----

----

| x |   | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---|--------|-----------------------------------------------------------------------------------------|

|  ̈ |   | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|--------|--------|------------------------------------------------------------------------------------------|

| Nevada                                                        |   | 20-4711443                             |
|---------------------------------------------------------------|--------|----------------------------------------|
| (State or other jurisdiction ofincorporation or organization) |   | (I.R.S. EmployerIdentification Number) |

| 218 N. Broadway, Suite 204Tyler, Texas 75702        |
|-----------------------------------------------------|
| (Address of principal executive offices) (Zip Code) |

|  Large accelerated filer o               |  Accelerated filer o         |
|-----------------------------------------------|-----------------------------------|
|  Non-accelerated filer o                 |  Smaller reporting company x |
| (Do not check if a smaller reporting company) |                              |

----

|                                                                                                | Page   |
|-----------------------------------------------------------------------------------------------------|--------|
| PART I - FINANCIAL INFORMATION                                                                      |
|                                                                                                |   |
| Item 1. Financial Statements                                                                        | 3      |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12     |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk                                  | 19     |
| Item 4. Controls and Procedures                                                                     | 19     |
|                                                                                                |   |
| PART II - OTHER INFORMATION                                                                         |
|                                                                                                |
| Item 1. Legal Proceedings                                                                           | 21     |
| Item 1A. Risk Factors                                                                               | 21     |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                 | 21     |
| Item 3. Defaults Upon Senior Securities                                                             | 21     |
| Item 4. (Removed and Reserved)                                                                      | 21     |
| Item 5. Other Information                                                                           | 21     |
| Item 6. Exhibits                                                                                    | 21     |
|                                                                                                |   |
| SIGNATURES                                                                                          | 22     |

----

|                                                                       |   | June 30,    |       |   | December 31, |   |
|----------------------------------------------------------------------------|--------|-------------|------------|--------|--------------|--------|
|                                                                       |   | 2010        |       |   | 2009         |   |
|                                                                       |   | (Unaudited) |       |   |         |   |
| Assets                                                                     |   |        |       |   |         |   |
| Current assets:                                                            |   |        |       |   |         |   |
|    Cash and cash equivalents                                |   | $           | 692,784    |   |         | $      | 127,176 |   |
|    Accounts receivable, trade                               |   |        | 100,090    |   |         |   | 98,578 |   |
|    Accounts receivable, related parties                     |   |        | 11,274     |   |         |   | 13,002 |   |
|    Joint-interest billings receivable, related parties, net |   |        | 10,675     |   |         |   | 17,983 |   |
|    Restricted cash – leasing program                  |   |        | 440,114    |   |         |   | - |   |
|    Other current assets                                     |   |        | 4,808      |   |         |   | 51,288 |   |
| Total current assets                                                       |   |        | 1,259,745  |   |         |   | 308,027 |   |
|                                                                       |   |        |       |   |         |   |   |   |
| Property and equipment:                                                    |   |        |       |   |         |   |   |   |
|    Equipment                                                |   |        | 680,928    |   |         |   | 601,759 |   |
|    Pipelines                                                |   |        | 701,065    |   |         |   | 700,765 |   |
|    Buildings                                                |   |        | 19,916     |   |         |   | 19,916 |   |
|    Leasehold improvements                                   |   |        | 7,022      |   |         |   | 7,022 |   |
|    Vehicles                                                 |   |        | 50,663     |   |         |   | 50,663 |   |
|    Office furniture                                         |   |        | 137,071    |   |         |   | 137,071 |   |
|    Website                                                  |   |        | 15,000     |   |         |   | 15,000 |   |
| Total property and equipment                                               |   |        | 1,611,665  |   |         |   | 1,532,196 |   |
| Less accumulated depreciation                                              |   |        | (589,110   | )      |         |   | (515,101 | ) |
| Property and equipment, net                                                |   |        | 1,022,555  |   |         |   | 1,017,095 |   |
|                                                                       |   |        |       |   |         |   |   |   |
| Oil and gas properties:                                                    |   |        |       |   |         |   |   |   |
|    Oil and gas properties, proved                           |   |        | 11,885,731 |   |         |   | 11,928,985 |   |
|    Oil and gas properties, unproved                         |   |        | 8,976,442  |   |         |   | 9,150,426 |   |
|    Capitalized asset retirement obligations                 |   |        | 220,237    |   |         |   | 220,237 |   |
| Total oil and gas properties                                               |   |        | 21,082,410 |   |         |   | 21,299,648 |   |
| Less accumulated depletion and depreciation                                |   |        | (944,102   | )      |         |   | (900,275 | ) |
| Oil and gas properties, net                                                |   |        | 20,138,308 |   |         |   | 20,399,373 |   |
|                                                                       |   |        |       |   |         |   |   |   |
| Other assets:                                                              |   |        |       |   |         |   |   |   |
|    Certificates of deposit                                  |   |        | 77,581     |   |         |   | 77,195 |   |
| Total other assets                                                         |   |        | 77,581     |   |         |   | 77,195 |   |
|                                                                       |   |        |       |   |         |   |   |   |
| Total assets                                                               |   | $           | 22,498,189 |   |         | $      | 21,801,690 |   |

----

|                                                                       |   | June 30,    |       |   | December 31, |   |
|----------------------------------------------------------------------------|--------|-------------|------------|--------|--------------|--------|
|                                                                       |   | 2010        |       |   | 2009         |   |
|                                                                       |   | (Unaudited) |       |   |         |   |
| Liabilities and Stockholders' Equity                                       |   |        |       |   |         |   |
| Current liabilities:                                                       |   |        |       |   |         |   |
|    Accounts payable                                         |   | $           | 382,809    |   |         | $      | 251,336 |   |
|    Accounts payable, related parties                        |   |        | 1,127,309  |   |         |   | 874,076 |   |
|    Revenues payable                                         |   |        | 95,544     |   |         |   | 104,366 |   |
|    Interest payable, related party                          |   |        | 78,697     |   |         |   | 840,052 |   |
|    Liquidated damages payable                               |   |        | 152,335    |   |         |   | 142,083 |   |
|    Other payables                                           |   |        | 19,574     |   |         |   | 35,795 |   |
|    Lease program deposits                                   |   |        | 440,114    |   |         |   | - |   |
|    Drilling prepayments                                     |   |        | 145,458    |   |         |   | - |   |
|    Current portion of notes payable                         |   |        | 4,085      |   |         |   | 6,570 |   |
|    Current portion of notes payable, related party          |   |        | 8,110,646  |   |         |   | 6,352,303 |   |
| Total current liabilities                                                  |   |        | 10,556,571 |   |         |   | 8,606,581 |   |
|                                                                       |   |        |       |   |         |   |   |   |
| Notes payable                                                              |   |        | 3,829      |   |         |   | 4,803 |   |
| Asset retirement obligations                                               |   |        | 309,323    |   |         |   | 300,311 |   |
|                                                                       |   |        |       |   |         |   |   |   |
| Total liabilities                                                          |   |        | 10,869,723 |   |         |   | 8,911,695 |   |
|                                                                       |   |        |       |   |         |   |   |   |
| Commitments and contingencies (Note 5)                                     |   |        |       |   |         |   |   |   |
|                                                                       |   |        |       |   |         |   |   |   |
| Stockholders' equity:                                                      |   |        |       |   |         |   |   |   |
| Common stock; $0.001 par value; 75,000,000 shares authorized;              |   |        |       |   |         |
| 33,610,801 shares issued and outstanding                                   |   |        |       |   |         |
|       at June 30, 2010 and December 31, 2009 |   |        | 33,611     |   |         |   | 33,611 |   |
|    Additional paid-in capital                               |   |        | 19,673,102 |   |         |   | 19,673,102 |   |
|    Accumulated deficit                                      |   |        | (8,078,247 | )      |         |   | (6,816,718 | ) |
| Total stockholders' equity                                                 |   |        | 11,628,466 |   |         |   | 12,889,995 |   |
|                                                                       |   |        |       |   |         |   |   |   |
| Total liabilities and stockholders' equity                                 |   | $           | 22,498,189 |   |         | $      | 21,801,690 |   |

----

|                                         |   |  Three Months Ended June 30, |       |   |  Six Months Ended June 30, |   |
|----------------------------------------------|--------|-----------------------------------|------------|--------|---------------------------------|--------|
|                                         |   | 2010                              |       |   | 2009                            |   |   | 2010 |   |   | 2009 |   |
| Revenues:                                    |   |                              |       |   |                            |   |   |   |   |   |   |   |
|   Oil and gas                      |   | $                                 | 127,603    |   |                            | $      | 131,449 |   |   | $ | 305,319 |   |   | $ | 246,256 |   |
|   Condensate and skim oil          |   |                              | 39,321     |   |                            |   | 19,556 |   |   |   | 55,869 |   |   |   | 40,823 |   |
|   Transportation and gathering     |   |                              | 64,232     |   |                            |   | 61,828 |   |   |   | 131,620 |   |   |   | 136,660 |   |
|   Saltwater disposal income        |   |                              | 24,113     |   |                            |   | 25,086 |   |   |   | 50,707 |   |   |   | 96,575 |   |
| Total revenues                               |   |                              | 255,269    |   |                            |   | 237,919 |   |   |   | 543,515 |   |   |   | 520,314 |   |
|                                         |   |                              |       |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses:                          |   |                              |       |   |                            |   |   |   |   |   |   |   |   |   |   |   |
|   Lease operating expenses         |   |                              | 75,242     |   |                            |   | 129,814 |   |   |   | 151,503 |   |   |   | 206,554 |   |
|   Saltwater disposal expenses      |   |                              | 34,410     |   |                            |   | 68,541 |   |   |   | 134,141 |   |   |   | 140,273 |   |
|   Pipeline operating expenses      |   |                              | 28,182     |   |                            |   | 20,974 |   |   |   | 47,341 |   |   |   | 46,288 |   |
|   Cost of gas purchased for resale |   |                              | 39,437     |   |                            |   | 35,902 |   |   |   | 86,495 |   |   |   | 86,227 |   |
|   Depletion and depreciation       |   |                              | 56,844     |   |                            |   | 60,827 |   |   |   | 117,861 |   |   |   | 121,892 |   |
|   General and administrative       |   |                              | 451,563    |   |                            |   | 457,208 |   |   |   | 973,536 |   |   |   | 1,140,289 |   |
| Total operating expenses                     |   |                              | 685,678    |   |                            |   | 773,266 |   |   |   | 1,510,877 |   |   |   | 1,741,523 |   |
| Loss from operations                         |   |                              | (430,409   | )      |                            |   | (535,347 | ) |   |   | (967,362 | ) |   |   | (1,221,209 | ) |
|                                         |   |                              |       |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Other income (expenses):                     |   |                              |       |   |                            |   |   |   |   |   |   |   |   |   |   |   |
|   Interest income                  |   |                              | 195        |   |                            |   | 412 |   |   |   | 386 |   |   |   | 1,827 |   |
|   Interest expense                 |   |                              | (143,351   | )      |                            |   | (112,589 | ) |   |   | (278,618 | ) |   |   | (215,420 | ) |
|   Liquidated damages               |   |                              | (5,126     | )      |                            |   | (5,126 | ) |   |   | (10,252 | ) |   |   | (10,252 | ) |
|   Other income (expense)           |   |                              | 40         |   |                            |   | 59 |   |   |   | (5,683 | ) |   |   | 665 |   |
| Total other expenses                         |   |                              | (148,242   | )      |                            |   | (117,244 | ) |   |   | (294,167 | ) |   |   | (223,180 | ) |
|                                         |   |                              |       |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Loss before income tax expense               |   |                              | (578,651   | )      |                            |   | (652,591 | ) |   |   | (1,261,529 | ) |   |   | (1,444,389 | ) |
|                                         |   |                              |       |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Income tax expense                           |   |                              | -          |   |                            |   | - |   |   |   | - |   |   |   | (370 | ) |
|                                         |   |                              |       |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                     |   | $                                 | (578,651   | )      |                            | $      | (652,591 | ) |   | $ | (1,261,529 | ) |   | $ | (1,444,759 | ) |
|                                         |   |                              |       |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Basis and diluted loss per share             |   | $                                 | (0.02      | )      |                            | $      | (0.02 | ) |   | $ | (0.04 | ) |   | $ | (0.04 | ) |
|                                         |   |                              |       |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average shares outstanding          |   |                              | 33,610,801 |   |                            |   | 33,610,801 |   |   |   | 33,610,801 |   |   |   | 33,610,801 |   |

----

|                                                                                                              |   |  Six Months Ended June 30, |       |
|-------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                                                              |   | 2010                            |       |   | 2009 |   |
| Operating Activities                                                                                              |   |                            |       |   |   |   |
|  Net loss                                                                                                    |   | $                               | (1,261,529 | ) |   | $ | (1,444,759 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities:                                       |   |                            |       |   |   |   |   |   |
|   Depletion and depreciation                                                                            |   |                            | 117,861    |   |   |   | 121,892 |   |
|   Accretion of discount on asset retirement obligations                                                 |   |                            | 9,012      |   |   |   | 8,503 |   |
|   Liquidated damages                                                                                    |   |                            | 10,252     |   |   |   | 10,252 |   |
|   Loss on abandonment of equipment                                                                      |   |                            | 5,727      |   |   |   | - |   |
|   Changes in operating assets and liabilities:                                                          |   |                            |       |   |   |   |   |   |
|     Accounts receivable, trade                                                                |   |                            | (1,512     | ) |   |   | 124,498 |   |
|     Accounts receivable, related parties                                                      |   |                            | 1,728      |   |   |   | 26,999 |   |
|     Joint-interest billings receivable, related parties, net                                  |   |                            | 7,308      |   |   |   | 34,279 |   |
|     Other current assets                                                                      |   |                            | 46,480     |   |   |   | (77,429 | ) |
|     Accounts payable                                                                          |   |                            | 131,473    |   |   |   | (75,306 | ) |
|     Accounts payable, related parties                                                         |   |                            | 253,233    |   |   |   | 103,616 |   |
|     Revenues payable                                                                          |   |                            | (8,822     | ) |   |   | (22,841 | ) |
|     Interest payable, related party                                                           |   |                            | 273,988    |   |   |   | 214,853 |   |
|     Drilling prepayment                                                                       |   |                            | 145,458    |   |   |   | - |   |
|     Other payables                                                                            |   |                            | (16,221    | ) |   |   | (8,457 | ) |
| Net cash used in operating activities                                                                             |   |                            | (285,564   | ) |   |   | (983,900 | ) |
|                                                                                                              |   |                            |       |   |   |   |   |   |
| Investing Activities                                                                                              |   |                            |       |   |   |   |   |   |
| Purchases of certificate of deposit                                                                               |   |                            | (386       | ) |   |   | - |   |
| Proceeds from sale of working interest                                                                            |   |                            | 265,565    |   |   |   | - |   |
| Purchases of property and equipment                                                                               |   |                            | (85,221    | ) |   |   | (23,957 | ) |
| Purchases of oil and gas properties                                                                               |   |                            | (48,327    | ) |   |   | (374,000 | ) |
| Net cash provided by (used in) investing activities                                                               |   |                            | 131,631    |   |   |   | (397,957 | ) |
|                                                                                                              |   |                            |       |   |   |   |   |   |
| Financing Activities                                                                                              |   |                            |       |   |   |   |   |   |
| Payments on notes payable                                                                                         |   |                            | (3,459     | ) |   |   | (3,245 | ) |
| Proceeds from borrowing on notes payable, related party                                                           |   |                            | 723,000    |   |   |   | 900,000 |   |
| Net cash provided by financing activities                                                                         |   |                            | 719,541    |   |   |   | 896,755 |   |
|                                                                                                              |   |                            |       |   |   |   |   |   |
| Net increase (decrease) in cash and cash equivalents                                                              |   |                            | 565,608    |   |   |   | (485,102 | ) |
| Cash and cash equivalents at beginning of period                                                                  |   |                            | 127,176    |   |   |   | 792,255 |   |
|                                                                                                              |   |                            |       |   |   |   |   |   |
| Cash and cash equivalents at end of period                                                                        |   | $                               | 692,784    |   |   | $ | 307,153 |   |
|                                                                                                              |   |                            |       |   |   |   |   |   |
| Supplemental Disclosure of Cash Flow Information                                                                  |   |                            |       |   |   |   |   |   |
| Cash paid during the period for interest                                                                          |   | $                               | -          |   |   | $ | 567 |   |
|                                                                                                              |   |                            |       |   |   |   |   |   |
| Non-cash financing activity relating to addition of accrued and unpaid interest into notes payable, related party |   | $                               | 1,035,343  |   |   | $ | - |   |

----

----

| Notes payable, related party consisted of the following at:                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | June 30,2010 |       |   | December 31, 2009 |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|------------|--------|-------------------|
| Original note payable dated May 21, 2007 to Teton (the “Teton Note”).  Additional funds added by amendments three, four, five to the note result in an outstanding balance of $5,952,303, including interest at 8%, with all interest and principal due on the maturity date of May 21, 2010.  Substantially all of the Company’s assets are pledged as collateral on the note.                                                                                                  |   | $            | -          |   |              | $ | 5,952,303 |   |
|  Note payable to Teton (the “Teton Renewal Note”) in the amount of $6,987,646 dated June 1, 2010, including interest at 8%, with all principal due on the maturity date of June 1, 2011.  Interest payments are due October 1, 2010; January 1, 2011; April 1, 2011; and at maturity.  Renewed original note above which matured May 21, 2010.  Secured by a stock pledge and security agreement.                                                                       |   |         | 6,987,646  |   |              |   | - |   |
|  Original unsecured promissory note payable in the amount of $1 million dated October 14, 2009 to Teton (the “Teton Promissory”).  Additional funds added by amendment two to the note result in funds available of $1.5 million.  Accrued interest of 6.25% per annum on the principal amount, which is the sum of all advances made, is due July 1, 2010.  The remaining interest and outstanding principal balance are due on the maturity date of October 14, 2010. |   |         | 1,123,000  |   |              |   | 400,000 |   |
|  Total notes payable, related party                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |         | 8,110,646  |   |              |   | 6,352,303 |   |
| Less current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |         | (8,110,646 | )      |              |   | (6,352,303 | )  |
| Total long-term notes payable, related party                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | $            | -          |   |              | $ | - |   |

----

|                                                       |   | Three Months EndedJune 30, 2010 |     |   | Three Months EndedJune 30, 2009 |   |     | Six Months EndedJune 30, 2010 |   |   | Six Months EndedJune 30, 2009 |   |
|------------------------------------------------------------|--------|---------------------------------|----------|--------|---------------------------------|--------|----------|------------------------------------|--------|--------|-------------------------------|--------|
|                                                       |   |                            |     |   |                            |   |     |                               |   |   |                          |   |
| Business segment revenue:                                  |   |                            |     |   |                            |   |     |                               |   |   |                          |   |
|      Oil and gas                  |   | $                               | 127,603  |   |                            | $      | 131,449  |                               |   | $      | 305,319                       |   |   | $ | 246,256 |   |
|  Condensate and skim oil                              |   |                            | 39,321   |   |                            |   | 19,556   |                               |   |   | 55,869                        |   |   |   | 40,823 |   |
|  Transportation and gathering                         |   |                            | 64,232   |   |                            |   | 61,828   |                               |   |   | 131,620                       |   |   |   | 136,660 |   |
|  Saltwater disposal income                            |   |                            | 24,113   |   |                            |   | 25,086   |                               |   |   | 50,707                        |   |   |   | 96,575 |   |
| Total revenues                                             |   | $                               | 255,269  |   |                            | $      | 237,919  |                               |   | $      | 543,515                       |   |   |   | 520,314 |   |
|                                                       |   |                            |     |   |                            |   |     |                               |   |   |                          |   |   |   |   |   |
| Business segment profit (loss):                            |   |                            |     |   |                            |   |     |                               |   |   |                          |   |   |   |   |   |
|      Oil and gas                  |   | $                               | (20,249  | )      |                            | $      | (83,590  | )                                  |   | $      | (4,616                        | )      |   | $ | (280,886 | ) |
|      Condensate and skim oil      |   |                            | 39,320   |   |                            |   | 19,556   |                               |   |   | 55,869                        |   |   |   | 40,823 |   |
|      Transportation and gathering |   |                            | (22,766  | )      |                            |   | (7,049   | )                                  |   |   | (42,676                       | )      |   |   | (24,319 | ) |
|      Saltwater disposal           |   |                            | (36,515  | )      |                            |   | (68,301  | )                                  |   |   | (136,134                      | )      |   |   | (95,653 | ) |
|      General corporate            |   |                            | (390,199 | )      |                            |   | (395,963 | )                                  |   |   | (839,805                      | )      |   |   | (861,174 | ) |
| Loss from operations                                       |   | $                               | (430,409 | )      |                            | $      | (535,347 | )                                  |   | $      | (967,362                      | )      |   | $ | (1,221,209 | ) |
|                                                       |   |                            |     |   |                            |   |     |                               |   |   |                          |   |   |   |   |   |
| Depreciation and depletion:                                |   |                            |     |   |                            |   |     |                               |   |   |                          |   |   |   |   |   |
|      Oil and gas                  |   | $                               | 21,768   |   |                            | $      | 27,235   |                               |   | $      | 47,708                        |   |   | $ | 54,987 |   |
|      Transportation and gathering |   |                            | 7,491    |   |                            |   | 7,599    |                               |   |   | 14,983                        |   |   |   | 15,198 |   |
|      Saltwater disposal           |   |                            | 19,821   |   |                            |   | 16,865   |                               |   |   | 39,643                        |   |   |   | 33,469 |   |
|      General corporate            |   |                            | 7,764    |   |                            |   | 9,128    |                               |   |   | 15,527                        |   |   |   | 18,238 |   |
| Total depletion and depreciation                           |   | $                               | 56,844   |   |                            | $      | 60,827   |                               |   | $      | 117,861                       |   |   | $ | 121,892 |   |

----

|                                                       |   | Six Months Ended June 30,2010 |       |   | Six Months EndedJune 30,2009 |   |
|------------------------------------------------------------|--------|------------------------------------|------------|--------|------------------------------|--------|
| Capital expenditures:                                      |   |                               |       |   |                         |   |
|      Oil and gas                  |   | $                                  | 48,327     |   |                         | $      | 374,000 |   |
|      Transportation and gathering |   |                               | 300        |   |                         |   | - |   |
|      Saltwater disposal           |   |                               | 84,921     |   |                         |   | 23,197 |   |
|      General corporate            |   |                               | -          |   |                         |   | 760 |   |
| Total capital expenditures                                 |   | $                                  | 133,548    |   |                         | $      | 397,957 |   |
|                                                       |   |                               |       |   |                         |   |   |   |
|                                                       |   | June 30,                           |       |   | December 31,                 |   |
|                                                       |   |                               | 2010       |   |                         |   | 2009 |   |
| Business segment assets:                                   |   |                               |       |   |                         |   |   |   |
|      Oil and gas                  |   | $                                  | 20,899,478 |   |                         | $      | 20,508,595 |   |
|      Transportation and gathering |   |                               | 644,182    |   |                         |   | 664,306 |   |
|      Saltwater disposal           |   |                               | 350,384    |   |                         |   | 294,086 |   |
|      General corporate            |   |                               | 604,145    |   |                         |   | 334,703 |   |
| Total assets                                               |   | $                                  | 22,498,189 |   |                         | $      | 21,801,690 |   |
|                                                       |   |                               |       |   |                         |   |   |   |

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| ·  | Develop the Cornerstone Project in East Texas through an aggressive lease renewal and lease acquisition program along with a drilling program.  We will focus our near-term efforts on our leasing program and development drilling on existing acreage.  We expect this drilling program to increase our proved reserve and cash flow profile. In early August 2010, we drilled a 7,000 foot well and pipe has been set to the bottom.  Completion work will commence in the latter part of August.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·  | Apply management expertise in the Cornerstone Project area and recent developments in drilling and completion technology to identify new drilling opportunities and enhance production.  We plan to maximize the present value of our vertical wells by utilizing a shotgun dual or sawtooth production technique. We will also implement the latest drilling, fracturing, and completion techniques, including shotgun duals, to develop our properties as well as horizontal drilling.  These horizontal wells will primarily target the Bossier formation and we anticipate these wells will yield significantly higher hydrocarbon flow rates than our vertical wells.  We plan to begin our horizontal programs in the first quarter of 2011.                                                                                                                                                                                                                               |
| ·  | Continue to lease underdeveloped acreage in the Cornerstone Project area.  We are operating an aggressive leasing program with funding of up to $8.7 million dollars from our two partners. The partners pay 100% of the cost for a 50% interest. The program includes renewing existing leasehold and acquiring new leaseholds.  We are using our extensive proprietary database to help optimize additional drilling locations and to acquire additional acreage.  We intend to target acreage with exploitation and technology upside within the Cornerstone Project area.  Most properties in the project area are held by smaller independent companies that lack the resources to exploit them fully.  We intend to pursue these opportunities to selectively expand our portfolio of properties.  These acreage additions will complement our existing substantial acreage position in the area and provide us with significant additional drilling inventory.  |
| ·  | Maintain a conservative and flexible financial strategy.  We intend to continue to focus on maintaining a low level of corporate overhead expense in addition to continued utilization of outsourcing, when appropriate, to maximize cash flow.  We believe this internally-generated cash flow, coupled with reserve-based debt financing when appropriate, will provide the optimal capital structure to fund our future drilling activity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

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|                           |   | 2010   |     |   | 2009   |   |     | Increase (Decrease) |   |
|--------------------------------|--------|--------|----------|--------|--------|--------|----------|---------------------|--------|
| Total revenues                 |   | $      | 255,269  |   |   | $      | 237,919  |                |   | $ | 17,350 |   |
| Total operating expenses       |   |   | 685,678  |   |   |   | 773,266  |                |   |   | (87,588 | ) |
| Loss from operations           |   |   | (430,409 | )      |   |   | (535,347 | )                   |   |   | (104,938 | ) |
| Total other income (expenses)  |   |   | (148,242 | )      |   |   | (117,244 | )                   |   |   | 30,998 |   |
| Loss before income tax expense |   |   | (578,651 | )      |   |   | (652,591 | )                   |   |   | (73,940 | ) |
| Income tax expense             |   |   | -        |   |   |   | -        |                |   |   | - |   |
| Net loss                       |   | $      | (578,651 | )      |   | $      | (652,591 | )                   |   | $ | (73,940 | ) |

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|                           |   | 2010   |       |   | 2009   |   |       | Increase(Decrease) |   |
|--------------------------------|--------|--------|------------|--------|--------|--------|------------|--------------------|--------|
| Total revenues                 |   | $      | 543,515    |   |   | $      | 520,314    |               |   | $ | 23,201 |   |
| Total operating expenses       |   |   | 1,510,877  |   |   |   | 1,741,523  |               |   |   | (230,646 | ) |
| Loss from operations           |   |   | (967,362   | )      |   |   | (1,221,209 | )                  |   |   | (253,847 | ) |
| Total other expenses           |   |   | (294,167   | )      |   |   | (223,180   | )                  |   |   | 70,987 |   |
| Loss before income tax expense |   |   | (1,261,529 | )      |   |   | (1,444,389 | )                  |   |   | (182,860 | ) |
| Income tax expense             |   |   | -          |   |   |   | (370       | )                  |   |   | (370 | ) |
| Net loss                       |   | $      | (1,261,529 | )      |   | $      | (1,444,759 | )                  |   | $ | (183,230 | ) |

| ·   | Lease Operating Expense:  The $55,051 decrease in lease operating expense to $151,503 for the six months ended June 30, 2010 from $206,554 for the six months ended June 30, 2009 is primarily due to workover costs on the Bramlett and Ralph #1 wells incurred in the first half of 2009. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | General and Administrative Expense:  The $166,753 decrease in general and administrative expense to $973,536 for the six months ended June 30, 2010 from $1,140,289 for the six months ended June 30, 2009 is primarily due to a decrease in legal and accounting fees of $150,488.  The decrease was due to continued efficiencies in the accounting work performed during the first quarter of 2010 related to the preparation of the 2009 10-K.  An additional $12,000 decrease in regulatory filing fees was due to lower audit fees for the 2009 10-K as compared to fees in the first quarter of 2009 for the audit of the 2008 10-K. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| ·   | Saltwater disposal expenses for the six months ended June 30, 2010 were $134,141 compared to $140,273 for the six months ended June 30, 2009.  Pipeline operating expenses for the six months ended June 30, 2010 were $47,341 compared to $46,288 for the six months ended June 30, 2009.  The cost of gas purchased for resale for the six months ended June 30, 2010 was $86,495 compared to $86,227 for the six months ended June 30, 2009.  Depletion and depreciation for the six months ended June 30, 2010 was $117,861 compared to $121,892 for the six months ended June 30, 2009. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                        |   | Six Months Ended June 30, |     |
|-------------------------------------------------------------|--------|---------------------------|----------|
|                                                        |   | 2010                      |     |   | 2009 |   |
| Total cash provided by (used in):                           |   |                      |     |   |   |   |
| Operating activities                                        |   | $                         | (285,564 | ) |   | $ | (983,900 | ) |
| Investing activities                                        |   |                      | 131,631  |   |   |   | (397,957 | ) |
| Financing activities                                        |   |                      | 719,541  |   |   |   | 896,755 |   |
| Increase (decrease)  in cash and cash equivalents |   | $                         | $565,608 |   |   | $ | (485,102 | ) |

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| i.   | We did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of GAAP commensurate with our complexity and our financial accounting and reporting requirements.  We have limited experience in the areas of financial reporting and disclosure controls and procedures.  Also, we do not have an independent audit committee.  As a result, there is a lack of monitoring of the financial reporting process and there is a reasonable possibility that material misstatements of the consolidated financial statements, including disclosures, will not be prevented or detected on a timely basis; and |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ii.   | Due to our small size, we do not have a proper segregation of duties in certain areas of our financial reporting process.  The areas where we have a lack of segregation of duties include cash receipts and disbursements, approval of purchases and approval of accounts payable invoices for payment. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the consolidated financial statements will not be prevented or detected on a timely basis. |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| 31.01 | Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 31.02 | Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 32.01 | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|                             | PEGASI ENERGY RESOURCES CORPORATION                                               |
|----------------------------------|----------------------------------------------------------------------------------------|
| Date:  August 13, 2010 | By: /s/ MICHAEL NEUFELD                                                           |
|                             | Michael Neufeld                                                                        |
|                             | Chief Executive Officer (Principal Executive Officer)                                  |
|                             |                                                                                   |
| Date:  August 13, 2010 | By: /s/ RICHARD LINDERMANIS                                                       |
|                             | Richard Lindermanis                                                                    |
|                             | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |