| 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                                  | 17     |
| Item 4. Controls and Procedures                                                                     | 17     |
|                                                                                                |   |
| PART II - OTHER INFORMATION                                                                         |
|                                                                                                |
| Item 1. Legal Proceedings                                                                           | 19     |
| Item 1A. Risk Factors                                                                               | 19     |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                 | 19     |
| Item 3. Defaults Upon Senior Securities                                                             | 19     |
| Item 4. (Removed and Reserved)                                                                      | 19     |
| Item 5. Other Information                                                                           | 19     |
| Item 6. Exhibits                                                                                    | 19     |
|                                                                                                |   |
| SIGNATURES                                                                                          | 20     |

----

|                                                                       |   | March 31,   |       |   | December 31, |   |
|----------------------------------------------------------------------------|--------|-------------|------------|--------|--------------|--------|
|                                                                       |   | 2011        |       |   | 2010         |   |
|                                                                       |   | (Unaudited) |       |   |         |   |
| Assets                                                                     |   |        |       |   |         |   |
| Current assets:                                                            |   |        |       |   |         |   |
|    Cash and cash equivalents                                |   | $           | 651,711    |   |         | $      | 249,802 |   |
|    Accounts receivable, trade                               |   |        | 375,846    |   |         |   | 186,669 |   |
|    Accounts receivable, related parties                     |   |        | 11,502     |   |         |   | 13,002 |   |
|    Joint-interest billings receivable, related parties, net |   |        | 15,669     |   |         |   | 192,700 |   |
|    Joint-interest billing receivable, net                   |   |        | 29,074     |   |         |   | 29,627 |   |
|    Assets held for sale                                     |   |        | 300,347    |   |         |   | 300,347 |   |
|    Other current assets                                     |   |        | 34,944     |   |         |   | 52,440 |   |
| Total current assets                                                       |   |        | 1,419,093  |   |         |   | 1,024,587 |   |
|                                                                       |   |        |       |   |         |   |   |   |
| Property and equipment:                                                    |   |        |       |   |         |   |   |   |
|    Equipment                                                |   |        | 73,099     |   |         |   | 83,711 |   |
|    Pipelines                                                |   |        | 722,809    |   |         |   | 722,937 |   |
|    Leasehold improvements                                   |   |        | 7,022      |   |         |   | 7,022 |   |
|    Vehicles                                                 |   |        | 50,663     |   |         |   | 50,663 |   |
|    Office furniture                                         |   |        | 135,689    |   |         |   | 135,689 |   |
|    Website                                                  |   |        | 15,000     |   |         |   | 15,000 |   |
| Total property and equipment                                               |   |        | 1,004,282  |   |         |   | 1,015,022 |   |
| Less accumulated depreciation                                              |   |        | (341,952   | )      |         |   | (334,668 | ) |
| Property and equipment, net                                                |   |        | 662,330    |   |         |   | 680,354 |   |
|                                                                       |   |        |       |   |         |   |   |   |
| Oil and gas properties:                                                    |   |        |       |   |         |   |   |   |
|    Oil and gas properties, proved                           |   |        | 11,790,039 |   |         |   | 11,762,909 |   |
|    Oil and gas properties, unproved                         |   |        | 9,103,877  |   |         |   | 9,044,960 |   |
|    Capitalized asset retirement obligations                 |   |        | 219,040    |   |         |   | 219,040 |   |
| Total oil and gas properties                                               |   |        | 21,112,956 |   |         |   | 21,026,909 |   |
| Less accumulated depletion and depreciation                                |   |        | (1,061,917 | )      |         |   | (1,018,100 | ) |
| Oil and gas properties, net                                                |   |        | 20,051,039 |   |         |   | 20,008,809 |   |
|                                                                       |   |        |       |   |         |   |   |   |
| Other assets:                                                              |   |        |       |   |         |   |   |   |
|    Restricted cash – leasing program                  |   |        | 166,570    |   |         |   | 394,693 |   |
|    Restricted cash – drilling program                 |   |        | 723,910    |   |         |   | 793,611 |   |
|    Certificates of deposit                                  |   |        | 78,049     |   |         |   | 77,947 |   |
| Total other assets                                                         |   |        | 968,529    |   |         |   | 1,266,251 |   |
|                                                                       |   |        |       |   |         |   |   |   |
| Total assets                                                               |   | $           | 23,100,991 |   |         | $      | 22,980,001 |   |

----

|                                                                                                                                                                             |   | March 31,   |        |   | December 31, |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|-------------|--------|--------------|--------|
|                                                                                                                                                                             |   | 2011        |        |   | 2010         |   |
|                                                                                                                                                                             |   | (Unaudited) |        |   |         |   |
| Liabilities and Stockholders' Equity                                                                                                                                             |   |        |        |   |         |   |
| Current liabilities:                                                                                                                                                             |   |        |        |   |         |   |
|    Cash overdraft                                                                                                                                                 |   | $           | 537,946     |   |         | $      | 340,118 |   |
|    Accounts payable                                                                                                                                               |   |        | 1,030,338   |   |         |   | 658,316 |   |
|    Accounts payable, related parties                                                                                                                              |   |        | 1,483,960   |   |         |   | 1,321,979 |   |
|    Revenues payable                                                                                                                                               |   |        | 279,087     |   |         |   | 124,723 |   |
|    Interest payable, related party                                                                                                                                |   |        | 552,783     |   |         |   | 394,704 |   |
|    Liquidated damages payable                                                                                                                                     |   |        | 181,751     |   |         |   | 173,802 |   |
|    Other payables                                                                                                                                                 |   |        | 31,881      |   |         |   | 27,893 |   |
|    Current portion of notes payable                                                                                                                               |   |        | 2,006       |   |         |   | 1,976 |   |
|    Current portion of notes payable, related party                                                                                                                |   |        | 8,160,646   |   |         |   | 8,160,646 |   |
| Total current liabilities                                                                                                                                                        |   |        | 12,260,398  |   |         |   | 11,204,157 |   |
|                                                                                                                                                                             |   |        |        |   |         |   |   |   |
| Lease program deposits                                                                                                                                                           |   |        | 166,570     |   |         |   | 394,693 |   |
| Drilling prepayments                                                                                                                                                             |   |        | 723,910     |   |         |   | 793,611 |   |
| Notes payable                                                                                                                                                                    |   |        | 2,313       |   |         |   | 2,826 |   |
| Asset retirement obligations                                                                                                                                                     |   |        | 323,192     |   |         |   | 317,279 |   |
| Total long-term liabilities                                                                                                                                                      |   |        | 1,215,985   |   |         |   | 1,508,409 |   |
|                                                                                                                                                                             |   |        |        |   |         |   |   |   |
| Total liabilities                                                                                                                                                                |   |        | 13,476,383  |   |         |   | 12,712,566 |   |
|                                                                                                                                                                             |   |        |        |   |         |   |   |   |
| Commitments and contingencies (Note 5)                                                                                                                                           |   |        |        |   |         |   |   |   |
|                                                                                                                                                                             |   |        |        |   |         |   |   |   |
| Stockholders' equity:                                                                                                                                                            |   |        |        |   |         |   |   |   |
|    Preferred stock: $0.001 par value; 5,000,000 shares authorized;                                                                                                |   |        |        |   |         |   |   |   |
|       None issued and outstanding                                                                                                                  |   |        | -           |   |         |   | - |   |
|   Common stock: $0.001 par value; 125,000,000 shares authorized; 33,660,801 shares issued and outstanding at March 31, 2011 and 33,610,801 shares at December 31, 2010 |   |        | 33,661      |   |         |   | 33,611 |   |
|    Additional paid-in capital                                                                                                                                     |   |        | 19,923,354  |   |         |   | 19,903,404 |   |
|    Accumulated deficit                                                                                                                                            |   |        | (10,332,407 | )      |         |   | (9,669,580 | ) |
| Total stockholders' equity                                                                                                                                                       |   |        | 9,624,608   |   |         |   | 10,267,435 |   |
|                                                                                                                                                                             |   |        |        |   |         |   |   |   |
| Total liabilities and stockholders' equity                                                                                                                                       |   | $           | 23,100,991  |   |         | $      | 22,980,001 |   |

----

|                                                                                            |   | Three Months Ended March 31, |       |
|-------------------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                            |   | 2011                         |       |   | 2010 |   |
| Revenues:                                                                                       |   |                         |       |   |   |   |
|   Oil and gas                                                                         |   | $                            | 201,166    |   |   | $ | 177,716 |   |
|   Condensate and skim oil                                                             |   |                         | 8,699      |   |   |   | 6,638 |   |
|   Transportation and gathering                                                        |   |                         | 147,457    |   |   |   | 67,388 |   |
| Total revenues                                                                                  |   |                         | 357,322    |   |   |   | 251,742 |   |
|                                                                                            |   |                         |       |   |   |   |   |   |
| Operating expenses:                                                                             |   |                         |       |   |   |   |   |   |
|   Lease operating expenses                                                            |   |                         | 101,500    |   |   |   | 76,261 |   |
|   Pipeline operating expenses                                                         |   |                         | 39,032     |   |   |   | 19,158 |   |
|   Cost of gas purchased for resale                                                    |   |                         | 94,814     |   |   |   | 47,058 |   |
|   Depletion and depreciation                                                          |   |                         | 61,713     |   |   |   | 41,195 |   |
|   General and administrative                                                          |   |                         | 587,586    |   |   |   | 515,314 |   |
| Total operating expenses                                                                        |   |                         | 884,645    |   |   |   | 698,986 |   |
| Loss from operations                                                                            |   |                         | (527,323   | ) |   |   | (447,244 | ) |
|                                                                                            |   |                         |       |   |   |   |   |   |
| Other income (expenses):                                                                        |   |                         |       |   |   |   |   |   |
|   Interest income                                                                     |   |                         | 102        |   |   |   | 191 |   |
|   Interest expense                                                                    |   |                         | (161,178   | ) |   |   | (134,096 | ) |
|   Liquidated damages                                                                  |   |                         | (7,949     | ) |   |   | (5,126 | ) |
|   Other income                                                                        |   |                         | 5,068      |   |   |   | (5,723 | ) |
| Total other income (expenses)                                                                   |   |                         | (163,957   | ) |   |   | (144,754 | ) |
|                                                                                            |   |                         |       |   |   |   |   |   |
| Loss from continuing operations before income tax benefit                                       |   |                         | (691,280   | ) |   |   | (591,998 | ) |
|                                                                                            |   |                         |       |   |   |   |   |   |
| Income tax benefit                                                                              |   |                         | (9,959     | ) |   |   | - |   |
|                                                                                            |   |                         |       |   |   |   |   |   |
| Loss from continuing operations                                                                 |   |                         | (681,321   | ) |   |   | (591,998 | ) |
| Income (loss) from discontinued operations (net of tax expenses of $9,959 and $0, respectively) |   |                         | 18,494     |   |   |   | (90,879 | ) |
|                                                                                            |   |                         |       |   |   |   |   |   |
| Net loss                                                                                        |   | $                            | (662,827   | ) |   | $ | (682,877 | ) |
|                                                                                            |   |                         |       |   |   |   |   |   |
| Basic and diluted loss per share:Loss from continuing operations                                |   |                         | (0.02      | ) |   |   | (0.02 | ) |
| Income (loss) from discontinued operations                                                      |   |                         | 0.00       |   |   |   | (0.00 | ) |
| Net loss                                                                                        |   | $                            | (0.02      | ) |   | $ | (0.02 | ) |
|                                                                                            |   |                         |       |   |   |   |   |   |
| Weighted average shares outstanding                                                             |   |                         | 33,627,468 |   |   |   | 33,610,801 |   |

----

|                                                                                      |   | Three Months Ended March 31, |     |
|-------------------------------------------------------------------------------------------|--------|------------------------------|----------|
|                                                                                      |   | 2011                         |     |   | 2010 |   |
| Operating Activities                                                                      |   |                         |     |   |   |   |
|  Net loss                                                                            |   | $                            | (662,827 | ) |   | $ | (682,877 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |   |                         |     |   |   |   |   |   |
|   Depletion and depreciation                                                    |   |                         | 61,713   |   |   |   | 61,017 |   |
|   Accretion of discount on asset retirement obligations                         |   |                         | 5,913    |   |   |   | 4,506 |   |
|   Stock issued for consulting services                                          |   |                         | 20,000   |   |   |   | - |   |
|   Loss on abandonment of equipment                                              |   |                         | -        |   |   |   | 5,727 |   |
|   Gain on sale of equipment                                                     |   |                         | (4,872   | ) |   |   | - |   |
|   Changes in operating assets and liabilities:                                  |   |                         |     |   |   |   |   |   |
|     Accounts receivable, trade                                        |   |                         | (189,177 | ) |   |   | (30,709 | ) |
|     Accounts receivable, related parties                              |   |                         | 1,500    |   |   |   | (1,272 | ) |
|     Joint-interest billing receivable, net                            |   |                         | 553      |   |   |   | - |   |
|     Joint-interest billings receivable, related parties, net          |   |                         | 177,031  |   |   |   | (3,911 | ) |
|     Other current assets                                              |   |                         | 17,496   |   |   |   | 24,974 |   |
|     Accounts payable                                                  |   |                         | 372,022  |   |   |   | 98,793 |   |
|     Accounts payable, related parties                                 |   |                         | 161,981  |   |   |   | 66,850 |   |
|     Revenues payable                                                  |   |                         | 154,364  |   |   |   | 14,376 |   |
|     Interest payable, related party                                   |   |                         | 158,079  |   |   |   | 131,046 |   |
|     Liquidated damages payable                                        |   |                         | 7,949    |   |   |   | 5,126 |   |
|     Other payables                                                    |   |                         | 3,988    |   |   |   | (11,942 | ) |
| Net cash provided by (used in) operating activities                                       |   |                         | 285,713  |   |   |   | (318,296 | ) |
|                                                                                      |   |                         |     |   |   |   |   |   |
| Investing Activities                                                                      |   |                         |     |   |   |   |   |   |
| Additions to certificate of deposit                                                       |   |                         | (102     | ) |   |   | (190 | ) |
| Purchases of oil and gas properties                                                       |   |                         | (86,047  | ) |   |   | (19,070 | ) |
| Purchases of property and equipment                                                       |   |                         | -        |   |   |   | (84,920 | ) |
| Proceeds from sale of property and equipment                                              |   |                         | 5,000    |   |   |   | - |   |
| Net cash used in investing activities                                                     |   |                         | (81,149  | ) |   |   | (104,180 | ) |
|                                                                                      |   |                         |     |   |   |   |   |   |
| Financing Activities                                                                      |   |                         |     |   |   |   |   |   |
| Payments on notes payable                                                                 |   |                         | (483     | ) |   |   | (1,716 | ) |
| Cash overdraft                                                                            |   |                         | 197,828  |   |   |   | - |   |
| Proceeds from borrowing on notes payable, related party                                   |   |                         | -        |   |   |   | 623,000 |   |
| Net cash provided by financing activities                                                 |   |                         | 197,345  |   |   |   | 621,284 |   |
|                                                                                      |   |                         |     |   |   |   |   |   |
| Net increase in cash and cash equivalents                                                 |   |                         | 401,909  |   |   |   | 198,808 |   |
| Cash and cash equivalents at beginning of period                                          |   |                         | 249,802  |   |   |   | 127,176 |   |
|                                                                                      |   |                         |     |   |   |   |   |   |
| Cash and cash equivalents at end of period                                                |   | $                            | 651,711  |   |   | $ | 325,984 |   |
|                                                                                      |   |                         |     |   |   |   |   |   |
| Supplemental Disclosure of Cash Flow Information                                          |   |                         |     |   |   |   |   |   |
| Cash paid during the period for interest                                                  |   | $                            | 3,564    |   |   | $ | 4,221 |   |
|                                                                                      |   |                         |     |   |   |   |   |   |
| Noncash disclosure - stock issued for consulting services                                 |   | $                            | 20,000   |   |   | $ | - |   |
|                                                                                      |   |                         |     |   |   |   |   |   |

----

|                                                                                                                                                                                                                                                                                                                                                                                             |   | March 31,2011 |        |   | December 31,2010 |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|-------------|--------|------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                  |   |          |        |   |             |   |   |   |
| 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 and  interest due on the maturity date of June 1, 2011 (however see third amendment below).    Renewed original note which matured May 21, 2010.  Secured by a stock pledge and security agreement. |   | $             | 6,987,646   |   |             | $ | 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 results in funds available of $1.5 million, including interest of 6.25%, with all interest and principal due on the maturity date of April 2, 2011 (however see fifth amendment below).   |   |          | 1,173,000   |   |             |   | 1,173,000 |   |
| Total notes payable, related party                                                                                                                                                                                                                                                                                                                                                                    |   |          | 8,160,646   |   |             |   | 8,160,646 |   |
| Less current portion                                                                                                                                                                                                                                                                                                                                                                                  |   |          | (8,160,646) |   |             |   | (8,160,646) |   |
| Total long-term notes payable, related party                                                                                                                                                                                                                                                                                                                                                          |   | $             | -           |   |             | $ | - |   |

----

----

|                                                       |   | Three Months EndedMarch 31,2011 |     |   | Three Months EndedMarch 31,2010 |   |
|------------------------------------------------------------|--------|---------------------------------|----------|--------|---------------------------------|--------|
|                                                       |   |                            |     |   |                            |   |
| Business segment revenue:                                  |   |                            |     |   |                            |   |
|      Oil and gas                  |   | $                               | 201,166  |   |                            | $      | 177,716 |   |
|  Condensate and skim oil                              |   |                            | 8,699    |   |                            |   | 6,638 |   |
|  Transportation and gathering                         |   |                            | 147,457  |   |                            |   | 67,388 |   |
| Total revenues                                             |   | $                               | 357,322  |   |                            | $      | 251,742 |   |
|                                                       |   |                            |     |   |                            |   |   |   |
| Business segment profit (loss):                            |   |                            |     |   |                            |   |   |   |
|      Oil and gas                  |   | $                               | (95,487  | )      |                            | $      | 15,633 |   |
|      Condensate and skim oil      |   |                            | 8,699    |   |                            |   | 6,638 |   |
|      Transportation and gathering |   |                            | (4,197   | )      |                            |   | (19,910 | ) |
|      General corporate            |   |                            | (436,338 | )      |                            |   | (449,605 | ) |
| Loss from operations                                       |   | $                               | (527,323 | )      |                            | $      | (447,244 | ) |
|                                                       |   |                            |     |   |                            |   |   |   |
| Depletion and depreciation:                                |   |                            |     |   |                            |   |   |   |
|      Oil and gas                  |   | $                               | 45,610   |   |                            | $      | 25,940 |   |
|      Transportation and gathering |   |                            | 11,799   |   |                            |   | 7,492 |   |
|       Assets held for sale   |   |                            | -        |   |                            |   | 19,822 |   |
|      General corporate            |   |                            | 4,304    |   |                            |   | 7,763 |   |
| Total depletion and depreciation                           |   | $                               | 61,713   |   |                            | $      | 61,017 |   |

|                                                       |   | Three Months Ended March 31,2011 |   |   | Three Months EndedMarch 31,2010 |   |
|------------------------------------------------------------|--------|---------------------------------------|--------|--------|---------------------------------|--------|
| Capital expenditures:                                      |   |                                  |   |   |                            |   |
|      Oil and gas                  |   | $                                     | 86,047 |   |                            | $      | 19,070 |   |
|      Transportation and gathering |   |                                  | -      |   |                            |   | - |   |
|      Assets held for sale         |   |                                  | -      |   |                            |   | 84,920 |   |
|      General corporate            |   |                                  | -      |   |                            |   | - |   |
| Total capital expenditures                                 |   | $                                     | 86,047 |   |                            | $      | 103,990 |   |
|                                                       |   |                                  |   |   |                            |   |   |   |

----

|                                                       |   | March 31, |       |   | December 31, |   |
|------------------------------------------------------------|--------|-----------|------------|--------|--------------|--------|
|                                                       |   | 2011      |       |   | 2010         |   |
| Business segment assets:                                   |   |      |       |   |         |   |
|      Oil and gas                  |   | $         | 21,154,514 |   |         | $      | 20,538,826 |   |
|      Transportation and gathering |   |      | 630,089    |   |         |   | 712,561 |   |
|      Assets held for sale         |   |      | 300,347    |   |         |   | 300,347 |   |
|      General corporate            |   |      | 1,016,041  |   |         |   | 1,428,267 |   |
| Total assets                                               |   | $         | 23,100,991 |   |         | $      | 22,980,001 |   |
|                                                       |   |      |       |   |         |   |   |   |

----

|                             |   | Cost   |    |   | AccumulatedDepreciation |   |    | March 31, 2011Net Book Value |   |
|----------------------------------|--------|--------|---------|--------|-------------------------|--------|---------|------------------------------|--------|
| Lease & well equipment       |   | $      | 597,740 |   |                    | $      | 318,916 |                         |   | $ | 278,824 |   |
| Buildings                        |   |   | 19,916  |   |                    |   | 2,353   |                         |   |   | 17,563 |   |
| Office furniture & equipment |   |   | 6,550   |   |                    |   | 2,590   |                         |   |   | 3,960 |   |
|                             |   | $      | 624,206 |   |                    | $      | 323,859 |                         |   | $ | 300,347 |   |

|                                                 |   | Three Months Ended |   |
|------------------------------------------------------|--------|--------------------|--------|
|                                                 |   | March 31,          |   |   | March 31, |   |
|                                                 |   | 2011               |   |   | 2010 |   |
|                                                 |   |               |   |   |   |   |
| Income (loss) from discontinued operations           |   | $                  | 28,453 |   |   | $ | (90,879 | ) |
| Income tax expense – discontinued operations   |   |               | (9,959 | ) |   |   | - |   |
| Income (loss) from discounted operations, net of tax |   | $                  | 18,494 |   |   | $ | (90,879 | ) |

----

----

| ·             | Develop the Cornerstone Project in East Texas through a 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 late 2010, we completed drilling the Norbord #1 well to 7,005 feet in the Travis Peak formation.  The deliverability rate is estimated at 3,381 MCF (a thousand cubic feet) per day and 55.2 BBLSPD (barrels per day).  Based on the success of this well, we will begin a developmental drilling program in midyear 2011. We have a gross working interest of 25% in the well as we have been carried for the cost of the well. The Swamp Fox #1 test well was drilled to a total depth of 7,000 feet in December 2010.  The well is presently waiting on fracture stimulation after testing oil in the Pettit formation.  We need to obtain financing before the fracture stimulation can be started.  |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·             | 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 drilling programs in the second half of 2011.                                                                                                                                                                                                                                                                                                                                  |
| ·             | Continue to lease underdeveloped acreage in the Cornerstone Project area. We are continuing our leasing program to support our present and future drilling plans with existing funding. 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 Cornerstone Project area are held by smaller independent companies that lack the resources to exploit them to the fullest extent. 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 focusing 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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|                                                           |   | 2011   |     |   | 2010   |   |     | Increase (Decrease) |   |
|----------------------------------------------------------------|--------|--------|----------|--------|--------|--------|----------|---------------------|--------|
| Total revenues                                                 |   | $      | 357,322  |   |   | $      | 251,742  |                |   |   | 105,580 |   |
| Total operating expenses                                       |   |   | 884,645  |   |   |   | 698,986  |                |   |   | 185,659 |   |
| Loss from operations                                           |   |   | (527,323 | )      |   |   | (447,244 | )                   |   |   | 80,079 |   |
| Total other income (expenses)                                  |   |   | (163,957 | )      |   |   | (144,754 | )                   |   |   | 19,203 |   |
| Loss from continuing operations before income tax benefit      |   |   | (691,280 | )      |   |   | (591,988 | )                   |   |   | 99,282 |   |
| Income tax benefit                                             |   |   | (9,959   | )      |   |   | -        |                |   |   | 9,959 |   |
| Loss from continuing operations                                |   |   | (681,321 | )      |   |   | (591,998 | )                   |   |   | 89,323 |   |
| Income (loss) from discontinued operations, net of tax expense |   |   | 18,494   |   |   |   | (90,879  | )                   |   |   | 109,373 |   |
| Net  loss                                            |   | $      | (662,827 | )      |   | $      | (682,877 | )                   |   |   | (20,050 | ) |

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|                                             |   | Three Months Ended March 31, |    |
|--------------------------------------------------|--------|------------------------------|---------|
|                                             |   | 2011                         |    |   | 2010 |   |
| Total cash provided by (used in):                |   |                         |    |   |   |   |
| Operating activities                             |   | $                            | 285,713 |   |   | $ | (318,296 | ) |
| Investing activities                             |   |                         | (81,149 | ) |   |   | (104,180 | ) |
| Financing activities                             |   |                         | 197,345 |   |   |   | 621,284 |   |
| Increase  in cash and cash equivalents |   | $                            | 401,909 |   |   | $ | 198,808 |   |

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| a)   | 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 |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| b)   | 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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| 10.01 | Form of Third Amendment to Promissory Note, effective as of April 1, 2011, by and among Pegasi Energy Resources Corporation, Pegasi Operating Inc., TR Rodessa, Inc., 59 Disposal, Inc. and Teton, Ltd. |
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| 10.02 | Form of Fifth Amendment to Promissory Note, effective as of April 2, 2011, by and among Pegasi Energy Resources Corporation, Pegasi Operating Inc., TR Rodessa, Inc., 59 Disposal, Inc. and Teton, Ltd. |
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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 |
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| 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 |
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| 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:  May 16, 2011 | By: /s/ MICHAEL NEUFELD                                                           |   |
|                          | Michael Neufeld                                                                        |   |
|                          | Chief Executive Officer (Principal Executive Officer)                                  |   |
|                          |                                                                                   |   |
| Date:  May 16, 2011 | By: /s/ RICHARD LINDERMANIS                                                       |   |
|                          | Richard Lindermanis                                                                    |   |
|                          | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |   |