as of such date.

                        Option Value at December 31, 2005

<TABLE>
<CAPTION>
                                          Number of Securities
                                         Underlying Unexercised                 Value of Unexercised In-The-Money
                                      Options at December 31, 2005                Options at December 31, 2005
                                     -------------------------------            ---------------------------------
                                     Exercisable       Unexercisable              Exercisable      Unexercisable
                                     -----------       -------------            -------------      -------------
<S>                                   <C>                       <C>                <C>                     <C>
Barrie Damson ...................     6,000,000                 --                 $5,700,000              -0-
Carey Birmingham ................       100,000                 --                    $95,000              -0-
Richard Cohen  ..................       175,000                 --                    $10,500              -0-
Richard d'Abo ...................       250,000                 --                   $237,500              -0-
Alan Gaines .....................     6,000,000                 --                 $5,700,000              -0-
</TABLE>

The last sale price of the common stock was $1.00 on December 30, 2005.

Employment Agreements.

      Presently, the Company does not have employment agreements with any of its
existing officers. The Purchase Agreement contemplates that at the same time as
the Closing, the Company will enter into employment agreements with the six Rex
Designees that will provide for annual base salaries not to exceed, in the
aggregate, $1,030,000. See Item 1. - "Description of Business."

      Equity Compensation Arrangements. The following table provides information
as of December 31, 2005 about our equity compensation arrangements.

<TABLE>
<CAPTION>
                                                                                        (c)
                                                                                        Number of securities
                                                                                        remaining available for
                                    (a)                        (b)                      future issuance under
                                    Number of securities to    Weighted-average         equity compensation
                                    be issued upon exercise    exercise price of        plans (excluding
                                    of outstanding options,    outstanding options,     securities reflected in
Plan Category                       warrants and rights        warrants and rights      column (a))
--------------------------------    -----------------------    --------------------     -----------------------
<S>                                 <C>                        <C>                      <C>
Equity compensation  plans
approved by security holders        -0-                        -0-                      -0-
--------------------------------    -----------------------    --------------------     -----------------------
Equity compensation plans not       14,150,000                 $.09                     -0-
approved by security holders (1)
--------------------------------    -----------------------    --------------------     -----------------------
Total (1)                           14,150,000                 $.07                     -0-
===============================     =======================    ====================     =======================
</TABLE>

(1)   Include warrants to our placement agent and individual stock option
      grants. See "Incentive Compensation" discussed above in Item 10.


                                       42
<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.

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

      We have 40,521,068 shares of common stock outstanding as of March 14,
2006. The following table sets forth certain information regarding the
beneficial ownership of our common stock as of March 14, 2006 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 of                                                                  Percent
Beneficial Owner                              Number of Shares           of Outstanding Shares
----------------                              ----------------           ---------------------
<S>                                           <C>                          <C>
Barrie Damson (Chairman & CEO)                11,894,250 (1)               25.6%
Alan Gaines (Vice Chairman & Director)        11,894,250 (1)               25.6%
Carey Birmingham (President & Director)       433,000 (2)                   1.1%
Richard d'Abo (Director)                      1,186,000 (3)(4)              2.5%
Richard Cohen (CFO)                           375,000 (5)                     *
Lance T. Shaner (6)                           4,847,700 (7)                12.0%
Benjamin W. Hulburt (6)                       2,908,620 (8)                 7.2%
Thomas F. Shields (6)                         2,908,620 (8)                 7.2%
All Officers & Directors as a Group           25,962,250
(5 persons)                                   (1)(2)(3)(4)(5)              48.1%
</TABLE>

----------
* Less than 1%

(1)   Includes 6,000,000 shares underlying a stock option, exercisable at $.05
      per share. Holder has agreed that, upon Closing of the Rex Assets, the
      number of shares underlying such option will be reduced to 2,105,750.

(2)   Includes 100,000 shares underlying a stock option, exercisable at $.05 per
      share.

(3)   Includes 936,000 shares underlying a convertible promissory note.


                                       43
<PAGE>

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

(5)   Includes 175,000 shares underlying a stock option, exercisable at $0.94
      per share.

(6)   This individual is a Rex Designee. Mr. Shaner, along with Benjamin W.
      Hulburt, Thomas F. Shields, Michael S. Carlson, Christopher K. Hulburt and
      Thomas C. Stabley, are parties to the Stock Agreement with the Company
      dated as of January 16, 2006. As such, since these individuals may be
      deemed to be acting together for the purpose of acquiring equity
      securities of an issuer, they may together be considered to have acquired
      beneficial ownership, for purposes of Sections 13(d) and(g) of the
      Securities Exchange Act of 1934, as amended, of all such equity securities
      of that issuer beneficially owned by each of them Thus, these individuals
      may be deemed to be beneficial owners of an aggregate of 12,119,250 shares
      of common stock (which includes an aggregate of 50,000 shares underlying
      presently exercisable stock options), which represents approximately 29.9%
      of the outstanding shares of common stock as of March 1, 2006, in
      accordance with Rule 13d-3(d) promulgated under the Securities Exchange
      Act of 1934, as amended.

(7)   Includes 20,000 shares underlying a stock option, exercisable at $1.00 per
      share.

(8)   Includes 12,000 shares underlying a stock option, exercisable at $1.00 per
      share.

      The address of each of our current officers and directors is 20022 Creek
Farm, San Antonio, Texas 78259. The address of Messrs. Shaner, Hulburt and
Shields is 1965 Waddle Road, State College, Pennsylvania.

      Upon Closing of our purchase of the Rex Assets, a change in control will
have occurred as described in more detail in Item 1 "Description of Business".
Upon the completion of the Closing, our officers will have completely changed,
our Board of Directors will have substantially changed and Alan Gaines and
Barrie Damson, who together currently have voting control of the Company, will
no longer have voting control of the Company.

Item 12. Certain Relationships and Related Transactions.

      During 2005, we granted stock options to certain of our affiliates as
described above under "Executive Compensation - Option Grants in Last Fiscal
Year".


                                       44
<PAGE>

Item 13. Exhibits.

      (A) Documents Filed as Part of this Report:

            (I) Financial Statements:

                                                                           Pages
          Baseline Oil & Gas Corp. Audited Financial Statements
          and Notes
      A.  Report of Independent Registered Public Accounting Firm          F - 2
      B.  Balance Sheets                                                   F - 3
      C.  Statements of Expenses                                           F - 4
      D.  Statements of Cash Flows                                         F - 5
      E.  Statements of Changes in Stockholders' Equity/(Deficit)          F - 6
      F.  Notes to Financial Statements                                  F -7-12


                                       45
<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.
               (incorporated herein by reference to Exhibit -- of Registrant's
               Annual Report on Form 10-KSB, filed March 31, 2006).
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. (incorporated
               herein by reference to Exhibit -- of Registrant's Annual Report
               on Form 10-KSB, filed March 31, 2006).
10.2           Purchase and Sale Agreement, dated as of November 15, 2005,
               between New Albany-Indiana, LLC and Aurora Energy Ltd.
               (incorporated herein by reference to Exhibit -- of Registrant's
               Annual Report on Form 10-KSB, filed March 31, 2006).
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. (incorporated
               herein by reference to Exhibit -- of Registrant's Annual Report
               on Form 10-KSB, filed March 31, 2006).
10.7           Purchase Agreement with Source Rock Resources, Inc. (incorporated
               herein by reference to Exhibit -- of Registrant's Annual Report
               on Form 10-KSB, filed March 31, 2006).
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.


                                       46
<PAGE>

Item 14. Principal Accountant Fees and Services.

      For fiscal year 2005 and fiscal year 2004, the aggregate fees billed by
Malone & Bailey, PC, our principal independent accounting firm, for professional
services were as follows:

                                                   Fiscal Year Ended
                                       December 31, 2005       December 31, 2004
Audit Fees (1)                               $69,705                 N/A
Audit-Related Fees (2)                       $ 7,680                 N/A
Tax Fees (3)                                 $ 3,950                 N/A
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, 2005, we did not have a formal documented pre-approval
policy for the fees of our principal accounting firm.


                                       47
<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: August 1, 2006                              By: /s/ Barrie Damson
                                                      --------------------------
                                                      Barrie Damson
                                                      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/  Barrie Damson                                                August 1, 2006
-------------------------------------------
Barrie Damson
Chief Executive Officer


/s/  Richard Cohen                                                August 1, 2006
-------------------------------------------
Richard Cohen
Chief Financial Officer
(Principal Financial and Accounting Officer)


/s/  Alan Gaines                                                  August 1, 2006
-------------------------------------------
Alan Gaines
Director


/s/  Richard d'Abo                                                August 1, 2006
-------------------------------------------
Richard d'Abo
Director


                                       48
<PAGE>

         Index to Financial Statements

                                                                           Pages

         Baseline Oil & Gas Corp. Audited Financial Statements
         and Notes

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

     B.  Balance Sheets                                                     F-3

     C.  Statements of Expenses                                             F-4

     D.  Statements of Cash Flows                                           F-5

     E.  Statements of Changes in Stockholders' Equity/(Deficit)            F-6

     F.  Notes to Financial Statements                                   F-7-12


                                      F-1
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying balance sheets of Baseline Oil & Gas Corp.
("Baseline") (formerly College Oak Investments, Inc.) (a development stage
company) as of December 31, 2005 and 2004 and the related statements of
expenses, stockholders' equity/(deficit), and cash flows for the year ended
December 31, 2005 and the periods from June 29, 2004 (inception) to December 31,
2004 and 2005. 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 audit 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,
2005 and 2004, 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
www.malone-bailey.com
Houston, Texas

March 10, 2006


                                      F-2
<PAGE>

                            BASELINE OIL & GAS CORP.
                    (Formerly COLLEGE OAK INVESTMENTS, INC.)
                          (A Development Stage Company)
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                  December 31,                 December 31,
                                                                      2005                         2004
                                                                  ------------                 ------------
<S>                                                               <C>                          <C>
ASSETS
  Cash                                                            $    206,489                 $        --
                                                                  ------------                 -----------
     Total current assets                                              206,489                          --

     Deferred debt issuance costs, net of amortization of
     $29,649 and $0, respectively                                      326,139                          --

     Property acquisition-deposit                                    1,750,000                          --
                                                                  ------------                 -----------
     Total assets                                                 $  2,282,628                 $        --
                                                                  ============                 ===========

LIABILITIES & STOCKHOLDERS'
  EQUITY/(DEFICIT)

  Accounts payable                                                $     98,726                 $    76,463
  Accrued liabilities                                                   56,492                          --
  Short term debt and current long term
    debt, net of discount                                              298,384                          --
                                                                  ------------                 -----------
     Total current liabilities                                         453,602                      76,463

  Long term debt, net of discount                                      809,333                      15,844
                                                                  ------------                 -----------

     Total liabilities                                               1,262,935                      92,307

  Commitments and contingencies                                             --                          --

STOCKHOLDERS' DEFICIT

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

  Common stock, $.001 par value,
    140,000,000 shares authorized,
    20,270,000 and 200,000 shares issued
    and outstanding, respectively                                       20,270                         200

  Additional paid-in-capital                                        18,791,179                        (200)

  Deficit accumulated in the development Stage                     (17,791,756)                    (92,307)
                                                                  ------------                 -----------

     Total stockholders'equity/(deficit)                             1,019,693                     (92,307)
                                                                  ------------                 -----------

     Total liabilities & stockholders' equity /(deficit)          $  2,282,628                 $        --
                                                                  ============                 ===========
</TABLE>

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


                                      F-3
<PAGE>

                            BASELINE OIL & GAS CORP.
                    (Formerly COLLEGE OAK INVESTMENTS, INC.)
                          (A Development Stage Company)
                             STATEMENTS OF EXPENSES
     Year Ended December 31, 2005 and Periods from June 29, 2004 (Inception)
                       Through December 31, 2005 and 2004

<TABLE>
<CAPTION>
                                                                 June 29, 2004          June 29, 2004
                                                              (Inception) Through    (Inception) Through
                                              Year Ended
                                          December 31, 2005    December 31, 2004      December 31, 2005
                                          --------------------------------------------------------------

<S>                                       <C>                 <C>                   <C>
Selling, general and
  administrative expenses                 $    835,258        $      89,809         $       925,067

Share based compensation                    16,499,670                   --              16,499,670

Interest expense                               362,916                  844                 363,760
Other expense                                    1,605                1,654                   3,259
                                          ------------        -------------         ---------------

    Total expenses                          17,699,449               92,307              17,791,756
                                          ------------        -------------         ---------------

    Net loss                              $(17,699,449)       $     (92,307)        $   (17,791,756)
                                          ============        =============         ===============

Basic and diluted net loss
  per common share                        $      (1.20)       $      (0.46)
                                          ============        =============

Weighted average common
  shares outstanding                        14,777,299              200,000
</TABLE>

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


                                      F-4
<PAGE>

                            BASELINE OIL & GAS CORP.
                    (Formerly COLLEGE OAK INVESTMENTS, INC.)
                          (A Development Stage Company)
                            STATEMENTS OF CASH FLOWS
   Year Ended December 31, 2005 and the Periods from June 29, 2004 (Inception)
                       Through December 31, 2005 and 2004

<TABLE>
<CAPTION>

                                                                               June 29, 2004        June 29, 2004
                                                           Year Ended       (Inception) Through  (Inception) Through
                                                       December 31, 2005     December 31, 2004    December 31, 2005
                                                      --------------------------------------------------------------

<S>                                                   <C>                   <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                              $ (17,699,449)        $    (92,307)        $ (17,791,756)
Adjustments to reconcile net loss to
 cash used in operating activities:
 Share based compensation                                16,499,670                   --            16,499,670
 Amortization of debt discount                              305,825                   --               305,825
 Amortization of debt issuance costs                         29,649                   --                29,649

Changes in:
 Accounts payable and accrued liabilities                    79,204               77,307               156,511
                                                      -------------         ------------         -------------

NET CASH USED IN OPERATING ACTIVITIES                      (785,101)             (15,000)             (800,101)
                                                      -------------         ------------         -------------

CASH FLOWS FROM INVESTING ACTIVITIES
 Property acquisition-deposit                            (1,750,000)                  --            (1,750,000)
                                                      -------------         ------------         -------------

NET CASH FLOWS USED IN INVESTING ACTIVITIES              (1,750,000)                  --            (1,750,000)
                                                      -------------         ------------         -------------

CASH FLOWS FROM FINANCING ACTIVITIES
 Proceeds from note payable                                      --               15,000                15,000
 Proceeds from sale of common stock                          16,590                   --                16,590
 Proceeds from convertible notes                          2,725,000                   --             2,725,000
                                                      -------------         ------------         -------------

NET CASH PROVIDED BY FINANCING
  ACTIVITIES                                              2,741,590               15,000             2,756,590
                                                      -------------         ------------         -------------

NET CHANGE IN CASH                                          206,489                   --               206,489
  Cash balance, beginning of period                              --                   --                     -
                                                      -------------         ------------         -------------
  Cash balance, end of period                         $     206,489         $         --         $     206,489
                                                      =============         ============         =============

SUPPLEMENTAL DISCLOSURES:
  Cash paid for interest                              $          --         $         --         $          --
  Cash paid for income taxes                          $          --         $         --         $          --
</TABLE>

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


                                      F-5
<PAGE>

                            BASELINE OIL & GAS CORP.
                    (Formerly COLLEGE OAK INVESTMENTS, INC.)
                          (A Development Stage Company)
            STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY/ (DEFICIT)
   Year Ended December 31, 2005 and the Period from June 29, 2004 (Inception)
                           Through December 31, 2004

<TABLE>
<CAPTION>
                                                                                           Deficit Accumulated
                                                 Common                      Paid In       During Development
                                        Shares             Stock             Capital              Stage               Totals
                                        ------             -----             -------              -----               ------
<S>                                   <C>              <C>                <C>                 <C>                 <C>
Balances at 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 at December 31, 2004            200,000                200               (200)            (92,307)            (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 costs                           --                 --            355,788                  --             355,788

Net loss                                      --                 --                 --         (17,699,449)        (17,699,449)
                                    ------------       ------------       ------------        ------------        ------------
Balances at December 31, 2005         20,270,000       $     20,270       $ 18,791,179        $(17,791,756)       $  1,019,693
                                    ============       ============       ============        ============        ============
</TABLE>

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


                                      F-6
<PAGE>

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of operations and organization

Baseline Oil & Gas Corp. (formerly known as College Oak Investments, Inc.,
"Baseline") 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, Baseline anticipates acquiring significant oil and
natural gas assets from Rex Energy Operating Corp. and its affiliates. Such
assets consist of operated and non-operated working interests in leases located
in Illinois, Indiana, Pennsylvania, West Virginia, New York, Texas and New
Mexico, and approximately 1,400 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

Cash and cash equivalents include cash in banks and certificates of deposit
which mature within three months of the date of purchase.

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.

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.


                                      F-7
<PAGE>

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

Basic and diluted net loss per share calculations are presented in accordance
with Financial Accounting Standards Statement No.128, and are calculated on the
basis of the weighted average number of common shares outstanding during the
year. They include the dilutive effect of common stock equivalents in years with
net income. Basic and diluted loss per share is the same due to the absence of
dilutive common stock equivalents.

Stock compensation

Baseline adopted the disclosure requirements of Financial Accounting Standard
No. 123, Accounting for Stock-Based Compensation FAS No. 123 and FAS No. 148
with respect to pro forma disclosure of compensation expense for options issued.
For purposes of the pro forma disclosures, the fair value of each option grant
is estimated on the grant date using the Black-Scholes option-pricing model.

Baseline accounts for its employee stock-based compensation plans under
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees. Baseline granted 13,675,000 options to purchase common stock to
employees during the fiscal year ended December 31, 2005. 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.

-------------------------------------------------------------------------------
                                                                Twelve Months
                                                                    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.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment," ("SFAS 123(R)"), which is a revision of SFAS 123. SFAS 123(R)
supersedes APB 25, Accounting for Stock Issued to Employees, and amends FASB
Statement No. 95, Statement of Cash Flows. SFAS 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be
recognized at the date of grant in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative. SFAS 123(R) is
effective at the beginning of the first interim or annual period beginning after
December 15, 2005. The Company is currently analyzing impacts of the requirement
of the adoption of SFAS No 123 (R).


                                      F-8
<PAGE>

NOTE 2 - COASTAL MERGER TRANSACTION

On April 6, 2005 (the effective date), Baseline acquired Coastal Energy
Services, Inc. ("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.

The share issuance resulted in the Coastal shareholders controlling
approximately 89% of Baseline's issued and outstanding shares of common stock.
Consequently, the transaction has been accounted for as a reverse merger with
Coastal being deemed the accounting acquirer. Since the transaction involved the
merger of a private company (Coastal) into a public shell company (Baseline), it
is considered to be a capital transaction rather than a purchase business
combination. As accounting acquirer, Coastal issued one share of its common
stock for each share of Baseline's common stock issued and outstanding as of the
effective date resulting in a total of 2,114,000 shares of Coastal shares being
issued. As of the effective date, Baseline had a net deficit of $1,366. For
financial accounting and reporting purposes, the historical financial statements
of Baseline prior to the effective date have been restated to be those of
Coastal.

NOTE 3 - CONVERTIBLE NOTES

Upon the effective date of the Coastal merger, Baseline assumed the obligations
with respect to $350,000 of convertible promissory notes. The notes are
convertible at any time into shares of Baseline's common stock at an effective
conversion rate of $0.21 per share, accrue interest at the rate of 10% per annum
and mature in twelve months from the date of issuance. Based on the effective
conversion rate of $0.21, Baseline has recognized a beneficial conversion
feature on the notes of $231,401 which was recorded as a debt discount. The
discount is being amortized over the life of the Notes. As of December 31, 2005,
$163,492 of the discount had been amortized.

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, 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 holder. Purchasers of the
Units received in the aggregate 950,000 Shares and, upon conversion of the
Notes, will receive an additional 5,462,500 Shares (assuming that the holders
elect to receive shares of common stock in lieu of cash interest through
maturity). Baseline recorded a debt discount in connection with the initial
issuance 950,000 shares of $680,500 given 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 discount is being amortized over the life of the Notes.
As of December 31, 2005, $142,333 of the discount had been amortized.

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, Coastal 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.


                                      F-9
<PAGE>

NOTE 5 - STOCK OPTION GRANTS

On April 1, 2005, Coastal 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 merger, 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 7) 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.

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 2005, Baseline' s Board of Directors granted the following stock options,
all of which are immediately exercisable:


                                      F-10
<PAGE>

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                                      14,150,000     $   0.09
Cancelled or Expired                                             --           --
Exercised                                                        --           --
                                                         ----------     --------

Outstanding as of December 31, 2005                      14,150,000     $   0.09
                                                         ----------     --------


Options outstanding and exercisable at December 31, 2005:

                                                                   Exercisable
                                  Number     Remaining               Number
      Exercise Price            of Shares      life                 of Shares
      --------------           ----------    ---------             ----------
         $ 0.05                12,950,000    4.2 years             12,950,000
         $ 0.30                   500,000    4.2 years                500,000
         $ 0.50                   475,000    4.7 years                475,000
         $ 0.94                   175,000    4.8 years                175,000
         $ 1.00                    50,000    2.8 years                 50,000
                               ----------                          ----------
                               14,150,000                          14,150,000
                               ----------                          ----------

NOTE 6 - INVESTMENT IN JOINT VENTURE

On November 25, 2005, Baseline entered into a joint venture with Rex Energy
Operating Corp. ("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-Indiana, LLC, ("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 will manage 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


                                      F-11
<PAGE>

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 would be 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. This transaction closed
on February 1, 2006 (see Note 7). Baseline deposited $1,750,000 representing
Baseline's 50% share of the deposit made by New Albany in connection with the
Aurora Purchase and Sale Agreement.

NOTE 7 - SUBSEQUENT EVENTS

On January 16, 2006, Baseline entered into a Purchase Agreement to purchase the
following assets (i) all of the assets of Douglas O&G, Midland, Douglas
Westmoreland, Penntex Resources and Rex Wabash, together with 100% of the
outstanding capital stock of Rex Energy and Penntex Resources Illinois, Inc.
(which hold operated and non-operated working interests in oil and gas leases
located in Illinois, Indiana, Pennsylvania, West Virginia, Texas, New Mexico and
New York, and approximately 1,387 gross producing oil and natural gas wells);
(ii) the 50% membership interest in New Albany that we do not already own,
together with all rights of New Albany in that certain purchase agreement, dated
as of November 15, 2005, by and between New Albany and Aurora Energy, Ltd.; and
(iii) all of the assets of Rex Royalties consisting of royalty interests in
producing natural gas wells located in Pennsylvania, Virginia and Kentucky.

The closing of the purchase is scheduled to occur on or before May 1, 2006. The
purchase price which Baseline has agreed to pay on the Closing Date for the
Acquired Assets (other than the New Albany Membership Interest) is $73,169,999
in cash, subject to certain adjustments. The purchase price we have agreed to
pay on the Closing Date for the New Albany Membership Interest is such number of
newly-issued shares of our common stock, equal to the quotient of (x) Sellers'
total capital contributions to New Albany from inception through the Closing
Date divided by (y) $1.10.

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 shares of our Common Stock. The issuance
of such shares is 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. Similarly, in the event that we do not purchase the Acquired
Assets then all shares delivered to such Management Designees shall be
immediately subject to a three (3) year "lock-up" period.

On February 1, 2006, Baseline completed a private placement of $9,000,000 by
selling an aggregate of 8,181,819 shares of newly-issued Common Stock at $1.10
per share. As part of the transaction, Baseline issued three 3-year warrants to
the placement agents to purchase an aggregate of 259,090 shares of Common Stock
at an exercise price of $1.32 per share.

From the proceeds, Baseline funded its 50% share of the remaining purchase price
on New Albany, put aside funds necessary (approximately $2.25 million) to drill
an initial 10 well pilot program, and retained the rest for working capital
purposes.

On February 1, 2006, New Albany, a Delaware limited liability company, of which
Baseline owns 50% of the membership interests, completed its acquisition of
certain oil and gas leases and other rights from Aurora, pursuant to a certain
purchase agreement, dated as of November 15, 2005 (see above). The total
purchase price under the Aurora Purchase Agreement and the grant of the Aurora
Option was $10,500,000 of which $3,500,000 had already been paid and the balance
of $7,000,000 was paid to Aurora on February 1, 2006.

On February 28, 2006, New Albany, a Delaware limited liability company of which
Baseline owns a 50% membership interest, acquired an undivided 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).


                                      F-12