Southern Star Energy (SSER) 10-Q/A 2008 Q2 Quarterly report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB/A

(Amendment No. 1)

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2007

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from __________to __________

Commission file number: 000-52106

SOUTHERN STAR ENERGY INC.

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

Nevada	20-2514234
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

110 Cypress Station Drive, Suite 152, Houston, Texas 77090

(Address of principal executive offices)

832.375.0330

(Issuer’s telephone number)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS

Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes o No o

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 36,348,278 common shares issued and outstanding as of January 14, 2008

Transitional Small Business Disclosure Format (Check one): Yes o No x

INTRODUCTORY NOTE

On January 14, 2009, the board of directors (the “Board”) of Southern Star Energy Inc. (the “Company”) and the Company’s management, including the Company’s recently appointed chief financial officer (the “CFO”), determined that the Company’s consolidated financial statements for the three and six months ended November 30, 2007 (the “Relevant Statements”), as filed with the Company’s Form 10-QSB for the quarter ended November 30, 2007 (the “Relevant Report”), incorrectly recognized a portion of the Company’s stock-based compensation expense. The Company recorded as an expense the grant-date fair value of certain stock option awards at the time of grant instead of over the requisite service period as required by Statement of Financial Accounting Standard No. 123R, Share-Based Payment (“SFAS 123R”). Although this accounting error was corrected by adjusting entries in the Company’s consolidated financial statements for the three and nine months ended February 29, 2008, the Board and the Company’s management, in consultation with Weaver & Tidwell, L.L.P. (the Company’s recently-appointed principal registered independent public accounting firm) (the “Auditor”), have determined that the Relevant Statements can no longer be relied upon. Accordingly, the Company is restating the Relevant Statements in this Amendment No. 1 (also, the “Amendment” or “Form 10-QSB/A”).

The Company’s management and previous auditor first discovered the accounting error in March 2008 during their review of the consolidated financial statements for the three and nine months ended February 29, 2008. Accordingly, the Company adjusted the stock-based compensation expense for the three and nine months ended February 29, 2008 to recognize the grant-date fair value of certain stock option awards over the requisite service period in accordance with SFAS 123R. In January 2009, in preparing the Company’s consolidated financial statements for the quarter ended November 30, 2008, and reviewing previously filed financial statements, the Company’s new CFO noted that the Relevant Statements had not been restated to reflect the adjustments to stock-based compensation expense recorded for the three and nine months ended February 29, 2008. Accordingly, on January 14, 2009, the Company’s chief executive officer (“CEO”), the CFO and the Board, in consultation with the Auditor, determined that the Relevant Statements could no longer be relied upon and must be restated in compliance with SFAS 123R.

The Company’s non-compliance with SFAS 123R in the Relevant Statements resulted in an overstatement of stock-based compensation expense of $993,275 for the quarter ended November 30, 2007. This had the following consequences in the Relevant Statements:

• an overstatement of $993,275 to the Company’s (a) general and administrative expenses, total operating expenses, net loss from operations, net loss before discontinued operations and net loss for the three and six months ended November 30, 2007 and for the period from February 7, 2005 (inception) to November 30, 2007; (b) stock-based compensation for the six months ended November 30, 2007 and for the period from February 7, 2005 (inception) to November 30, 2007; and (c) additional paid-in capital and deficit accumulated during the exploration stage as at November 30, 2007; and

• an overstatement by $0.03 to the Company���s basic net loss per share and diluted net loss per share for the three and six months ended November 30, 2007.

The Company’s restatement of the Relevant Statements in this Amendment adjusts the overstatements by $993,275 or $0.03 (as applicable) and restates the erroneous entries in compliance with SFAS 123R.

The Company is filing this Form 10-QSB/A to amend Items 1 and 2 of Part I of the Relevant Report to properly recognize the Company’s stock-based compensation expense in accordance with SFAS 123R. A detailed description of the restatement is presented in Note 2 –Restatement, which shows the effect the accounting error had on general and administrative expenses, total operating expenses, net loss from operations, net less before discontinued operations, net loss, stock-based compensation, additional paid-in capital, basic net loss per share and diluted net loss per share for the periods ended November 30, 2007. The effect of the restatement is also reflected within the consolidated financial statements and Note 8 – Stock Options. The Company anticipates that the costs to the Company stemming from this error will be immaterial. No adjustments are necessary for financial statements for periods subsequent to November 30, 2007, and neither the restatement nor the error caused a breach of covenants or default on obligations by the Company.

In addition, this Form 10-QSB/A reflects the revision of Management’s Discussion and Analysis or Plan of Operation in Item 2 of Part I; the revision of Controls and Procedures in Item 3 of Part I; and new certifications filed as exhibits in Item 6 of Part II. Aside from the foregoing, this Form 10-QSB/A has not been updated for events or information subsequent to the date of filing of the Relevant Report. Accordingly, this Form 10-QSB/A should be read in conjunction with the Company’s other filings made with the Securities and Exchange Commission (“SEC”).

2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements, as restated.

It is the opinion of management that the interim consolidated financial statements for the quarter ended November 30, 2007 include all adjustments necessary in order to ensure that the interim consolidated financial statements are not misleading.

3

Southern Star Energy Inc.

(formerly Surge Enterprises, Inc.)

(An Exploration Stage Company)

(Unaudited)

November 30, 2007

	Index
Consolidated Balance Sheets, as restated	F–1
Interim Consolidated Statements of Operations, as restated	F–2
Interim Consolidated Statements of Cash Flows, as restated	F–3
Notes to the Consolidated Financial Statements, as restated	F–4

Southern Star Energy Inc.

(formerly Surge Enterprises, Inc.)

(An Exploration Stage Company)

Consolidated Balance Sheets

	November 30,		May 31,
	2007		2007
	$		$
	(Unaudited)
	(Restated, see
	Note 2)
ASSETS
Current Assets
Cash	499,174		737,588
Accounts Receivable (Note 3)	3,542		23,900
Deferred Costs (Note 9(c))	25,000		–
Prepaids	92,336		239,418
Total Current Assets	620,052		1,000,906
Surety Bond (Note 3)	10,000		10,000
Oil and Gas Property (Note 3)	4,686,148		2,796,962
Total Assets	5,316,200		3,807,868
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts Payable and Accrued Liabilities	323,960		646,803
Advances (Note 3)	233,299		82,540
Due to Related Parties (Note 6)	37,334		282
Total Current Liabilities	594,593		729,625
Asset Retirement Obligations (Note 4)	36,412		–
Convertible Debentures, less unamortized discount of $Nil (Note 5)	–		838,538
Total Liabilities	631,005		1,568,163
Contingency and Commitments (Notes 1 and 9)
Stockholders’ Equity
Common Stock
Authorized: 843,750,000 shares, par value $0.001
Issued: 30,806,250 shares (May 31, 2007 – 30,806,250 shares)	30,806		30,806
Additional Paid-In Capital	3,349,402		2,265,819
Common Stock Subscribed	2,882,416		–
Convertible Units (Note 7)	2,430,000		1,850,000
Deficit Accumulated During the Development Stage	(21,286	)	(21,286	)
Deficit Accumulated During the Exploration Stage	(3,986,143	)	(1,885,634	)
Total Stockholders’ Equity	4,685,195		2,239,705
Total Liabilities and Stockholders’ Equity	5,316,200		3,807,868

Subsequent Events (Note 10)

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

F-1

Southern Star Energy Inc.

(An Exploration Stage Company)

(formerly Surge Enterprises, Inc.)

(Unaudited)

Interim Consolidated Statements of Operations

	Accumulated
	From February 7,		Three		Three		Six		Six
	2005 (Date of		Months		Months		Months		Months
	Inception) to		Ended		Ended		Ended		Ended
	November 30,		November 30,		November 30,		November 30,		November 30,
	2007		2007		2006		2007		2006
	$		$		$		$		$
	(Restated, see Note 2)		(Restated, see Note 2)				(Restated, see Note 2)
Revenue	23,277		23,277		–		23,277		–
Operating Expenses
Depletion, depreciation and accretion	66,354		66,354		–		66,354		–
General and administrative (Note 8)	782,102		346,303		31,065		458,453		31,065
Travel	63,548		4,676		23,398		24,101		23,398
Total Operating Expenses	912,004		417,333		54,463		548,908		54,463
Net Loss from Operations	(888,727	)	(394,056	)	(54,463	)	(525,631	)	(54,463	)
Accretion of discount on convertible debentures
(Note 5)	(1,160,000	)	(1,027,868	)	–		(1,081,462	)	–
Financing costs (Note 7)	(1,775,000	)	–		–		(406,000	)	–
Interest on convertible debentures (Note 5)	(162,416	)	(52,416	)	(5,000	)	(87,416	)	(5,000	)
Net Loss Before Discontinued Operations	(3,986,143	)	(1,474,340	)	(59,463	)	(2,100,509	)	(59,463	)
Discontinued operations	(21,286	)	–		48,024		–		35,920
Net Loss	(4,007,429	)	(1,474,340	)	(11,439	)	(2,100,509	)	(23,543	)
Net Loss Per Share
Continuing Operations – Basic and Diluted			(0.05	)	–		(0.07	)	–
Discontinued Operations – Basic and Diluted			–		–		–		–
			(0.05	)	–		(0.07	)	–
Weighted Average Number of Shares Outstanding
– Basic and Diluted			30,806,250		56,662,500		30,806,250		56,662,500

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

F-2

Southern Star Energy Inc.

(An Exploration Stage Company)

(formerly Surge Enterprises, Inc.)

Interim Consolidated Statements of Cash Flows

(Unaudited)

	Accumulated
	From February 7,
	2005 (Date of		Six Months		Six Months
	Inception) to		Ended		Ended
	November 30,		November 30,		November 30,
	2007		2007		2006
	(Restated, see Note 2)		(Restated, see Note 2)
	$		$		$
Operating Activities
Net loss	(4,007,429	)	(2,100,509	)	(23,543	)
Adjustments to reconcile net loss to net cash used in operating
activities:
Accretion of convertible debt discount	1,160,000		1,081,462		–
Asset retirement obligations	732		732		–
Common stock subscribed (Note 9(b))	20,000		20,000
Depreciation	885		–		–
Intrinsic value of convertible units	1,775,000		406,000		–
Interest accrued on convertible debt	–		(75,000	)	5,000
Stock-based compensation	157,583		157,583		–
Changes in operating assets and liabilities
Accounts receivable	6,598		20,358		(6,564	)
Prepaids	297,312		301,860		(671,176	)
Accounts payable and accrued liabilities	(188,894	)	(373,275	)	97,696
Deferred revenue	18,708		–		(3,209	)
Due to related parties	10,724		37,052		–
Net Cash Used in Continuing Operations	(748,781	)	(523,737	)	(601,796	)
Discontinued operations	(38,215	)	–		(38,215	)
Net Cash Used in Operating Activities	(786,996	)	(523,737	)	(640,011	)
Investing Activities
Acquisition of equipment	(7,216	)	–		–
Surety bond	(10,000	)	–		–
Oil and gas property	(4,325,100	)	(1,720,436	)	(560,043	)
Advances from joint interest owners	233,299		150,759		531,600
Net Cash Used in Investing Activities	(4,109,017	)	(1,569,677	)	(28,443	)
Financing Activities
Deferred costs	(25,000	)	(25,000	)	–
Proceeds from issuance of common stock	287,625		–		–
Proceeds from convertible units	2,430,000		580,000		800,000
Advances to related party	6,400		–		6,400
Proceeds from issuance of convertible debentures	2,700,000		1,300,000		600,000
Net Cash Provided by Financing Activities	5,399,025		1,855,000		1,406,400
Effect of exchange rate on cash	(3,838	)	–		–
Change in Cash	499,174		(238,414	)	737,946
Cash – Beginning	–		737,588		25,507
Cash – Ending	499,174		499,174		763,453
Supplemental Disclosures:
Asset retirement obligations recorded in oil and gas property	35,680		35,680		–
Oil and gas property expenditures recorded in accounts payable and
accrued liabilities	304,245		287,848		332,045
Oil and gas property expenditures recorded in prepaids	(87,687	)	(154,278	)	668,596
Interest paid	–		–		–
Income taxes paid	–		–		–

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

F-3

Southern Star Energy Inc.

(An Exploration Stage Company)

(formerly Surge Enterprises, Inc.)

Notes to Interim Consolidated Financial Statements

(Unaudited)

1. Nature of Operations and Continuance of Business

The Company was incorporated in the State of Nevada on February 7, 2005 under the name Surge Enterprises, Inc. Pursuant to a Restructuring Agreement dated November 6, 2006, the Company disposed of its interest in its wholly- owned subsidiary, Surge Marketing Corp. (“Surge Marketing”). On November 13, 2006 the Company changed its name to Southern Star Energy Inc.

The Company previously focused its business efforts on software sales and website development. On November 2, 2006, the Company commenced the business of the acquisition, exploration and development of oil and gas resources with the acquisition of a 20% interest in certain oil and gas leases located in Louisiana.

These financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company is unlikely to pay dividends or generate significant earnings in the immediate or foreseeable future. The continuation of the Company as a going concern and the ability of the Company to emerge from the exploration stage are dependent upon its successful efforts to raise additional equity financing to continue operations and generate sustainable significant revenue. There is no guarantee that the Company will be able to raise adequate equity financings or generate profitable operations. As at November 30, 2007, the Company has incurred losses of $5,000,704 since inception. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.

Unaudited Interim Financial Statements, as restated

The unaudited interim consolidated financial statements, as restated, have been prepared by the Company in accordance with generally accepted accounting principles in the United States for interim financial information and conforms with instructions to Form 10-QSB of Regulation S-B and reflects all adjustments (all of which are normal and recurring in nature) that, in the opinion of management, are necessary for fair presentation of the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending May 31, 2008. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted. These unaudited interim consolidated financial statements and notes, as restated, included herein should be read in conjunction with the Company’s audited consolidated financial statements and notes for the year ended May 31, 2007, included in the Company’s Annual Report on Form 10-KSB. The accounting principles applied in the preparation of these interim consolidated financial statements, as restated, are consistent with those applied for the year ended May 31, 2007.

2. Restatement

In connection with the close for the quarter ended February 29, 2008, the Company determined that it had recognized a portion of its stock-based compensation expense in error, resulting in an overstatement of stock-based compensation expense of $993,275. The Company’s previously issued financial statements for the three and six months ended November 30, 2007 have been restated to reflect the changes in stock-based compensation expense.

F-4

Southern Star Energy Inc.

(An Exploration Stage Company)

(formerly Surge Enterprises, Inc.)

Notes to Interim Consolidated Financial Statements

(Unaudited)

The following tables summarize the effect of the restatement adjustments on the financial statements as of and for the three and six months ended November 30, 2007.

Interim Consolidated Statements of Operations	Three months ended November 30, 2007
	Previously Reported $			Restated $
General and administrative expenses		1,339,578			346,303
Total Operating Expenses		1,410,608			417,333
Net Loss from Operations		(1,387,331	)		(394,056	)
Net Loss		(2,467,615	)		(1,474,340	)
Basic net loss per share		(0.08	)		(0.05	)
Diluted net loss per share		(0.08	)		(0.05	)

Interim Consolidated Statements of Operations	Six months ended November 30, 2007
	Previously Reported $			Restated $
General and administrative expenses		1,451,728			458,453
Total Operating Expenses		1,542,183			548,908
Net Loss from Operations		(1,518,906	)		(525,631	)
Net Loss		(3,093,784	)		(2,100,509	)
Basic net loss per share		(0.10	)		(0.07	)
Diluted net loss per share		(0.10	)		(0.07	)

Interim Consolidated Statements of Cash Flow	Six months ended November 30, 2007
	Previously Reported $			Restated $
Operating activities
Net loss		(3,093,784	)		(2,100,509	)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Stock-based compensation		1,150,858			157,583

Interim Consolidated Balance Sheet	As of November 30, 2007
	Previously Reported $			Restated $
Additional paid-in capital		4,342,677			3,349,402
Deficit accumulated during the exploration stage		(4,979,418	)		(3,986,143	)

3. Oil and Gas Property

On November 6, 2006, the Company entered into a restructuring agreement (the “Restructuring Agreement”) between the Company, Big Sky Management (“Big Sky”), Eric Boehnke (the former President of the Company and current Chief Executive Officer (“CEO”)) and two former officers of the Company. Pursuant to the terms of the Restructuring Agreement, Big Sky, a company owned by the CEO, agreed to assign all rights, title and interest to the Company of a 20% working interest in certain oil and gas leases located in Louisiana, known as the D Duck Prospect (the “D Duck Prospect”). Pursuant to a prospect acquisition agreement with Dynamic Resources Corporation (“Dynamic”), dated October 10, 2006, Big Sky was obligated to pay Dynamic $97,634. Big Sky also was obligated to pay 100% of Dynamic’s remaining share, being 20%, of the drilling and completion costs on the initial two wells drilled on the property up to a maximum of $400,000 per well. As at November 6, 2006, the date of the Restructuring Agreement, Big Sky had not made any payments for the D Duck Prospect. The Company paid $97,634 to Dynamic for its 20% interest and $144,116 was paid to Dynamic by Ramshorn Investments, Inc. (“Ramshorn”) for its 40% interest. The Company’s working interest is subject to a 24% royalty interest. As

F-5

Southern Star Energy Inc.

(An Exploration Stage Company)

(formerly Surge Enterprises, Inc.)

Notes to Interim Consolidated Financial Statements

(Unaudited)

a result, the Company is entitled to receive 76% of its interest in of any production from the prospect, less all exploration and development costs, and the holder of the royalty interest is entitled to the remaining 24% of any production. The holder of the royalty interest is not responsible for any exploration or development costs.

On November 2, 2006, the Company acquired another 20% working interest in the property for $290,062, resulting in a combined interest of 40%, and became the Operator of the D Duck Prospect. An additional 40% working interest is held by Ramshorn who has agreed to pay 40% of the Company’s drilling costs on the D Duck Prospect.

On February 12, 2007, the Company entered into the subscription agreement described in Note 7(b). Pursuant to the agreement, the subscriber is to receive 1% of the net proceeds from production attributable to the Company’s interest in certain wells located on the D Duck Prospect.

On July 11, 2007, the Company entered into the subscription agreement described in Note 7(a). Pursuant to the agreement, the subscriber is to receive 1.98% of the net proceeds from production attributable to the Company’s interest in certain wells located on the D Duck Prospect.

Pursuant to a Farmout Agreement entered into on September 1, 2006 with the owner of the D Duck Prospect, to retain its interest in one section of the D Duck Prospect, the Company, Dynamic and Ramshorn (the “Farmees”) were obligated to drill a test well on the D Duck Prospect on or before March 1, 2007. During the six month period ended November 30, 2007, the Company paid a further $15,000 (May 31, 2007 - $45,000) to extend the deadline to November 30, 2007, of which $9,000 (May 31, 2007 - $27,000) has been billed to the Farmees for their share of this cost. During the six month period ended November 30, 2007, the Company drilled the required test well.

During the period ended November 30, 2007, the Company incurred additional acquisition costs relating to lease rentals and extensions totaling $97,294 (May 31, 2007 - $63,467).

The Company’s portion of drilling costs incurred during the six month period ended November 30, 2007 was $1,911,663 (May 31, 2007 - $2,327,799). During the year ended May 31, 2007 the Company provided a $10,000 certificate of deposit towards a $25,000 surety bond which was requested by the Bureau of Land Management of the state of Louisiana, before drilling can commence. The surety bond was allocated between the Company, Dynamic and Ramshorn based on their working interest on the D Duck Prospect, being 40%, 40% and 20% respectively.

At November 30, 2007, Ramshorn and Dynamic have prepaid $233,299 towards future costs (May 31, 2007 -Dynamic has prepaid $82,540), recorded as advances on the balance sheet. At November 30, 2007, the Company was owed $Nil (May 31, 2007 - $23,900) from Ramshorn and Dynamic. At November 30, 2007, the Company had recorded $3,542 (May 31, 2007 - $Nil) receivable in revenue from the property.

All of the Company’s proven and unproven oil and gas properties are located in the United States. The following table summarizes information regarding the Company’s oil and gas acquisition, exploration and development activities:

	November 30, 2007 $			May 31, 2007 $
Proved Properties
Acquisition costs		508,990			—
Exploration costs		4,239,462			—
Less:
Accumulated depletion		(65,622	)		—
		4,682,830			—
Unproven Properties
Acquisition costs		—			469,163
Exploration costs		3,318			2,327,799
		3,318			2,796,962
Net Carrying Value		4,686,148			2,796,962

F-6

Southern Star Energy Inc.

(An Exploration Stage Company)

(formerly Surge Enterprises, Inc.)

Notes to Interim Consolidated Financial Statements

(Unaudited)

4. Asset Retirement Obligations

The Corporation’s asset retirement obligations (“AROs”) in regards to the D Duck Prospect (Note 3) relates to site restoration.

A reconciliation between the opening and closing AROs balance is provided below:

	November 30, 2007 $		May 31, 2007 $
Beginning asset retirement obligations		—		—
Liabilities incurred		35,680		—
Accretion		732		—
Total asset retirement obligations		36,412		—

In accordance with Statement of Financial Accounting Standards No. 143 “Accounting for Asset Retirement Obligations,” the Company measured the AROs at a fair value of $35,680 and capitalized this to the oil and gas property. The AROs will accrete to $63,457 until the time at which it is expected to be settled, being 7 years. The corresponding accretion at November 30, 2007, being $732 (May 31, 2007 - $Nil), has been included in depletion, depreciation and amortization. Actual retirement costs will be recorded against the AROs when incurred. Any difference between the recorded AROs and the actual retirement costs incurred will be recorded as a gain or loss in the period of settlement.

5. Convertible Debentures

a) On November 1, 2006, the Company issued a 10% convertible debenture with a principal amount of $600,000 which is due and payable on November 1, 2008. The principal and accrued interest on the debenture may be converted into shares of the Company’s common stock at $0.33 per share, at the option of the holder. An equity portion representing the beneficial conversion feature has not been recorded, as there was no intrinsic value at the date of commitment. On November 16, 2007, the Company received notice that the outstanding principal and accrued interest of $63,333 was to be converted into 1,989,999 shares of common stock. At November 30, 2007, $663,333 was included in common stock subscribed. On December 21, 2007, 265,333 shares were issued and the remaining 1,724,666 shares are issuable by the Company.

b) On December 1, 2006, the Company issued a 10% convertible debenture with a principal amount of $800,000 which is due and payable on December 1, 2008. The principal and accrued interest on the debenture may be converted into shares of the Company’s common stock at $0.33 per share, at the option of the holder.

In accordance with Emerging Issues Task Force (“EITF”) 98-5 “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, the Company recognized the value of the embedded beneficial conversion feature of $640,000 as additional paid-in capital and an equivalent discount which will be expensed over the term of the convertible debenture. The Company will record interest expense over the term of the convertible debenture of $640,000 resulting from the difference between the stated value and carrying value at the date of issuance.

On November 16, 2007, the Company received notice that the outstanding principal and accrued interest of $77,778 was to be converted into 2,633,333 shares of common stock. At November 30, 2007, $877,778 was included in common stock subscribed. Upon notice of conversion the Company recognized the unaccreted discount of $507,868 as interest expense. The shares were issued on December 21, 2007.

F-7

Southern Star Energy Inc.

(An Exploration Stage Company)

(formerly Surge Enterprises, Inc.)

Notes to Interim Consolidated Financial Statements

(Unaudited)

c) On September 18, 2007, the Company issued a 10% convertible debenture with a principal amount of $1,300,000 which is due and payable on September 18, 2009. The principal and accrued interest on the debenture may be converted into shares of the Company’s common stock at $0.50 per share, at the option of the holder.

In accordance with EITF 98-5, the Company recognized the value of the embedded beneficial conversion feature of $520,000 as additional paid-in capital and an equivalent discount which will be expensed over the term of the convertible debenture. The Company will record interest expense over the term of the convertible debenture of $520,000 resulting from the difference between the stated value and carrying value at the date of issuance.

On November 16, 2007, the Company received notice that the outstanding principal and accrued interest of $21,306 was to be converted into 2,624,611 shares of common stock. At November 30, 2007, $1,321,306 was included in common stock subscribed. Upon notice of conversion the Company recognized the entire discount of $520,000 as interest expense. The shares were issued on December 21, 2007.

6. Related Party Transactions

a) The Company granted, to a company wholly owned by a director of the Company, 750,000 stock options to purchase shares of the Company’s common stock at $1.09 per share for a period of 4 years pursuant to a consulting agreement (Note 9(d)).

b) The Company granted, to the President of the Company, 1,500,000 stock options to purchase shares of the Company’s common stock at $1.20 per share for a period of 5 years pursuant to a consulting agreement (Note 9(f)).

c) At November 30, 2007, the Company owes $28,231 (May 31, 2007 - $Nil) to the President for $21,300 of consulting expenses and $6,931 of expenses incurred on behalf of the Company. At November 30, 2007, the Company owed $9,103 (May 31, 2007 - $282) to the CEO for expenses incurred on behalf of the Company. These amounts are unsecured, non-interest bearing and are due on demand.

7. Financing Costs

a) On July 11, 2007, the Company entered into a subscription agreement for the issuance of 11.6 units at $50,000 per unit for proceeds of $580,000. Each unit entitles the subscriber to receive 1.98% of the net proceeds from production attributable to the Company’s interest in certain wells located on the D Duck Prospect (Note 3). Each unit is convertible into shares of the Company’s common stock at a rate of 1 share for every $0.50 of investment. During the six month period ended November 30, 2007, pursuant to EITF 98-5 and EITF 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments,” the Company recorded the $406,000 intrinsic value of the beneficial conversion feature upon issuance.

b) On February 12, 2007, the Company entered into a subscription agreement for the issuance of 37 units at $50,000 per unit for proceeds of $1,850,000. Each unit entitles the subscriber to receive 1% of the net proceeds from production attributable to the Company’s interest in certain wells located on the D Duck Prospect (Note 3). Each unit is convertible into shares of the Company’s common stock at a rate of 1.5 shares for every $0.50 of investment. During the year ended May 31, 2007, pursuant to EITF 98-5 and EITF 00-27, the Company recorded the $1,369,000 intrinsic value of the beneficial conversion feature upon issuance.

F-8

Southern Star Energy Inc.

(An Exploration Stage Company)

(formerly Surge Enterprises, Inc.)

Notes to Interim Consolidated Financial Statements

(Unaudited)

8. Stock Options

On October 31, 2007, the Company approved the 2007 Stock Option Plan to issue up to 3,000,000 shares to eligible employee, officers, directors and consultants. Pursuant to the Plans, the Company has granted stock options to certain directors and consultants.

The weighted average grant date fair value of stock options granted during the six month periods ended November 30, 2007 and 2006 was $0.86 and $Nil per share, respectively. No stock options were exercised during the six month periods ended November 30, 2007 and 2006. During the six month periods ended November 30, 2007 and 2006, the Company recorded stock-based compensation of $157,583 and $Nil, respectively, as general and administrative expense.

A summary of the Company’s stock option activity is as follows:

			Weighted Average
	Number of	Weighted Average	Remaining	Aggregate
	Options	Exercise Price	Contractual Term	Intrinsic Value
		$		$
Outstanding, May 31, 2007	–	–
Granted	2,750,000	1.15
Outstanding, November 30, 2007	2,750,000	1.15	4.17	330,000
Exercisable, November 30, 2007	250,000	1.09	4.44	45,000

The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	Six Month
	Period Ended
	November 30,
	2007
Expected dividend yield	0%
Expected volatility	110%
Expected life (in years)	4.18
Risk-free interest rate	3.51%

As at November 30, 2007, there was $3,137,408 (May 31, 2007 - $Nil) of total unrecognized compensation costs related to nonvested share-based compensation arrangements granted under the Plan which are expected to be recognized over a weighted-average period of 2.35 years. The total fair value of shares vested during the periods ended November 30, 2007 and 2006 was $157,583 and $Nil, respectively.

A summary of the status of the Company’s nonvested shares as of November 30, 2007, and changes during the six month period ended November 30 2007, is presented below:

		Weighted-Average
		Grant-Date
	Number of	Fair Value
	Shares	$
Nonvested at May 31, 2007	–	–
Granted	2,750,000	0.86
Vested	(250,000)	0.63
Nonvested at November 30, 2007	2,500,000	0.88

F-9

Southern Star Energy Inc.

(An Exploration Stage Company)

(formerly Surge Enterprises, Inc.)

Notes to Interim Consolidated Financial Statements

(Unaudited)

9. Commitments

a) On February 27, 2007 the Company entered into a services agreement with a consultant who will provide consulting services in consideration for $140 per hour of services and 375,000 shares of the Company’s common stock. The Company is to issue 187,500 shares upon the generation of revenues from the D Duck Prospect in excess of all costs reasonably incurred in relation to the

drilling of the well. The Company is also obligated to issue 187,500 shares to be held in escrow for a period of one year upon the D Duck Prospect generating more than 15 bullion cubic feet equivalent of natural gas or having reserves greater than $75,000,000 calculated on a 10% discounted cash flow. As at November 30, 2007, no shares have been issued under this services agreement.

b) On May 3, 2007, the Company entered into a marketing agreement with RedChip Companies Inc. (“RedChip”) for an initial term of 12 months in consideration of $7,500 per month, and commencing August 1, 2007, an equivalent value of $5,000 per month payable in shares of the Company’s common stock, the value of which will be determined based upon the closing price of the shares as reported by StockWatch Inc. on the first business day of each quarterly period. The shares will be issued by the Company to RedChip on a quarterly basis no later than ten days after the first day of each subsequent quarter. A late fee of 5% of the monthly fee will be billed if the payment is received more than 15 days after the due date. At November 30, 2007, $20,000 was included in common stock subscribed for shares that were issued subsequent to November 30, 2007. Refer to Note 10.

c) On June 18, 2007, the Company entered into a services agreement with a financial advisor who will provide services related to assisting the Company in future financing activities in consideration of a 8% cash fee and a warrant to purchase the higher of 8% of the dollar amount or the number of equity securities issued in the financing or 8% of the face value of any debt securities sold in the financing on at least the following minimum terms and conditions: (i) purchase price of $0.01, (ii) exercise price set at the closing price of the Company’s common stock on the closing date of the financing; (iii) warrant term of 3 years; and (iv) the Company has the right on 15 days written notice to require the Warrant holder to exercise the Warrant so long as the closing price of the common shares of the Company equals or exceeds $1.75 per common share for at least 20 consecutive trading days prior to the date of the call notice. The Company paid an initial cash deposit of $25,000 to be set against expenses of the advisor, which has been recorded as a deferred cost at November 30, 2007. Upon successful completion of the future financing, this cost will be recorded as a reduction of additional paid-in capital. If the future financing is not successfully completed, this cost will be charged to the consolidated statement of operations.

d) On November 22, 2007, the Company entered into a consulting agreement with a company wholly owned by a director of the Company that will provide consulting services in consideration for $10,000 per month, options to purchase 750,000 shares of the Company’s common stock at $1.09 per share for 4 years and $60,000 upon the commercial production of each new well. In addition, if during the term of this agreement, the Company identifies an oil and gas property interest or well for potential exploration by the Company and retain the consultant, the consultant will be granted an overriding royalty of: 2% for leases where the Company has acquired a working interest of greater than 80%, 1.75% for leases where the Company has acquired a working interest of greater than 78% but less than 80%, 1.5% for leases where the Company has acquired a working interest of greater than 75% but less than 78%, 1.0% for leases where the Company has acquired a working interest of less than 75%.

e) On November 22, 2007, the Company entered into a consulting agreement with a consultant who will provide consulting services in consideration for $175 per hour of services, options to purchase 500,000 shares of the Company’s common stock at $1.09 per share for 2 years and $25,000 upon the successful completion of three of the Company’s wells.

f) On November 22, 2007, the Company entered into a consulting agreement with the President of the Company who will provide consulting services in consideration for $200 per hour of services

F-10

Southern Star Energy Inc.

(An Exploration Stage Company)

(formerly Surge Enterprises, Inc.)

Notes to Interim Consolidated Financial Statements

(Unaudited)

to a maximum of $1,500 per day and $30,000 per month, options to purchase 1,500,000 shares of the Company’s common stock at $1.20 per share for 5 years and up to two bonus payments of $30,000 upon the successful completion of a new well outside the current D Duck Prospect or the acquisition of any property or financing of greater than $3,000,000. If the President completes an equity financing in excess of $5,000,000 the President will cease to be a consultant and will become an employee with a base salary of $240,000 per year.

10. Subsequent Events

a) On January 1, 2008, the Company entered into a consulting agreement with the CEO of the Company to provide consulting services in exchange for $10,000 per month

b) On December 11, 2007, the Company issued 18,750 shares pursuant to the consulting agreement described in Note 9(b).

c) Subsequent to November 30, 2007, the Company issued 5,523,277 shares of common stock upon the conversion of convertible debentures. In addition, the Company is obligated to issue an additional 1,724,666 shares to complete the conversion of one of the convertible debentures. Refer to Note 5.

F-11

Item 2. Management’s Discussion and Analysis or Plan of Operation, as restated.

FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements as that term is defined in Section 27A of the United States Securities Act of 1933 and Section 21E of the United States Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors”, that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

Financial information contained in this quarterly report and in our consolidated unaudited financial statements are stated in United States dollars and are prepared in accordance with United States generally accepted accounting principles. The following discussion should be read in conjunction with our consolidated unaudited financial statements and the related notes that appear elsewhere in this quarterly report.

As used in this quarterly report, and unless otherwise indicated, the terms “Southern Star”, “we”, “us” and “our” refer to Southern Star Energy Inc. and our wholly-owned subsidiary, Southern Star Operating Inc.

Summary of Description of Business

We are an exploration stage company engaged in the acquisition of prospective oil and gas properties. We conduct due diligence on potential acquisitions of suitable oil and gas properties and have acquired various leasehold rights from land owners in an area which comprises approximately 5,300 acres in the prospect area within Bossier Parish and Caddo Parish Louisiana, commonly referred to as the D Duck Prospect. Southern Star Energy currently holds a 40% working interest in the prospect area and is the operator of the prospect. We intend to undertake exploration and development drilling projects on the properties pursuant to the leasehold rights we have acquired within our prospect area. As partial owner of the working interest in and to the leasehold rights, we, together with the other interest holders, have the exclusive right to explore and exploit any oil and gas and mineral resources contained in the prospect area.

The 100% working interest in the prospect is held by the following non-affiliated parties: Dynamic Resources Corp. holds a 20% working interest; Southern Star Operating holds a 40% working interest; and Ramshorn Investments, Inc. holds the remaining 40% interest. The working interest is subject to a royalty interest of approximately 24% for the leases in the propsect area. As a result, the holders of the working interest are entitled to receive 76% of any production from the prospect, less all exploration and development costs, and the holder of the royalty interest is entitled to the remaining 24% of any production. The royalty interest is not responsible for any exploration or development costs.

During the previous twelve months, we have drilled four wells, the Atkins Lincoln 18-1, the Atkins Etal 8-1 and the Atkins-Lincoln 18-2, all drilled to a depth of approximately 9,950 feet to test our primary objective Cotton Valley interval. We also drilled the Rendall 7-1 well drilled to a depth of approximately 5,000’ to test several shallow horizons. All three of the deep wells successfully tested their objectives. The 18-1 was placed on production in September, the 8-1 in November, and the 18-2 in early January, 2008. After evaluating several hydrocarbon shows, the Rendall 7-1 was P&A in December. We have also laid a 15,000’ gathering system and central processing and metering facility to service the three producers as well as provide for future wells and production.

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Plan of Operations

Overview

Discussion of our financial condition and results of operations should be read in conjunction with our consolidated unaudited financial statements, as restated, and the notes thereto included elsewhere in this quarterly report prepared in accordance with accounting principles generally accepted in the United States. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those anticipated in these forward-looking statements.

Plan of Operation

We are an exploration stage oil and gas company.

We estimate our general operating expenses for the next twelve month period to be as follows:

Estimated Operating Expenses For the Next Twelve Month Period
Operating Expenses
Exploration Costs	$	5,300,000
General and Administrative Expenses	$	1,613,000
Total	$	6,913,000

We do not currently have sufficient capital to fund our planned expenditures for the fiscal year and intend to fund the expenditures through operating revenue and debt and/or equity financing. There can be no assurance that such financing will be available on acceptable terms, if at all.

Exploration Costs

Our property interests in the D Duck Prospect are presently considered underdeveloped acreage. We have successfully drilled four evaluation wells, consisting of the Atkins-Lincoln 18-1 well, the R.C. Atkins 8-1 well, the Atkins-Lincoln 18-2 well and the Rendall 7 well, the first three wells to a depth of approximately 9,950 feet and the fourth well to a depth of 5,000 feet. Based on the satisfactory results of our three deep Cotton Valley wells, we intend to continue to drill additional wells to define the core productive outlines of the acreage. Following these delineation wells, we intend to develop the prospect by drilling at least one well per 160 acres over as much of the prospect area as warranted. However, until we determine the extent of the productive limits of the project, we will not know the full extent of development costs to bring the acreage to production. We intend to drill two additional wells in our successful core area followed by step-out drilling to extend the productive limits of acreage. We estimate that our exploration costs during the next twelve month period will be approximately $5,300,000.

General and Administrative Expenses

We expect to incur $1,613,000 in general and administrative expenses during the next twelve-month period. General and administrative expenses include ongoing legal, accounting and audit expenses to comply with our reporting responsibilities as a public company under the Exchange Act, insurance, rent, software, office supplies and equipment. Further, general and administrative costs include compensation arrangements with our employees and consultants, which are described in more detail below.

Our company is operated by Eric Boehnke as Chief Executive Officer, Hilda Kouvelis as Chief Financial Officer, David Gibbs as President, Secretary and Treasurer, and Bruce Ganer as Vice President of Exploration and Development. Each person provides their services through management companies pursuant to written agreements, the terms of which are described below. To reduce costs, we intend to continue to outsource our professional and personnel requirements by retaining consultants on an as-needed basis. Although we enter into consulting agreements periodically, we have entered into two long term consulting agreements with Larry Keller and Sierra Pine Resources International, Inc., a company wholly owned by Bruce Ganer, the terms of which are described below. We estimate that our consultant and related professional compensation expenses for the next twelve month period will be approximately $882,000.

5

We pay Eric Boehnke, our Chief Executive Officer, compensation of $10,000 per month pursuant to a consulting agreement dated January 1, 2008. Pursuant to an agreement dated November 2, 2007, we pay Hilda Kouvelis, our Chief Financial Officer, $175 per hour for all services provided.

On November 27, 2007, we entered into an agreement with William David Gibbs, whereby we agreed to employ Mr. Gibbs as our President, Secretary and Treasurer. Pursuant to the terms of the agreement, we pay Mr. Gibbs $200 per hour for services provided as an executive officer of our company. Regardless of the number of hours worked in any day or calendar month, however, Mr. Gibbs is entitled to a maximum compensation of $1,500 per day and no more than $30,000 per calendar month. We also issued 1,500,000 stock options to Mr. Gibbs, each option of which entitles Mr. Gibbs to purchase one share of our common stock at a price of $1.20 per share, exercisable until November 9, 2012. Upon our company completing an equity financing of no less than $5 million, Mr. Gibbs will be paid a base salary of $240,000 per year and incentive bonuses as set forth in the agreement.

On October 1, 2007, we appointed Bruce Ganer as our Vice President of Exploration and Development. Effective November 22, 2007, we entered into a consulting agreement between our company and Sierra Pine Resources International, Inc., a company wholly-owned by Bruce Ganer, whereby Sierra Pine agreed to provide consulting services to our company in consideration for, among other things, the payment of $10,000 per month and the grant of a stock option to purchase up to 750,000 shares of our common stock at a price of $1.09 per share, exercisable until November 22, 2011. On November 22, 2007, we entered into a consulting agreement with Larry Keller, whereby Larry Keller agreed to provide consulting services to our company for a consulting fee of $175 per hour and the grant of a stock option to purchase up to 500,000 shares of our common stock at a price of $1.09 per share, exercisable until November 22, 2009. We also agreed to pay a cash bonus of $25,000 per well upon the successful completion of our company’s following three wells: Lincoln Atkins 18-1; Lincoln Atkins 8-1; and Atkins 18-2.

Results of Operations

The Company has been in the exploration stage since completion of its restructuring in November 2006 and has not yet realized any significant revenues from its planned operations. The Company is unlikely to generate significant earnings in the immediate or foreseeable future. The continuation of the Company as a going concern and the ability of the Company to emerge from the exploration stage are dependent upon its successful efforts to raise additional equity financing to continue operations and generate sustainable significant revenue. There is no guarantee that the Company will be able to raise adequate equity or debt financings or generate profitable operations.

Three months ended November 30, 2007 compared to three months ended November 30, 2006

Revenues. We reported revenues from the production of oil and natural gas of $23,277 for the three months ended November 30, 2007 compared to no revenue for the three months ended November 30, 2006. The increase in revenues is attributable to the Company placing its first two wells into production during this period.

Depletion, depreciation and amortization. Depletion, depreciation and amortization was $66,354 for the three months ended November 30, 2007. There was no depletion, depreciation and amortization for the three months ended November 30, 2006.

General and administrative. For the three months ended November 30, 2007, we recorded general and administrative expenses of $346,303 compared to $31,065 for the three months ended November 30, 2006. The increase was primarily attributable to the adoption of the 2007 Stock Option Plan and the issuance of options exercisable to acquire common shares thereunder; increased business activity related to development of our properties; increased employee and consultant expenses; and exploring business development opportunities. We anticipate that our general and administrative expenses may increase as we anticipate that our business activities may increase in future periods.

Accretion of discount on debt. In the quarter ended November 30, 2007, we recorded accretion of discount on convertible debentures of $1,027,868. No accretion of discount on convertible debentures was recorded in the three months ended November 30, 2006 as such amount was not yet recognizable and most debentures had not yet been issued.

6

Financing costs. There were no financing costs for the periods ended November 30, 2007 and 2006. We anticipate we may raise additional capital during the last half of the fiscal year ending May 31, 2008, which will result in an increase in financing costs. There can be no assurance that additional financing will be available on acceptable terms, if at all.

Interest expense. For the three months ended November 30, 2007, we recognized $52,416 in interest expense related to convertible debentures outstanding. For the three months ended November 30, 2006, we recorded interest expense of $5,000 related to convertible debentures outstanding. The increase is due to the increased number of convertible debentures issued subsequent to November 30, 2006. Interest expense may increase during the last half of the fiscal year ending May 31, 2008, if we obtain additional debt financing. There can be no assurance that additional debt financing will be available on acceptable terms, if at all.

Six months ended November 30, 2007 compared to six months ended November 30, 2006

Revenues. We reported revenues from the production of oil and natural gas of $23,277 for the six months ended November 30, 2007 compared to no revenues for the six months ended November 30, 2006. The increase in revenues is attributable to the Company placing its first two wells into production during this period.

Depletion, depreciation and amortization. Depletion, depreciation and amortization for the six-month period ended November 30, 2007 was $66,354. There was no depletion, depreciation and amortization recorded during the six months ended November 30, 2006.

General and administrative. For the six months ended November 30, 2007, we recorded general and administrative expenses of $458,453 compared to $31,065 for the six months ended November 30, 2006. The increase was primarily attributable to the adoption of the 2007 Stock Option Plan and the issuance of options exercisable to acquire common shares thereunder; increased business activity related to development of our properties; increased employee and consultant expenses; and exploring business development opportunities. We anticipate that our general and administrative expenses may increase as we anticipate that our business activities may increase in future periods.

Accretion of discount on debt. In the six months ended November 30, 2007, we recorded accretion of discount on convertible debentures of $1,081,462. During the six months ended November 30, 2006, we recorded no accretion of discount on convertible debentures as such amount was not yet recognizable and most debentures had not yet been issued.

Financing costs. We recorded financing costs for the six months ended November 30, 2007 in the amount of $406,000. There were no financing costs for the same period in 2006. This is due to the issuance of units convertible into shares of common stock through a subscription agreement in July 2007. We anticipate we may raise additional capital during the last half of the fiscal year ending May 31, 2008, which will result in an increase in financing costs. There can be no assurance that additional financing will be available on acceptable terms, if at all.

Interest expense. For the six months ended November 30, 2007, we recognized $87,416 in interest expense related to convertible debentures outstanding. For the six months ended November 30, 2006, we recorded interest expense of $5,000 related to convertible debentures outstanding. The increase is due to the increased number of convertible debentures issued subsequent to November 30, 2006. Interest expense may increase during the last half of the fiscal year ending May 31, 2008, if we obtain additional debt financing. There can be no assurance that additional debt financing will be available on acceptable terms, if at all.

Liquidity and Capital Resources

As of November 30, 2007, we had cash of approximately $500,000, current assets of approximately $620,000 and approximately $595,000 in current liabilities. The current liabilities consisted of accounts payable and accrued liabilities, advances and amounts due to related parties. We had working capital of approximately $25,000 as of November 30, 2007.

To date, we have had negative cash flows from operations and we have been dependent on sales of our equity securities and debt financing to meet our cash requirements. We expect this situation to continue for the foreseeable future. We anticipate that we will have negative cash flows during the next twelve month period.

7

From September through November 2007, several debt holders converted certain convertible debentures which eliminated our interest payable on such securities. On September 18, 2007, we issued a 10% $1,300,000 convertible debenture to Gobbet Management Inc. The debenture, which was due September 18, 2009, was converted into shares of common stock of our company at a conversion price of $0.50 per share. On November 16, 2007, Gobbet Management converted the principal amount of $1,300,000 plus $21,305.556 in interest into 2,624,611 shares of common stock of our company. We issued the 2,624,611 shares of common stock on December 21, 2007. On November 16, 2007, Sovereign Services Limited converted the principal amount of $800,000 plus interest of $77,777.78 pursuant to a 10% convertible debenture due December 1, 2008, into 2,633,333 shares of common stock of our company. We issued the 2,633,333 shares of common stock on December 21, 2007. On November 16, 2007, Sovereign Services converted the principal amount of $600,000 plus interest of $63,333.33 pursuant to a 10% convertible debenture due November 1, 2008, into 265,333 shares of common stock of our company. We issued the 265,333 shares of common stock on December 21, 2007.

We incurred a net loss of $1,474,340 for the three months ended November 30, 2007, as compared to $11,439 for the three months ended November 30, 2006. We incurred a net loss of $2,100,509 for the six months ended November 30, 2007, as compared to $23,543 for the six months ended November 30, 2006. We anticipate losses will continue in the quarters ended February 29 and May 31, 2008. As indicated above, we anticipate that our estimated operating expenses for the next twelve months will be $6,913,000. As we anticipate that our estimated operating expenses for the next twelve months will be $6,913,000, we do not have sufficient working capital to enable us to complete our drilling program of exploration wells or to finance our normal operations for the next twelve month period. As a result, we will be required to raise additional funds through the issuance of equity securities or through debt financing in order to carry out our plan of operations for the next twelve month period. There can be no assurance that we will be successful in raising the required capital or that actual cash requirements will not exceed our estimates.

Given that we have not achieved profitable operations to date, our cash requirements are subject to numerous contingencies and risk factors beyond our control, including operational and development risks, competition from well-funded competitors, and our ability to manage growth. We can offer no assurance that our company will generate cash flow sufficient to achieve profitable operations or that our expenses will not exceed our projections. If our expenses exceed estimates, we will require additional monies during the next twelve months to execute our business plan.

There are no assurances that we will be able to obtain funds required for our continued operation. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain additional financing on a timely basis, we will not be able to meet our other obligations as they become due and we will be forced to scale down or perhaps even cease the operation of our business.

There is substantial doubt about our ability to continue as a going concern as the continuation of our business is dependent upon obtaining further long-term financing, successful exploration and development of our oil and gas properties and, finally, achieving a profitable level of operations. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.

Future Financings

We anticipate that additional funding, when required, will be in the form of equity financing from the sale of our common stock or through debt financing. However, we cannot provide investors with any assurance that we will be able to raise sufficient funding from the sale of our common stock or through debt financing on commercially reasonable terms to fund operations. We do not currently have any arrangements in place for any future equity or debt financing. Our limited operating history and our lack of significant tangible capital assets makes it unlikely that we will be able to obtain significant debt financing in the near future.

8

Capital Expenditures

As of November 30, 2007, our company had only minor commitments (approximately $100,000 in aggregate) for capital expenditures to finish the completion and hook-up of the Atkins – Lincoln 18-2 well. The planned drilling program identified in the discussion of our Plan of Operations will require a capital investment of $5,300,000. However, these projects are entirely discretionary and subject to available equity.

Off-Balance Sheet Arrangements

Our company has no outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. Our company does not engage in trading activities involving non-exchange traded contracts.

Critical Accounting Policies

The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures of our company. Although these estimates are based on management’s knowledge of current events and actions that our company may undertake in the future, actual results may differ from such estimates.

Going Concern

These interim consolidated financial statements for the quarter ended November 30, 2007 as well as the audited financial statements included with our annual report filed with the Securities and Exchange Commission on August 28, 2007 have been prepared on the going concern basis which assumes that adequate sources of financing will be obtained as required and that our assets will be realized and liabilities settled in the ordinary course of business. Accordingly, the audited financial statements do not include any adjustments related to the recoverability of assets and classification of assets and liabilities that might be necessary should we be unable to continue as a going concern. In order to continue as a going concern, we require additional financing. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to continue as a going concern, we would likely be unable to realize the carrying value of our assets reflected in the balances set out in our financial statements.

Oil and Gas Properties

Our company utilizes the full-cost method of accounting for petroleum and natural gas properties. Under this method, our company capitalizes all costs associated with acquisition, exploration and development of oil and natural gas reserves, including leasehold acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties and costs of drilling of productive and non-productive wells into the full cost pool on a country by country basis. As of November 30, 2007, we had no properties with proven reserves. When our company obtains proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves proved and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates of proved reserves. The costs of unproved properties are not amortized until it is determined whether or not proved reserves can be assigned to the properties. Until such determination is made our company assesses annually whether impairment has occurred, and includes in the amortization base drilling exploratory dry holes associated with unproved properties.

Our company applies a ceiling test to the capitalized cost in the full cost pool. The ceiling test limits such cost to the estimated present value, using a ten percent discount rate, of the future net revenue from proved reserves, based on current economic and operating conditions. Specifically, our company computes the ceiling test so that capitalized cost, less accumulated depletion and related deferred income tax, do not exceed an amount (the ceiling) equal to the sum of: (A) the present value of estimated future net revenue computed by applying current prices of oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current cost) to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation of existing economic conditions; plus

9

(B) the cost of property not being amortized; plus (C) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; less (D) income tax effects related to differences between the book and tax basis of the property.

For unproven properties, our company excludes from capitalized costs subject to depletion, all costs directly associated with the acquisition and evaluation of the unproved property until it is determined whether or not proved reserves can be assigned to the property. Until such a determination is made, our company assesses the property at least annually to ascertain whether impairment has occurred. In assessing impairment our company considers factors such as historical experience and other data such as primary lease terms of the property, average holding periods of unproved property, and geographic and geologic data. Our company adds the amount of impairment assessed to the cost to be amortized subject to the ceiling test. As of November 30, 2007, all of our company’s oil and gas properties were unproved and were excluded from amortization.

Recent Accounting Pronouncements

There were no recent accounting pronouncements as at January 14, 2008 which materially affected our company.

RISK FACTORS

Much of the information included in this quarterly report includes or is based upon estimates, projections or other forward-looking statements. Such forward looking statements include any projections or estimates made by us and our management in connection with our business operations. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein.

Such estimates, projections or other forward-looking statements involve various risks and uncertainties as outlined below. We caution the reader that important factors in some cases have affected and, in the future, could materially affect actual results and cause actual results to differ materially from the results expressed in any such estimates, projections or other forward-looking statements. Prospective investors should consider carefully the risk factors set out below.

Risks Related to Our Business

We have had negative cash flows from operations and if we are not able to continue to obtain further financing, our business operations may fail.

To date, we have had negative cash flows from operations and we have been dependent on sales of our equity securities and debt financing to meet our cash requirements and have incurred a net loss of $1,474,340 for the three month period ended November 30, 2007, and a net loss of $4,007,429 from inception to November 30, 2007. As of November 30, 2007, we had working capital of approximately $25,000. We do not expect positive cash flow from operations in the near term. There is no assurance that actual cash requirements will not exceed our estimates. In particular, additional capital may be required in the event that:

• the costs to acquire further acreage are more than we currently anticipate;

• drilling and completion costs for wells increase beyond our expectations; or

• we encounter greater costs associated with our projected operating expenses.

The occurrence of any of the aforementioned events could adversely affect our ability to meet our business plans.

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We depend almost exclusively on outside capital to pay for the continued exploration and development of our properties. Such outside capital may include the sale of additional stock and/or commercial borrowing. Capital may not continue to be available if necessary to meet these continuing development costs or, if the capital is available, that it will be on terms acceptable to us. The issuance of additional equity securities by us would result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.

If we are unable to obtain financing in the amounts and on terms deemed acceptable to us, we may be unable to continue our business and as a result may be required to scale back or cease operations for our business, the result of which would be that our stockholders would lose some or all of their investment.

If we issue additional shares in the future, it will result in dilution to our existing stockholders.

We are authorized to issue 843,750,000 shares of common stock. Our board of directors has the authority to issue additional shares up to the authorized capital of our company. Our board of directors may choose to issue some or all of such shares to acquire one or more businesses or to provide additional financing in the future. The issuance of any such shares may result in a reduction of the book value or market price of the outstanding shares of our common stock. If we issue any such additional shares, such issuance will also cause a reduction in the proportionate ownership and voting power of all other stockholders. Further, any such issuance may result in a change of control of our company.

We have a history of losses and fluctuating operating results which raise substantial doubt about our ability to continue as a going concern.

Since inception through November 30, 2007, we have incurred aggregate losses of $4,007,429. There is no assurance that we will operate profitably or will generate positive cash flow in the future. In addition, our operating results in the future may be subject to significant fluctuations due to many factors not within our control, such as the general economic cycle, the market price of oil and gas and exploration and development costs. If we cannot generate positive cash flows in the future, or raise sufficient financing to continue our normal operations, then we may be forced to scale down or even close our operations. Until such time as we generate revenues, we expect an increase in development costs and operating costs. Consequently, we expect to incur operating losses and negative cash flow until our properties enter commercial production.

We have a limited operating history and if we are not successful in continuing to grow our business, then we may have to scale back or even cease our ongoing business operations.

We have yet to generate positive earnings and there can be no assurance that we will ever operate profitably. Our company has a limited operating history and must be considered in the development stage. The success of our company is significantly dependent on a successful acquisition, drilling, completion and production program. Our company’s operations will be subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties arising from the absence of a significant operating history. We may be unable to locate recoverable reserves or operate on a profitable basis. We are in the development stage and potential investors should be aware of the difficulties normally encountered by enterprises in the development stage. If our business plan is not successful, and we are not able to operate profitably, investors may lose some or all of their investment in our company.

Due to the speculative nature of the exploration of oil and gas properties, there is substantial risk that our business will fail.

The business of oil and gas exploration and development is highly speculative involving substantial risk. There is generally no way to recover any funds expended on a particular property unless reserves are established and unless we can exploit such reserves in an economic manner. We can provide investors with no assurance that any property interest that we may acquire will provide commercially exploitable reserves. Any expenditures by our company in connection with locating, acquiring and developing an interest in an oil and gas property may not provide or contain commercial quantities of reserves.

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Because of the early stage of development and the nature of our business, our securities are considered highly speculative.

Our securities must be considered highly speculative, generally because of the nature of our business and the early stage of our development. We are engaged in the business of exploring and, if warranted, developing commercial reserves of oil and gas. Our properties are in the exploration stage only and are without known reserves of oil and gas. Accordingly, we have not generated any revenues from our oil and gas business nor have we realized a profit from our operations to date and there is little likelihood that we will generate any revenues or realize any profits in the short term. Any profitability in the future from our business will be dependent upon locating and developing economic reserves of oil and gas, which itself is subject to numerous risk factors as set forth herein. Since we have not generated any revenues, we will have to raise additional monies through the sale of our equity securities or debt in order to continue our business operations.

The potential profitability of oil and gas ventures depends upon factors beyond the control of our company.

The oil and gas industry in general is cyclical in nature. It tends to reflect and be amplified by general economic conditions, both domestically and abroad. Historically, in periods of recession or periods of minimal economic growth, the operations of oil and gas companies have been adversely affected. Certain end-use markets for oil and petroleum products experience demand cycles that are highly correlated to the general economic environment which is sensitive to a number of factors outside our control. A recession or a slowing of the economy could have a material adverse effect on our financial results and proposed plan of operations. A recession may lead to significant fluctuations in demand and pricing for oil and gas. If we elect to proceed with the development of any of our property interests, our profitability may be significantly affected by decreased demand and pricing of oil and gas. Reduced demand and pricing pressures will adversely affect our financial condition and results of operations. We are not able to predict the timing, extent and duration of the economic cycles in the markets in which we operate.

The potential profitability of oil and gas properties is dependent upon many factors beyond our control. For instance, world prices and markets for oil and gas are unpredictable, highly volatile, potentially subject to governmental fixing, pegging, controls, or any combination of these and other factors, and respond to changes in domestic, international, political, social, and economic environments. Additionally, due to worldwide economic uncertainty, the availability and cost of funds for production and other expenses have become increasingly difficult, if not impossible, to project. These changes and events may materially affect our financial performance.

Adverse weather conditions can also hinder drilling operations. A productive well may become uneconomic in the event water or other deleterious substances are encountered which impair or prevent the production of oil and/or gas from the well. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. The marketability of oil and gas which may be acquired or discovered will be affected by numerous factors beyond our control. These factors include the proximity and capacity of oil and gas pipelines and processing equipment, market fluctuations of prices, taxes, royalties, land tenure, allowable production and environmental protection. These factors cannot be accurately predicted and the combination of these factors may result in our company not receiving an adequate return on invested capital.

The oil and gas industry is highly competitive and there is no assurance that we will be successful in acquiring additional property interests.

The oil and gas industry is very competitive. We compete with numerous individuals and companies, including many major oil and gas companies, which have substantially greater technical, financial and operational resources and staffs. Accordingly, there is a high degree of competition for desirable oil and gas interests, suitable properties for drilling operations and necessary drilling equipment, as well as for access to funds. We cannot predict if the necessary funds can be raised or that any projected work will be completed.

We are required to obtain licenses and permits from various governmental authorities. We anticipate that we will be able to obtain all necessary licenses and permits to carry on the activities which we intend to conduct, and that we intend to comply in all material respects with the terms of such licenses and permits. However, there can be no guarantee that we will be able to obtain and maintain, at all times, all necessary licenses and permits required to undertake our proposed exploration and development or to place our properties into commercial production. In the

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event that we proceed with our operation without necessary licenses and permits, we may be subject to large fines and possibly even court orders and injunctions to cease operations.

The acquisition of oil and gas interests involve many risks and disputes as to the title of such interests, and any title dispute may result in a material adverse effect on our company.

The acquisition of oil and gas interests involves certain risks. Title to property claims and the borders of such claims may be disputed. The leases may be subject to prior unregistered agreements or transfers and title may be affected by undetected defects. If it is determined that any of our company’s leases are based upon a claim with an invalid title, a disputed border, or subject to a prior right, the balance sheet of our company will be adversely affected and we may not be able to recover damages without incurring expensive litigation costs.

The marketability of natural resources will be affected by numerous factors beyond our control which may result in us not receiving an adequate return on invested capital to be profitable or viable.

The marketability of natural resources which may be acquired or discovered by us will be affected by numerous factors beyond our control. These factors include market fluctuations in oil and gas pricing and demand, the proximity and capacity of natural resource markets and processing equipment, governmental regulations, land tenure, land use, regulation concerning the importing and exporting of oil and gas and environmental protection regulations. The exact effect of these factors cannot be accurately predicted, but the combination of these factors may result in us not receiving an adequate return on invested capital to be profitable or viable.

Oil and gas operations are subject to comprehensive regulation which may cause substantial delays or require capital outlays in excess of those anticipated causing an adverse effect on our company.

Oil and gas operations are subject to federal, state, and local laws relating to the protection of the environment, including laws regulating removal of natural resources from the ground and the discharge of materials into the environment. Oil and gas operations are also subject to federal, state, and local laws and regulations which seek to maintain health and safety standards by regulating the design and use of drilling methods and equipment. Various permits from government bodies are required for drilling operations to be conducted, and no assurance can be given that such permits will be received. Environmental standards imposed by federal, provincial, or local authorities may be changed and any such changes may have material adverse effects on our activities. Moreover, compliance with such laws may cause substantial delays or require capital outlays in excess of those anticipated, thus causing an adverse effect on us. Additionally, we may be subject to liability for pollution or other environmental damages which we may elect not to insure against due to prohibitive premium costs and other reasons. To date, we have not been required to spend any material amount on compliance with environmental regulations. However, we may be required to do so in the future and this may affect our ability to expand or maintain our operations.

Exploration and production activities are subject to certain environmental regulations which may prevent or delay the commencement or continuance of our operations.

In general, our exploration and production activities are subject to certain federal, state and local laws and regulations relating to environmental quality and pollution control. Such laws and regulations increase the costs of these activities and may prevent or delay the commencement or continuance of a given operation. Compliance with these laws and regulations has not had a material effect on our operations or financial condition to date. Specifically, we are subject to legislation regarding emissions into the environment, water discharges and storage and disposition of hazardous wastes. In addition, legislation has been enacted which requires well and facility sites to be abandoned and reclaimed to the satisfaction of state authorities. However, such laws and regulations are frequently changed and we are unable to predict the ultimate cost of compliance. Generally, environmental requirements do not appear to affect us any differently or to any greater or lesser extent than other companies in the industry.

We believe that our operations comply, in all material respects, with all applicable environmental regulations. However, we are not fully insured against all possible environmental risks.

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Any future operations will involve many risks and we may become liable for pollution or other liabilities which may have an adverse effect on our financial position.

In the course of the exploration, acquisition and development of oil and gas properties, several risks and, in particular, unexpected or unusual geological or operating conditions may occur. Drilling operations generally involve a high degree of risk. Hazards such as unusual or unexpected geological formations, power outages, labor disruptions, blow-outs, sour gas leakage, fire, inability to obtain suitable or adequate machinery, equipment or labour, and other risks are involved. We may become subject to liability for pollution. It is not always possible to fully insure against such risks, and we do not currently have any insurance against such risks nor do we intend to obtain such insurance in the near future due to high costs of insurance. Should such liabilities arise, they could reduce or eliminate any future profitability and result in an increase in costs and a decline in value of the securities of our company.

We are not insured against most environmental risks. Insurance against environmental risks (including potential liability for pollution or other hazards as a result of the disposal of waste products occurring from exploration and production) has not been generally available to companies within the industry. We will periodically evaluate the cost and coverage of such insurance. If we became subject to environmental liabilities and do not have insurance against such liabilities, the payment of such liabilities would reduce or eliminate our available funds and may result in bankruptcy. Should we be unable to fully fund the remedial cost of an environmental problem, we might be required to enter into interim compliance measures pending completion of the required remedy.

Resource exploration involves many risks, regardless of the experience, knowledge and careful evaluation of the property by our company. These hazards include unusual or unexpected formations, formation pressures, fires, power outages, labour disruptions, flooding, explosions and the inability to obtain suitable or adequate machinery, equipment or labour.

Operations in which we will have a direct or indirect interest will be subject to all the hazards and risks normally incidental to the exploration, development and production of resource properties, any of which could result in damage to or destruction of mines and other producing facilities, damage to life and property, environmental damage and possible legal liability for any or all damage. We do not currently maintain liability insurance and may not obtain such insurance in the future. The nature of these risks is such that liabilities could represent a significant cost to our company, and may ultimately force our company to become bankrupt and cease operations.

Any change to government regulation/administrative practices may have a negative impact on our ability to operate.

The laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency in the United States or any other jurisdiction, may be changed, applied or interpreted in a manner which will fundamentally alter the ability of our company to carry on our business.

The actions, policies or regulations, or changes thereto, of any government body or regulatory agency, or other special interest groups, may have a detrimental effect on us. Any or all of these situations may have a negative impact on our ability to operate and/or our profitably.

If we are unable to hire and retain key personnel, we may not be able to implement our plan of operation and our business may fail.

Our success will be largely dependent on our ability to hire and retain highly qualified personnel. This is particularly true in the highly technical businesses of oil and gas exploration. These individuals may be in high demand and we may not be able to attract the staff we need. In addition, we may not be able to afford the high salaries and fees demanded by qualified personnel, or we may fail to retain such employees after they are hired. At present, we have not hired any key personnel. Our failure to hire key personnel when needed will have a significant negative effect on our business.

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Our executive officers have other business interests, and as a result, they may not be willing or able to devote a sufficient amount of time to our business operations, thereby limiting the success of our company.

Eric Boehnke presently spends approximately 50% of his business time on business management services of our company. Due to the time commitments of Mr. Boehnke’s other business interests, Mr. Boehnke may not be able to provide sufficient time to the management of our business in the future and our business may be periodically interrupted or delayed as a result of Mr. Boehnke’s other business interests. To mitigate any such interruption, we have added additional management and intend to continue to retain the necessary consultants in future operations.

Risks Associated with Our Common Stock

A decline in the price of our common stock could affect our ability to raise further working capital and adversely impact our operations.

A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because our operations have been primarily financed through the sale of equity securities, a decline in the price of our common stock could be especially detrimental to our liquidity and our continued operations. Any reduction in our ability to raise equity capital in the future would force us to reallocate funds from other planned uses and would have a significant negative effect on our business plans and operations, including our ability to explore and develop new properties and continue our exploration and development of our current property interests. If our stock price declines, we may not be able to raise additional capital or generate funds from operations sufficient to meet our obligations.

Our stock is a penny stock. Trading of our stock may be restricted by the Securities and Exchange Commission’s penny stock regulations which may limit a stockholder’s ability to buy and sell our stock.

Our stock is a penny stock. The Securities and Exchange Commission has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.

The Financial Industry Regulatory Authority, or FINRA, has adopted sales practice requirements which may also limit a stockholder’s ability to buy and sell our stock.

In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some

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customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

Item 3. Controls and Procedures, as restated.

Disclosure Controls and Procedures

At the end of the period covered by this report, an evaluation was carried out under the supervision of and with the participation of the Company’s management, including the CEO and CFO, of the effectiveness of the design and operations of the Company’s disclosure controls and procedures (as defined in Rule 13a - 15(e) and Rule 15d - 15(e) under the Exchange Act). Based on that evaluation the CEO and the CFO concluded that the Company’s disclosure controls and procedures were adequately designed and effective in ensuring that: (i) information required to be disclosed by the Company in reports that it files or submits to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and (ii) material information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow for accurate and timely decisions regarding required disclosure.

However, subsequent to the end of the period covered by this report, a further evaluation was carried out under the supervision of and with the participation of the Company’s management, including the CEO and CFO, of the effectiveness of the design and operations of the Company’s disclosure controls and procedures for the period covered by this report. Based on this subsequent evaluation, the CEO and the CFO have concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures were in fact not adequately designed and effective in ensuring that: (i) information required to be disclosed by the Company in reports that it files or submits to the Securities and Exchange Commission under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and (ii) material information required to be disclosed in our reports filed under the Exchange Act was accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow for accurate and timely decisions regarding required disclosure.

In management’s subsequent evaluation of the effectiveness of the Company’s disclosure controls and procedures for the period covered by this report, management determined that a material weakness existed in the Company’s internal control over financial reporting for such period, which resulted in management determining that an accounting error was made, but not subsequently restated, in the Company’s consolidated financial statements for the period ended November 30, 2007 (the “Relevant Statements”). This accounting error, which is more fully described in Note 2 to the financial statements included in this Form 10-QSB/A, was an error recognizing a portion of the Company’s stock-based compensation expense in the Relevant Statements, as filed with the Company’s Form 10-QSB for the quarter ended November 30, 2007 (the “Relevant Report”). The Company recorded as an expense the grant-date fair value of certain stock option awards at the time of grant instead of over the requisite service period as required by Statement of Financial Accounting Standard No. 123R, Share-Based Payment (“SFAS 123R”).

The Company’s management and previous auditor first discovered the accounting error in March 2008 during their review of the Company’s consolidated financial statements for the three and nine months ended February 29, 2008. Accordingly, the Company adjusted the stock-based compensation expense for the three and nine months ended February 29, 2008 to recognize the grant-date fair value of certain stock option awards over the requisite service period in accordance with SFAS 123R. In January 2009, in preparing the Company’s consolidated financial statements for the quarter ended November 30, 2008, and reviewing previously filed financial statements, the Company’s new CFO noted that the Relevant Statements had not been restated to reflect the adjustments to stock-based compensation expense recorded for the three and nine months ended February 29, 2008. Accordingly, on January 14, 2009, our CEO, CFO and Board, in consultation with Weaver and Tidwell, L.L.P. (the Company’s recently appointed principal registered independent public accounting firm) (the “Auditor”), determined that the Relevant Statements could no longer be relied upon and must be restated in compliance with SFAS 123R.

For the reasons stated above, the CEO and CFO, based on their further analysis of the Company’s disclosure controls and procedures for the period covered by this report, have determined that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were not adequate. The Company’s

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management, including the CEO and CFO, have taken the following actions to address the deficiencies in the Company’s disclosure controls and procedures and internal control over financial reporting:

• beginning with the period ended February 29, 2008, the Company now states stock-based compensation in accordance with the requirements of SFAS 123R. Specifically, the Company records as an expense the grant-date fair value of stock option awards over the requisite service period  instead of at the time of grant;

• the Company is restating the Relevant Statements in this Form 10-QSB/A so that the Relevant Statements will be in compliance with the requirements of SFAS 123R;

• in January 2009, management adopted additional accounting review systems designed to improve the Company’s system of internal control over financial reporting. These systems included adopting an improved system for monitoring, classifying and recording accounting entries, a review of historic financial statements, ledgers and accounting entries and allocation of additional resources to financial reporting; and

• also in January 2009, the Company’s management instituted a policy that if management discovers an accounting error made in a previous period, management, in conjunction with the Board and Auditors, will take the following steps as soon as practicable after the discovery: (a) determine whether the previous financial statements can be relied upon; and (b) if such financial statements cannot be relied upon, issue a disclosure to that effect on Form 8-K and restate the financial statements in an amended quarterly or annual report, as applicable.

Management believes that the effective implementation of the above procedures has corrected the material weakness cited above in its disclosure controls and procedures and internal controls over financial reporting. However, the Company will continue to review and monitor its disclosure controls and procedures and internal controls over financial reporting and will adopt further changes, if and when management determines that such changes are necessary, to ensure accuracy in the Company’s future filings.

To date, management estimates that these changes in disclosure controls and procedures and internal control over financial reporting will have no material cost to the Company.

Changes in Internal Control Over Financial Reporting

Other than as set forth in this Form 10-QSB/A, there were no changes in the Company’s internal control over financial reporting that occurred during the quarterly period coved by this Form 10-QSB/A that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

We know of no material, existing or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On December 11, 2007, we issued 18,750 shares of common stock to RedChip Companies, Inc. We issued the securities relying on Rule 506 of Regulation D and/or Section 4(2) of the Securities Act of 1933.

On December 21, 2007, we issued a total of 5,523,277 shares of common stock of our company to three accredited investors. The 5,523,277 shares of our common stock were issued in reliance upon Regulation S and/or Section 4(2) of the United States Securities Act of 1933, as amended, in an offshore transaction to non-US Persons (as that term is defined in Rule 902 of Regulation S under the United States Securities Act of 1933, as amended).

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Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information.

On October 1, 2007, we appointed Bruce Ganer to our board of directors and as Vice President of Exploration and Development. On November 2, 2007, we appointed Hilda Kouvelis as our Chief Financial Officer.

On December 3, 2007, Eric Boehnke was appointed as our Chief Executive Officer and resigned as our President, Secretary and Treasurer. Also on December 3, 2007, we appointed William David Gibbs as President, Secretary and Treasurer in place of Eric Boehnke. On the same date we also appointed William David Gibbs to our board of directors.

Item 6. Exhibits, as restated.

(3)	(i) Articles of Incorporation; and (ii) Bylaws
3.1	Articles of Incorporation (incorporated by reference from our SB-2 filed on October 13, 2005)
3.2	Bylaws (incorporated by reference from our SB-2 filed on October 13, 2005)
3.3	Certificate of Correction (incorporated by reference from our SB-2 filed on October 13, 2005)
3.4	Articles of Merger filed with the Secretary of Sate of Nevada on November 7, 2006 and which is effective November 13, 2006 (incorporated by reference from our Current Report on Form 8-K filed on November 13, 2006)
3.5	Certificate of Change filed with the Secretary of State of Nevada on November 7, 2006 and which is effective November 13, 2006 (incorporated by reference from our Current Report on Form 8-K filed on November 13, 2006)
3.6	Certificate of Change filed with the Secretary of State of Nevada on April 2 2007 and which is effective April 2, 2007 (incorporated by reference from our Current Report on Form 8-K filed on April 4, 2007)
(4)	Instruments Defining the Rights of Securityholders including Indentures
4.1*	Stock Option Plan
(10)	Material Contracts
10.1	Subscription Agreement dated November 1, 2006 with Sovereign Services Limited (incorporated by reference from our Current Report on Form 8-K filed on November 9, 2006)
10.2	Convertible Debenture dated November 1, 2006 with Sovereign Services Limited (incorporated by reference from our Current Report on Form 8-K filed on November 9, 2006)
10.3	Assignment of Oil, Gas and Mineral Leases dated November 3, 2006 by Meagher Oil & Gas Properties, Inc. (incorporated by reference from our Current Report on Form 8-K filed on November 9, 2006)
10.4	Purchase and Sale Agreement dated November 2, 2006 with Dynamic Resources Corporation, Tyner Texas Operating Company, Tyner Texas Resources LP and Ramshorn Investments, Inc. (incorporated by reference from our Current Report on Form 8-K filed on January 3, 2007)
10.5	Restructuring Agreement dated November 6, 2006 with Southern Star Operating, Inc., Big Sky Management, Ltd., Eric Boehnke, Troy Mutter and Frank Hollmann (incorporated by reference from our Current Report on Form 8-K filed on November 9, 2006)
10.6	Amendment Agreement dated December 22, 2006 with Southern Star Operating, Inc., Big Sky Management, Ltd., Eric Boehnke, Troy Mutter and Frank Hollmann (incorporated by reference from our Current Report on Form 8-K filed on January 3, 2007)
10.7	Oil and Gas Services Agreement dated January 22, 2007 with Sunland Production Company (incorporated by reference from our Current Report on Form 8-K filed on February 23, 2007)
10.8	Amended and Restated Subscription Agreement dated July 10, 2007 between our company and Venture Capital Asset Management Ag (incorporated by reference from our Current Report on Form 8-K filed on July 18, 2007)
10.9	Private Placement Subscription dated September 18, 2007 (incorporated by reference from our Quarterly Report on Form 10-QSB filed on October 15, 2007)

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10.10	Convertible Debenture dated September 18, 2007 (incorporated by reference from our Current Report on Form 8-K filed on November 21, 2007)
10.11	Letter Agreement dated November 7, 2007 with VirtualCFO, Inc. doing business as VCFO (incorporated by reference from our Current Report on Form 8-K filed on November 7, 2007)
10.12	Consulting Agreement dated November 22, 2007 with Larry Keller (incorporated by reference from our Current Report on Form 8-K filed on December 6, 2007)
10.13	Stock Option and Subscription Agreement dated November 22, 2007 with Larry Keller (incorporated by reference from our Current Report on Form 8-K filed on December 6, 2007)
10.14	Consulting Agreement dated November 22, 2007 with Sierra Pine International, Inc. (incorporated by reference from our Current Report on Form 8-K filed on December 10, 2007)
10.15	Stock Option and Subscription Agreement dated November 22, 2007 with Sierra Pine International, Inc. (incorporated by reference from our Current Report on Form 8-K filed on December 10, 2007)
10.16	Agreement dated November 9, 2007 with William David Gibbs (incorporated by reference from our Current Report on Form 8-K filed on December 3, 2007)
10.17	Stock Option and Subscription Agreement dated November 27, 2007 with William David Gibbs (incorporated by reference from our Current Report on Form 8-K filed on December 3, 2007)
10.18	Consulting Agreement dated January 1, 2008 with Big Sky Management Ltd. (incorporated by reference from our Current Report on Form 8-K filed on January 7, 2008)
(31)	Rule 13a-14(a)/15d-14(a) Certifications
31.1*	Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Principal Financial and Accounting Officer filed pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
(32)	Section 1350 Certifications
32.1*	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SOUTHERN STAR ENERGY INC.

By: William David Gibbs                             

William David Gibbs

Chief Executive Officer

(On behalf of the Company and as Principal Executive Officer)

Date:   February 17, 2009  

By: /s/ Christopher H. Taylor                    

Christopher H. Taylor

Chief Financial Officer

(Principal Financial and Accounting Officer)

Date:   February 17, 2009 

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