Edgar Filing: SARATOGA RESOURCES INC /TX

SARATOGA RESOURCES, INC.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

FORM 8-K

_________________________

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): July 14, 2008

SARATOGA RESOURCES, INC.

(Exact name of Registrant as specified in its charter)

Texas

0-27563

76-0314489

(State or other jurisdiction of

incorporation or organization)

(Commission File No.)

(IRS Employer Identification No.)

2304 Hancock Drive, Suite 5

Austin, Texas 78756

(Address of Principal Executive Offices)(Zip Code)

Registrant’s Telephone Number, including area code: (512) 478-5717

N/A

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

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2.):

□ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

□ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

□ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

□ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Forward-Looking Statements

This Current Report on Form 8-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. This Current Report on Form 8-K includes statements regarding our plans, goals, strategies, intent, beliefs or current expectations. These statements are expressed in good faith and based upon a reasonable basis when made, but there can be no assurance that these expectations will be achieved or accomplished. These forward looking statements can be identified by the use of terms and phrases such as “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions (“will,” “may,” “could,” “should,” etc.). Items contemplating, or making assumptions about, actual or potential future sales, market size, collaborations, and trends or operating results also constitute such forward-looking statements.

Although forward-looking statements in this report reflect the good faith judgment of management, forward-looking statements are inherently subject to known and unknown risks, business, economic and other risks and uncertainties that may cause actual results to be materially different from those discussed in these forward-looking statements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Current Report on Form 8-K. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, other than as may be required by applicable law or regulation. Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the SEC which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected.

The use of the terms “we”, “us”, “our” or similar words below, refer to Saratoga Resources, Inc. and its subsidiaries.

Item 1.01.

Entry into a Material Definitive Agreement.

Amendment to Harvest Purchase and Sale Agreements

On July 14, 2008, we entered into (1) a Fourth Amendment to Purchase and Sale Agreement (the “Harvest Oil PSA Amendment”) with Harvest Oil & Gas, LLC (“Harvest Oil”) and Barry Ray Salsbury, Salsbury Foundation, Brian Carl Albrecht and Shell Sibley, the owners of Harvest Oil, and (2) a Fourth Amendment to Purchase and Sale Agreement (the “Harvest Group PSA Amendment”) with The Harvest Group, LLC (“Harvest Group”, and together with Harvest Oil, the “Harvest Companies”) and Barry Ray Salsbury, Salsbury Foundation, Brian Carl Albrecht, Shell Sibley, Willie Willard Powell and Carolyn Monica Greer, the owners of Harvest Group.

Each of the Harvest Oil PSA Amendment and the Harvest Group PSA Amendment reinstates the original Purchase and Sale Agreements between us and Harvest Oil and Harvest Group (the original Purchase and Sale Agreements being referred to, respectively, as the “Original Harvest Oil PSA” and the “Original Harvest Group PSA” and, as amended, the “Amended Harvest Oil PSA” and the “Amended Harvest Group PSA” and, collectively, the “Harvest PSAs”) and extends the closing date under the Harvest PSAs to July 14, 2008.

The Harvest Oil PSA Amendment provides for an amended purchase price of Harvest Oil consisting of (1) $84,546,400 in cash and (2) 3,920,000 shares of our common stock.

The Harvest Group PSA Amendment provides for an amended purchase price of Harvest Group consisting of (1) $21,136,600 in cash and (2) 980,000 shares of our common stock.

The foregoing is qualified in its entirety by reference to the Harvest Oil PSA Amendment and the Harvest Group PSA Amendment filed herewith as Exhibits 10.1 and 10.2.

Wayzata Credit Agreement

In conjunction with the acquisition of Harvest Oil and Harvest Group, as described in Item 2.01 below, on July 14, 2008, we entered into a Credit Agreement (the “Wayzata Credit Agreement”) with Wayzata Investment Partners LLC (“Wayzata”) pursuant to which Wayzata, or other lenders (together, the “Wayzata Lenders”), agreed to provide loans to us in an amount up to, and did loan to us, $97,500,000 to be used to fund the acquisition of the Harvest Companies.

Pursuant to the terms of the Wayzata Credit Agreement, we granted to the Wayzata Lenders a second lien on substantially all of our assets, and each of our subsidiaries, including the Harvest Companies, agreed to guaranty all amounts owing under the Wayzata Credit Agreement.

Loans made under the Wayzata Credit Agreement bear interest at 20% per annum and are due and payable in monthly installments of interest only with the principal being due and payable in full on July 14, 2011.

Pursuant to the terms of the Wayzata Credit Agreement, we issued to the Wayzata Lenders a warrant to purchase 805,515 shares of our common stock exercisable for a period of five years at a price of $0.01 per share.

The Wayzata Credit Agreement includes normal covenants and credit conditions and is subject to the terms of an Intercreditor Agreement with us and Macquarie Bank Limited.

The foregoing is qualified in its entirety by reference to the Wayzata Credit Agreement and the form of warrant filed herewith as Exhibits 10.3 and 10.5.

Macquarie Credit Agreement

In conjunction with the acquisition of Harvest Oil and Harvest Group, on July 14, 2008, we entered into a Credit Agreement (the “Revolving Credit Agreement”) with Macquarie Bank Limited (“Macquarie”) pursuant to which we assumed and restated the existing Macquarie credit facilities of the Harvest Companies and Macquarie, or other lenders (together, the “Revolving Credit Lenders”), agreed to provide a revolving credit loan facility in an amount up to $25,000,000. Simultaneous with execution of the Revolving Credit Agreement, we borrowed $12,528,878 under the revolving credit facilities to pay amounts due with respect to the acquisition of the Harvest Companies and related transaction costs. Additionally, letters of credit of the Harvest Companies, totaling $11.5 million, remained outstanding following the acquisition and reduce available borrowing under the revolving credit facility.

Pursuant to the terms of the Revolving Credit Agreement, we granted to the Macquarie Lenders a first lien on substantially all of our assets, and each of our subsidiaries, including the Harvest Companies, agreed to guaranty all amounts owing under the Revolving Credit Agreement.

Loans made under the Revolving Credit Agreement are subject to borrowing base requirements and bear interest at varying rates based on percentage usage of the borrowing base and margins ranging from 2.25% to 2.75% over the applicable LIBO Rate, as defined in the Revolving Credit Agreement, and 0.75% to 1.25% over the applicable prime rate. Interest on the revolving credit facility is due monthly with respect to prime rate based loans

and at the end of each applicable interest period with respect to Eurodollar loans. Loans under the Revolving Credit Agreement mature on April 1, 2011.

Pursuant to the terms of the Revolving Credit Agreement, we will pay certain administrative fees, letter of credit fees and other fees and expenses in connection with maintenance and advances under the Revolving Credit Agreement.

The Revolving Credit Agreement includes normal covenants and credit conditions and is subject to the terms of the Intercreditor Agreement with us and the Wayzata Lenders.

The foregoing is qualified in its entirety by reference to the Revolving Credit Agreement filed herewith as Exhibit 10.4.

Renewal and Extension of Shareholder Loan and Accrued Salaries of Officers

In conjunction with the acquisition of the Harvest Companies and the related financing, at closing, the Company repaid $100,000 of advances from Thomas Cooke, the Company’s Chairman, Chief Executive Officer and principal shareholder. The balance owing to Mr. Cooke, totaling $463,412, plus accrued salary in the amount of $157,500, was renewed and extended pursuant to a Subordinated Promissory Note, providing for payment of equal monthly installments of $17,247.55, including interest at 10% per annum, over three years.

Accrued salary in the amount of $157,500 owed to Andy Clifford, the Company’s President was renewed and extended pursuant to a Subordinated Promissory Note providing for payment of equal monthly installments of $4,375, including interest at 10%, over three years.

The foregoing is qualified in its entirety by reference to the Subordinated Promissory Notes filed herewith as Exhibits 10.6 and 10.7.

Item 2.01.

Completion of Acquisition or Disposition of Assets.

On July 14, 2008, we acquired (the “Harvest Acquisitions”) all of the equity interests in Harvest Oil and Harvest Group pursuant to the terms of the Harvest PSAs.

The Harvest Companies are independent oil and natural gas companies engaged in the production, development, and exploitation of natural gas and crude oil properties, together covering an estimated 33,000 gross acres (30,000 net) across 11 fields in the state waters of Louisiana. In connection with the Harvest Acquisitions, we entered into employment agreements with, or otherwise retained the services of, the management and certain key employees of the Harvest Companies.

As consideration for the membership interests in the Harvest Companies, we paid to the former members of the Harvest Companies a combined purchase price of $105,683,000 in cash and issued 4.9 million shares of our common stock. The cash portion of the purchase price included $33,650,818 and $30,000,000 paid by the Harvest Companies to pay a note payable to Macquarie and to obtain a release of a net profits interest and an overriding royalty interest in the properties of the Harvest Companies held by Macquarie and its affiliates, respectively, which amounts we paid directly to Macquarie on behalf of the Harvest Companies at closing. Of the 4.9 million shares of common stock issued in the acquisitions, 3.3 million shares were issued directly to Macquarie pursuant to an agreement between Macquairie and the members of the Harvest Companies relating to the release of the net profits interest and overriding royalty interest held by Macquarie. Prior to the Harvest Acquisitions, there existed no material relationship between the Harvest Companies and us or any of our affiliates, or any of our directors or officers, or any associates of our directors or officers.

The cash portion of the purchase price payable in connection with the Harvest Acquisitions was paid from borrowings under the Wayzata Credit Agreement and the Revolving Credit Agreement.

Because of the materiality of the Harvest Acquisitions, we have included in Exhibit 99.1 to this Current Report, the information that would be required if we were filing a general form for registration of securities on Form 10-SB as a smaller reporting company.

Item 2.03.

Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant

See “Wayzata Credit Agreement” and “Macquarie Credit Agreement” under Item 1.01 above.

Item 3.02.

Unregistered Sale of Equity Securities

In connection with the Harvest Acquisition described in Item 2.01 above, we issued (i) 4,900,000 shares of common stock to 6 persons as partial consideration for the acquisition of the Harvest Companies, (ii) a warrant to purchase 805,515 shares of common stock at $0.01 per share for five years as partial consideration under the Wayzata Credit Agreement, and (iii) 1,040,000 shares of restricted stock to 9 key employees of the Harvest Companies as an inducement for ongoing services.

The foregoing securities were issued to a limited number of investors without general solicitation pursuant to the exemption set forth in Section 4(2) of the Securities Act of 1933.

Item 5.02.

Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers

In connection with the Harvest Acquisition, on July 14, 2008, the Company appointed Barry Salsbury as President of the Company’s principal operating subsidiaries, Harvest Oil & Gas LLC and The Harvest Group, LLC.

Mr. Salsbury co-founded and, since 2004, served as President of the Harvest Companies.

The Company entered into an employment agreement and restricted stock agreement with Mr. Salsbury. Under the terms of Mr. Salsbury’s employment agreement, Mr. Salsbury will serve as President of the Harvest Companies for a term of three years and will receive a base salary of $165,000 per year plus participation in the Company’s executive benefit programs. Under the terms of a restricted stock agreement, Mr. Salsbury was issued 500,000 shares of common stock, of which 200,000 shares are subject to forfeiture in the event that Mr. Salsbury is not continuing in his service as President of the Harvest Companies on January 14, 2009 and 200,000 shares are subject to forfeiture in the event that Mr. Salsbury is not continuing in his service as President of the Harvest Companies on July 14, 2009.

Item 9.01.

Financial Statements and Exhibits.

(a) Financial Statements of Business Acquired.


The Harvest Group, LLC
Balance Sheet at March 31, 2008 (Unaudited)	F-1
Statement of Operations for the three months ended March 31, 2008 (Unaudited)	F-3
Statement of Cash Flow for the three months ended March 31, 2008 (Unaudited)	F-5
Notes to Unaudited Financial Statements	F-6

Report of Independent Registered Public Accounting Firm	F-13
Balance Sheet at December 31, 2007 and 2006	F-14
Statements of Operations for the years ended December 31, 2007 and 2006	F-16
Statement of Changes in Members’ Capital for the years ended December 31, 2007 and 2006	F-17
Statement of Cash Flows for the years ended December 31, 2007 and 2006	F-18
Notes to Financial Statements	F-19

Harvest Oil & Gas, LLC
Balance Sheet at March 31, 2008 (Unaudited)	F-30
Statement of Operations for the three months ended March 31, 2008 (Unaudited)	F-32
Statement of Cash Flow for the three months ended March 31, 2008 (Unaudited)	F-34
Notes to Unaudited Financial Statements	F-35

Report of Independent Registered Public Accounting Firm	F-42
Balance Sheets at December 31, 2007 and December 31, 2006	F-43
Statements of Operations for years ended December 31, 2007 and 2008	F-45
Statement of Changes in Members’ Deficit for the years ended December 31, 2007 and 2008	F-46
Statements of Cash Flows for the years ended December 31, 2007 and 2006	F-47
Notes to Financial Statements	F-48

(b) Pro Forma Financial Information.


Introduction to Pro Forma Financial Information	F-59
Unaudited Pro Forma Condensed Combined Balance Sheet at March 31, 2008	F-60
Unaudited Pro Forma Condensed Combined Statement of Operations for three months ended March 31, 2008	F-61
Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2007	F-62

(d) Exhibits


Exhibit No.		Description

10.1		Fourth Amendment to Purchase and Sale Agreement, dated July 11, 2008, between Saratoga Resources, Inc., Harvest Oil & Gas, LLC, Barry Ray Salsbury, Brian Carl Albrecht and Shell Sibley

10.2		Fourth Amendment to Purchase and Sale Agreement, dated July 11, 2008, between Saratoga Resources, Inc., The Harvest Group, LLC, Barry Ray Salsbury, Brian Carl Albrecht, Shell Sibley, Willie Willard Powell and Carolyn Monica Greer

10.3		Credit Agreement, dated July 14, 2008, between Saratoga Resources, Inc. and Wayzata Investment Partners, LLC

10.4		Amended and Restated Credit Agreement, dated July 14, 2008, between Saratoga Resources, Inc. and Macquarie Bank Limited

10.5		Wayzata Investment Partners LLC Warrant, dated July 14, 2008

10.6		Subordinated Promissory Note, dated July 14, 2008, payable to Thomas F. Cooke

10.7		Subordinated Promissory Note, dated July 14, 2008

10.8		Employment Agreement, dated July 14, 2008 between Saratoga Resources, Inc. and Barry Salsbury

99.1		Form 10 Information reflecting Harvest Acquisition

SIGNATURES

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


	SARATOGA RESOURCES, INC.


	By:	/s/ Thomas Cooke
		Thomas Cooke
		Chief Executive Officer

Date: July 18, 2008

THE HARVEST GROUP, LLC

BALANCE SHEET

March 31, 2008

ASSETS


CURRENT ASSETS
Cash	$	6,302,916
Sales and Marketing Receivables		7,277,256
Joint Interest and Other Receivables		1,804,180
Prepaid Expenses		222,688
Due from Affiliates		501,415
Other Assets		625,000

Total Current Assets		16,733,455

PROPERTY AND EQUIPMENT, at Cost
Successful Efforts Used for Oil and Gas Properties:
Oil and Gas Property and Equipment - Proved		13,189,335
Furniture, Fixtures, Equipment and Other		145,458

		13,334,793

Less: Accumulated Depreciation, Depletion and Amortization		(4,910,189)

Total Property and Equipment, Net		8,424,604

OTHER ASSETS
Restricted Cash		945,604

Total Other Assets		945,604


Total Assets	$	26,103,663

See accompanying notes to financial statements.

F-1

LIABILITIES AND MEMBERS' CAPITAL



CURRENT LIABILITIES
Accounts Payable	$	4,702,134
Accrued Expenses Payable		1,009,187
Note Payable, Net of Debt Discount ($186,783 in 2008)		512,681
Hedging Liability		110,820

Total Current Liabilities		6,334,822

LONG-TERM LIABILITIES
Hedging Liability		1,861,654
Asset Retirement Obligations		7,022,017

Total Long-Term Liabilities		8,883,671

Total Liabilities		15,218,493

MEMBERS' CAPITAL
Members' Distributions		(2,769,864)
Retained Earnings		13,655,034

Total Members' Capital		10,885,170


Total Liabilities and Members' Capital	$	26,103,663

See and accompanying notes to financial statements.

F-2

THE HARVEST GROUP, LLC

STATEMENT OF OPERATIONS

For the Three Months Ended March 31, 2008


REVENUE
Oil and Gas Revenue, Net of Royalties	$	10,255,709
Derivative Expense		(657,611)
Other Income		285,474

Total Revenue		9,883,572

COSTS AND EXPENSES
Lease Operating Expenses		5,129,816
Depreciation, Depletion and Amortization		605,469
Plug and Abandonment Provision		180,583
Other Selling, General and Administrative Expenses		546,224

Total Cost and Expenses		6,462,092

Operating Income		3,421,480

OTHER INCOME (EXPENSE)
Interest Income		17,378
Interest Expense		(17,406)

Total Other Expense		(28)


NET INCOME	$	3,421,452

See accompanying notes to financial statements.

F-3

THE HARVEST GROUP, LLC

STATEMENT OF CHANGES IN MEMBERS' CAPITAL

For the Three Months Ended March 31, 2008


	Members'		Retained
	Distributions		Earnings		Total

BALANCE - December 31, 2007	$	(2,266,407)	$	10,233,582	$	7,967,175

Members' Distribution		(503,457)		-		(503,457)

Net Income		-		3,421,452		3,421,452

BALANCE - March 31, 2008	$	(2,769,864)	$	13,655,034	$	10,885,170

See accompanying notes to financial statements.

F-4

THE HARVEST GROUP, LLC

STATEMENT OF CASH FLOWS

For the Three Months Ended March 31, 2008


CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	3,421,452
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation, Depletion and Amortization		605,469
Amortization of Debt Discount		8,361
Accretion of Plug and Abandonment Liability		180,583
Loss on Derivative Instruments		657,611
Increase in Receivables		(1,072,690)
Decrease in Prepaid Expenses and Other Assets		147,340
Increase in Due from Affiliates		(803,640)
Increase in Accounts Payable and Accrued Expenses		2,107,478

Net Cash Provided by Operating Activities		5,251,964

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Oil and Gas Property and Equipment		(316,657)
Purchases of Furniture, Fixtures, Equipment and Other		(15,000)
Net Settlement of Derivative Instruments		(539,705)

Net Cash Used in Investing Activities		(871,362)

CASH FLOWS FROM FINANCING ACTIVITIES
Members' Distributions		(503,457)

Net Cash Used in Financing Activities		(503,457)

NET INCREASE IN CASH AND CASH EQUIVALENTS		3,877,145

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		2,425,771

CASH AND CASH EQUIVALENTS AT END OF YEAR	$	6,302,916

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Period for Interest	$	5,051

See accompanying notes to financial statements.

F-5

THE HARVEST GROUP, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE A

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

THE HARVEST GROUP, LLC (the Company), is an independent oil and gas company engaged in the acquisition, development and exploration of oil and natural gas. The Company’s principal areas of operation are in the Gulf of Mexico. The Company was formed as a limited liability company on June 10, 2004, and began operations in September 2006.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of depreciation, depletion and amortization, plugging and abandonment liabilities, and the valuation of oil and gas property.

REVENUE RECOGNITION

The Company recognizes oil and gas revenue from its interests in producing wells as the oil and gas is sold. Revenue from the purchase, transportation, and sale of natural gas is recognized upon completion of the sale and when transported volumes are delivered. The Company recognizes revenue related to gas balancing agreements based on the entitlement method. The Company’s net imbalance position at March 31, 2008, was immaterial.

HEDGING AGREEMENTS

The Company manages the potential impact of changes in the price of oil and natural gas by entering into derivatives commodity instruments (hedges), but does not use them for speculative purposes.

The Company accounts for hedging agreements in accordance with SFAS No. 133, as amended, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires the Company to recognize all derivative instruments on the balance sheet as either an asset or liability, measured at fair value, and requires that changes in a derivative’s fair value be realized currently in earnings, unless hedge accounting criteria are met. If the derivative is a qualifying hedge, depending on the nature of the hedge, changes in the fair value will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings.

CONCENTRATION OF CREDIT RISK

The Company’s accounts receivable relate primarily to the sale of natural gas and crude oil. Credit terms, typical of industry standards, are of a short-term nature and generally do not require collateral.

F-6

THE HARVEST GROUP, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE A

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

CONCENTRATION OF CREDIT RISK (Continued)

During the three months ended March 31, 2008, the Company sold 100% of its products to one customer. At March 31, 2008, amounts due from that customer totaled $7,277,256.

Periodically during the three months ended March 31, 2008, the Company maintained cash balances in a financial institution in excess of federally insured limits.

CASH AND CASH EQUIVALENTS

For the purpose of the Statement of Cash Flows, the Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents.

ACCOUNTS RECEIVABLE

Receivables are carried at original invoice amount. Uncollectible accounts receivable are charged directly against earnings when they are determined to be uncollectible. Use of this method does not result in a material difference from the valuation method required by generally accepted accounting principles.

PROPERTY AND EQUIPMENT

The successful efforts method is used for accounting for oil and gas exploration and production operations. Lease acquisition, tangible and intangible drilling costs are capitalized when incurred. If the drilling venture is successful, these costs are amortized over the estimated recoverable proved reserves. Costs of unsuccessful exploratory drilling ventures are charged to expense.

The Company capitalizes interest on expenditures for significant exploration and development projects while activities are in progress to bring the assets to their intended use. There was no interest capitalized for the three months ended March 31, 2008.

Depreciation, depletion, and amortization (DD&A) is computed on the units-of-production method separately on each individual property. DD&A expense includes the accrual of future plugging and abandonment costs. The Company accounts for future plugging and abandonment costs in accordance with SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires legal obligations associated with the retirement of long-lived assets (i.e., future plugging and abandonment costs) to be recognized at their fair value at the time the obligations are incurred. Upon initial recognition of the liability, that cost should be capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. The estimate of future plugging and abandonment costs is highly subjective. Management’s current estimate of the Company’s share of such future costs is approximately $14,453,000 as of March 31, 2008. The DD&A expense per equivalent MCF of production for the three months ended March 31, 2008 was $.55.

F-7

THE HARVEST GROUP, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE A

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

PROPERTY AND EQUIPMENT(Continued)

Furniture, fixtures, equipment, and other are depreciated using the straight-line method over the estimated useful lives of the assets.

LONG-LIVED ASSETS

The Company evaluates the recoverability of its long-lived assets in accordance with
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which superseded SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. Impairment losses are based on the difference between fair value, which was calculated using the discounted future cash flows of the related properties, and the net book value of those properties. The discounted future cash flows are derived from reserve estimates of independent petroleum engineers. There were no impairment losses recognized during the three months ended March 31, 2008.

INCOME TAXES

The Company is treated as a partnership for income tax purposes and, as such, each member is taxed separately on their distributive share of the Company’s income whether or not that income is actually distributed.

NOTE B

NOTES PAYABLE AND LONG-TERM DEBT

At March 31, 2008, the Company’s long-term debt included borrowings under a Credit Agreement dated September 29, 2006, and amended December 15, 2006, in an amount up to $25,000,000. The balance outstanding as of March 31, 2008, was $699,464. The Credit Agreement is scheduled to mature September 29, 2008. The loan requires monthly interest payments that are accrued on the principal balance at prime plus 4%, which, at March 31, 2008, was 9.25%. Principal reductions will result if the lender’s sweep of the Company’s net operating cash flows exceeds interest and fees payable to the lender. The loan is collateralized by all of the real and personal property of the Company, and the membership interests.

F-8

THE HARVEST GROUP, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE B

NOTES PAYABLE AND LONG-TERM DEBT (Continued)

As part of the loan agreement, the Company conveyed to the lender a 4% overriding royalty interest (ORRI) in all of its oil and gas properties, commencing on September 29, 2006. As a result, $3,425,374, the fair value, was allocated to the property conveyance, thereby reducing capitalized costs and recording a debt discount. The debt discount is being amortized over the life of the loan. Included in interest expense for the three months ended March 31, 2008, was $8,361, related to the amortization of the debt discount.

NOTE C

HEDGING AGREEMENTS

The Company entered into hedging agreements to reduce the impact of changes in the prices of oil and natural gas. Under SFAS No. 133, as amended, the nature of a derivative instrument must be evaluated to determine if it qualifies for hedge accounting treatment. Instruments qualifying for hedge accounting treatment are recorded as an asset or liability measured at fair value and subsequent changes in fair value are recognized in equity through other comprehensive income, to the extent the hedge is effective. The cash settlements of cash flow hedges are recorded into revenue. Instruments not qualifying for hedge accounting treatment are recorded in the balance sheet and changes in fair value are recognized in earnings as derivative expense (income). During the three month period ended March 31, 2008, the Company recognized net derivative expense of $591,041 in the Statement of Operations, as the result of hedges settled during the period and $66,570 as the result of market fluctuations.

The Company’s hedges are specifically referenced to the NYMEX index prices received for its designated production. The effectiveness of hedges is evaluated at the time the contracts are entered into, as well as periodically over the lives of the contracts, by analyzing the correlation between NYMEX index prices and the posted prices received from the designated production. Through this analysis, the Company is able to determine if a high correlation exists between the prices received for its designated production and the NYMEX prices at which the hedges will be settled. At March 31, 2008, the Company’s hedging contracts were considered effective cash flow hedges.

Estimating the fair value of hedging derivatives requires complex calculations incorporating estimates of future prices, discount rates and price movements. As a result, the Company obtains the fair value of its commodity derivatives from the counterparties to those contracts. Because the counterparties are market makers, they are able to provide a literal market value, or what they would be willing to settle such contracts for as of the given date.

F-9

THE HARVEST GROUP, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE C

HEDGING AGREEMENTS (Continued)

As of March 31, 2008, the Company had the following oil and gas hedge contracts accounted for as cash flow hedges, still in place:


	Instrument
Production Period	Type	Volume		Price
Crude Oil:
2008	Swap	51,592	Bbls	$60.00
2009	Swap	40,989	Bbls	$60.00
2008	Call	49,601	Bbls	$75.00
2009	Call	40,989	Bbls	$75.00
2008	Put	24,801	Bbls	$60.00
2009	Put	20,495	Bbls	$60.00

Natural Gas:
2008	Swap	115,437	Mmbtu	$7.00
2009	Swap	59,437	Mmbtu	$7.00
2008	Put	70,094	Mmbtu	$7.00
2009	Put	57,619	Mmbtu	$7.00

At March 31, 2008, the Company recognized a liability of $1,972,474 related to the estimated fair value of these derivative instruments.

NOTE D

ASSET RETIREMENT OBLIGATIONS

The Company accounts for plugging and abandonment costs in accordance with SFAS 143, Accounting for Asset Retirement Obligations.

A reconciliation of the beginning and ending aggregate carrying amount of asset retirement obligations at March 31, 2008 is as follows:


Beginning Balance	$	6,841,434
Liabilities Incurred		--
Accretion Expense		180,583
Revisions		--

Ending Balance	$	7,022,017

NOTE E

COMMITMENTS AND CONTINGENCIES

The Company is subject to claims and complaints, which arise in the ordinary course of business. It is the opinion of management that the outcome of these matters will not have a material adverse effect on the Company’s financial position or results of operations.

In connection with the purchase of certain oil and gas interests, the Company, by agreement, assumed certain plugging and abandonment, reclamation, restoration, and clean up liabilities and obligations related thereto. To secure these liabilities and certain accounts payable liabilities, the Company maintains $625,000 in letters of credit, maturing September 2008, and at March 31, 2008, the Company maintains $945,604 in restricted cash for this purpose.

F-10

THE HARVEST GROUP, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE F

RELATED PARTY TRANSACTIONS

During 2006, the Company entered into an agreement for an affiliate to provide administrative services. The agreement, expiring in September 2011, requires the Company to reimburse the affiliate for the actual general and administrative expenses incurred for the benefit of the Company, not to exceed $25,000 per month. During the three months ended March 31, 2008, the affiliate charged the Company $-0-.

On December 28, 2006, the Company entered into an agreement for an affiliate to provide charter boat services for transporting its product for $10,000 per month. During the three months ended March 31, 2008, the affiliate charged the Company $23,706 for these services. The agreement, which expires December 28, 2009, calls for the following payments subsequent to March 31, 2008: 2008 - $90,000, 2009 - $120,000.

The Company has amounts due from affiliates totaling $757,886 and amounts due to affiliates of $256,471 at March 31, 2008. These amounts are unsecured, non-interest bearing, and are due on demand.

NOTE G

EMPLOYMENT AGREEMENTS

The Company has entered into employment contracts with key employees. These contracts are a joint commitment with an affiliate company. The gross compensation commitments expire as follows:


Years Ending December 31,
2008	$	217,500
2009		241,667
	$	459,167

F-11

THE HARVEST GROUP, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE G

EMPLOYMENT AGREEMENTS (Continued)

In addition, the Company granted Membership Interest Rights as an incentive to retain key employees. The rights granted under the agreements entitle the holders to 15% membership interest, vesting over a three year period. In addition, following a “Change in Control,” as defined in the agreement, to payment of the value of the designated membership interest rights at that time, or in the event of other vesting or terminating events, as defined in the agreement, to payment of the value of the designated membership interest rights over 3 years.

As of March 31, 2008, Membership Interest Rights were vested 47% of the 15% membership interest of the Company. There were no compensation costs associated with the vesting for the three months ended March 31, 2008.

NOTE H

SUBSEQUENT EVENT

Effective July 14, 2008, Saratoga Resources, Inc. completed the acquisition of Harvest Oil & Gas, LLC and the Harvest Group, LLC (together the “Harvest Companies”) in a transaction to be accounted for under the purchase method of accounting. Saratoga paid $105.7 million in cash and issued 4,900,000 common shares of Saratoga stock, in connection with the related transaction that acquired 100% of the ownership of both Harvest Companies. Pursuant to the terms of the Purchase and Sales agreement, a portion of the cash paid was used to retire all existing bank debt on the Harvest Companies totaling approximately $33.7 million and in a related transaction paid $30 million in cash to eliminate an existing net profits interest in Harvest’s properties held by Macquarie Bank that was released after repayment of the Harvest Companies loans.

The acquisition and the related closing cost were funded with $12.5 million in borrowings under a new $25 million first lien revolving credit facility with Macquarie Bank who received 3,300,000 of the common shares issued, and a $97.5 million loan under a new second lien credit agreement with Wayzata Investment Partners which included Saratoga issuing 805,515 warrants to Wayzata to purchase common stock of Saratoga, at an exercise price of $0.01 per share, as part of the terms.

F-12

[f8k071808001.jpg]

To the Members

THE HARVEST GROUP, LLC

Report of Independent Registered Public Accounting Firm

We have audited the accompanying balance sheets of THE HARVEST GROUP, LLC (the Company) as of December 31, 2007 and 2006, and the related statements of operations, changes in members’ capital and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of THE HARVEST GROUP, LLC as of December 31, 2007 and 2006, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ LaPorte, Sehrt, Romig and Hand

A Professional Accounting Corporation

Metairie, LA

February 6, 2008

F-13

[f8k071808002.jpg]

THE HARVEST GROUP, LLC

BALANCE SHEETS

ASSETS


	December 31,
	2007		2006
CURRENT ASSETS
Cash	$	2,425,771	$	585,934
Sales and Marketing Receivables		6,179,122		2,733,973
Joint Interest and Other Receivables		1,829,624		-
Prepaid Expenses		370,028		608,184
Other Assets		625,000		625,000

Total Current Assets		11,429,545		4,553,091

PROPERTY AND EQUIPMENT, At Cost
Successful Efforts Used for Oil and Gas Properties:
Oil and Gas Property and Equipment - Proved		12,872,677		13,576,267
Furniture, Fixtures, Equipment and Other		130,458		-

		13,003,135		13,576,267

Less: Accumulated Depreciation, Depletion and Amortization		(4,304,719)		(862,103)

Total Property and Equipment, Net		8,698,416		12,714,164

OTHER ASSETS
Restricted Cash		945,604		534,060

Total Other Assets		945,604		534,060


Total Assets	$	21,073,565	$	17,801,315

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

F-14

LIABILITIES AND MEMBERS’ CAPITAL


	December 31,
	2007		2006
CURRENT LIABILITIES
Accounts Payable	$	2,804,528	$	1,733,981
Accrued Expenses Payable		799,315		504,830
Due to Affiliates		339,460		76,214
Note Payable, Net of Debt Discount ($195,144 in 2007)		504,320		-
Hedging Liability		1,854,568		215,104

Total Current Liabilities		6,302,191		2,530,129

LONG-TERM LIABILITIES
Asset Retirement Obligations		6,841,434		6,163,455
Note Payable, Net of Debt Discount ($2,988,392 in 2006)		-		7,723,092

Total Long-Term Liabilities		6,841,434		13,886,547

Total Liabilities		13,143,625		16,416,676

MEMBERS' CAPITAL
Members' Distributions		(2,266,407)		(136,000)
Retained Earnings		10,196,347		1,520,639

Total Members' Capital		7,929,940		1,384,639


Total Liabilities and Members' Capital	$	21,073,565	$	17,801,315

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

F-15

THE HARVEST GROUP, LLC

STATEMENTS OF OPERATIONS


	For the Years Ended December 31,
	2007		2006
REVENUE
Oil and Gas Revenue, Net of Royalties	$	29,461,573	$	5,333,700
Derivative Expense		(2,406,628)		(852,664)
Other Income		72,845		-

Total Revenue		27,127,790		4,481,036

COSTS AND EXPENSES
Lease Operating Expenses		10,103,628		1,978,582
Workover Expenses		708,644		-
Depreciation, Depletion and Amortization		3,436,669		862,103
Plug and Abandonment Provision (Recovery)		677,979		(824,792)
Other Selling, General and Administrative Expenses		259,368		186,401

Total Cost and Expenses		15,186,288		2,202,294

Operating Income		11,941,502		2,278,742

OTHER INCOME (EXPENSE)
Interest Income		148,740		-
Interest Expense		(3,414,534)		(784,667)

Total Other Income (Expense)		(3,265,794)		(784,667)


NET INCOME	$	8,675,708	$	1,494,075

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

F-16

THE HARVEST GROUP, LLC

STATEMENT OF CHANGES IN MEMBERS' CAPITAL


	Members’ Contributions (Distributions)		Retained Earnings		Total
BALANCE - December 31, 2005	$	-	$	26,564	$	26,564

Members' Distribution		(136,000)		-		(136,000)

Net Income		-		1,494,075		1,494,075

BALANCE - December 31, 2006		(136,000)		1,520,639		1,384,639

Members' Distributions		(2,130,407)		-		(2,130,407)

Net Income		-		8,675,708		8,675,708

BALANCE - December 31, 2007	$	(2,266,407)	$	10,196,347	$	7,929,940

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

F-17

THE HARVEST GROUP, LLC

STATEMENTS OF CASH FLOWS


	For the Years Ended December 31,
	2007		2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	8,675,708	$	1,494,075
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation, Depletion and Amortization		3,436,669		862,103
Amortization of Debt Discount		2,793,248		436,982
Accretion of Plug and Abandonment Liability		677,979		175,207
Loss on Derivative Instruments		2,406,628		852,664
Increase in Receivables		(5,274,773)		(2,733,973)
Decrease (Increase) in Prepaid Expenses and Other Assets		238,156		(1,233,184)
Increase in Due to Affiliates		263,246		212,214
Increase in Accounts Payable and Accrued Expenses		1,365,031		2,238,811

Net Cash Provided by Operating Activities		14,581,892		2,304,899

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Oil and Gas Property and Equipment		(4,603,241)		(12,013,394)
Proceeds from Escrow Held on Purchase of Oil and Gas Property		5,182,321		-
Increase in Restricted Cash		(411,544)		(197,452)
Net Settlement of Derivative Instruments		(767,164)		(137,559)
Purchase of Commodity Derivative Instruments		-		(500,000)

Net Cash Used in Investing Activities		(599,628)		(12,848,405)

CASH FLOWS FROM FINANCING ACTIVITIES
Members' Distributions		(2,130,407)		(136,000)
Net (Repayments) Borrowings on Long-Term Debt		(10,012,020)		10,711,484

Net Cash (Used in) Provided by Financing Activities		(12,142,427)		10,575,484

NET INCREASE IN CASH AND CASH EQUIVALENTS		1,839,837		31,978

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		585,934		553,956

CASH AND CASH EQUIVALENTS AT END OF YEAR	$	2,425,771	$	585,934

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Year for Interest	$	719,374	$	245,973
Non-Cash Transaction:
Debt Discount Related to Conveyance of Overriding Royalty
Interest to Lender	$	-	$	3,425,374

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

F-18

NOTE A

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

REVENUE RECOGNITION

HEDGING AGREEMENTS

The Company manages the potential impact of changes in the price of oil and natural gas by entering into derivatives commodity instruments (hedges), but does not use them for speculative purposes.

CONCENTRATION OF CREDIT RISK

F-19

NOTE A

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

CONCENTRATION OF CREDIT RISK (Continued)

During the years ended December 31, 2007 and 2006, the Company sold 100% of its products to one customer. At December 31, 2007 and 2006, amounts due from that customer totaled $6,179,122 and $2,733,973, respectively.

Periodically during the years ended December 31, 2007 and 2006, the Company maintained cash balances in a financial institution in excess of federally insured limits.

CASH AND CASH EQUIVALENTS

For the purpose of the Statement of Cash Flows, the Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents.

ACCOUNTS RECEIVABLE

PROPERTY AND EQUIPMENT

Depreciation, depletion, and amortization (DD&A) is computed on the units-of-production method separately on each individual property. DD&A expense includes the accrual of future plugging and abandonment costs. The Company accounts for future plugging and abandonment costs in accordance with SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires legal obligations associated with the retirement of long-lived assets (i.e., future plugging and abandonment costs) to be recognized at their fair value at the time the obligations are incurred. Upon initial recognition of the liability, that cost should be capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. The estimate of future plugging and abandonment costs is highly subjective. Management’s current estimate of the Company’s share of such future costs is approximately $14,453,000 as of December 31, 2007 and 2006. The DD&A expense per equivalent MCF of production for the years ended December 31, 2007 and 2006, was $.89 and $.79, respectively.

F-20

NOTE A

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

PROPERTY AND EQUIPMENT(Continued)

Furniture, fixtures, equipment, and other are depreciated using the straight-line method over the estimated useful lives of the assets.

LONG-LIVED ASSETS

The Company evaluates the recoverability of its long-lived assets in accordance with
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which superseded SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Impairment losses are based on the difference between fair value, which was calculated using the discounted future cash flows of the related properties, and the net book value of those properties. The discounted future cash flows are derived from reserve estimates of independent petroleum engineers. There were no impairment losses recognized during the years ended December 31, 2007 or 2006.

INCOME TAXES

NOTE B

NOTES PAYABLE AND LONG-TERM DEBT

At December 31, 2007 and 2006, the Company’s long-term debt included borrowings under a Credit Agreement dated September 29, 2006, and amended December 15, 2006, in an amount up to $25,000,000. The balance outstanding as of December 31, 2007 and 2006, was $699,464 and $10,711,484, respectively. The Credit Agreement is scheduled to mature September 29, 2008. The loan requires monthly interest payments that are accrued on the principal balance at prime plus 4%, which, at December 31, 2007, was 11.25%. Principal reductions will result if the lender’s sweep of the Company’s net operating cash flows exceeds interest and fees payable to the lender. The loan is collateralized by all of the real and personal property of the Company, and the membership interests.

F-21

NOTE B

NOTES PAYABLE AND LONG-TERM DEBT (Continued)

As part of the loan agreement, the Company conveyed to the lender a 4% overriding royalty interest (ORRI) in all of its oil and gas properties, commencing on September 29, 2006. As a result, $3,425,374, the fair value, was allocated to the property conveyance, thereby reducing capitalized costs and recording a debt discount. The debt discount is being amortized over the life of the loan. Included in interest expense for the years ended December 31, 2007 and 2006, was $2,793,248 and $436,982, respectively, related to the amortization of the debt discount.

NOTE C

HEDGING AGREEMENTS

The Company entered into hedging agreements to reduce the impact of changes in the prices of oil and natural gas. Under SFAS No. 133, as amended, the nature of a derivative instrument must be evaluated to determine if it qualifies for hedge accounting treatment. Instruments qualifying for hedge accounting treatment are recorded as an asset or liability measured at fair value and subsequent changes in fair value are recognized in equity through other comprehensive income, to the extent the hedge is effective. The cash settlements of cash flow hedges are recorded into revenue. Instruments not qualifying for hedge accounting treatment are recorded in the balance sheet and changes in fair value are recognized in earnings as derivative expense (income). During the years ended December 31, 2007 and 2006, the Company recognized net derivative expense of $975,390 and $163,798, respectively, in the Statement of Operations, as the result of hedges settled during the period and $1,431,238 and $688,866 expense, respectively, as the result of market fluctuations.

The Company’s hedges are specifically referenced to the NYMEX index prices received for its designated production. The effectiveness of hedges is evaluated at the time the contracts are entered into, as well as periodically over the lives of the contracts, by analyzing the correlation between NYMEX index prices and the posted prices received from the designated production. Through this analysis, the Company is able to determine if a high correlation exists between the prices received for its designated production and the NYMEX prices at which the hedges will be settled. At December 31, 2007, the Company’s hedging contracts were considered effective cash flow hedges.

F-22

NOTE C

HEDGING AGREEMENTS (Continued)

As of December 31, 2007, the Company had the following oil and gas hedge contracts accounted for as cash flow hedges, still in place:


	Instrument
Production Period	Type	Volume		Price
Crude Oil:
2008	Swap	75,413	Bbls	$60.00
2009	Swap	40,989	Bbls	$60.00
2008	Call	71,207	Bbls	$75.00
2009	Call	40,989	Bbls	$75.00
2008	Put	35,603	Bbls	$60.00
2009	Put	20,495	Bbls	$60.00

Natural Gas:
2008	Swap	217,731	Mmbtu	$7.00
2009	Swap	59,437	Mmbtu	$7.00
2008	Put	100,655	Mmbtu	$7.00
2009	Put	57,619	Mmbtu	$7.00

At December 31, 2007 and 2006, the Company recognized a liability of $1,854,568 and $215,104, respectively, related to the estimated fair value of these derivative instruments.

NOTE D

ASSET RETIREMENT OBLIGATIONS

The Company accounts for plugging and abandonment costs in accordance with SFAS 143, Accounting for Asset Retirement Obligations.

A reconciliation of the beginning and ending aggregate carrying amount of asset retirement obligations is as follows:


	2007		2006
Beginning Balance	$	6,163,455	$	--
Liabilities Incurred		--		6,888,068
Accretion Expense		677,979		175,208
Revisions		--		(899,821)

Ending Balance	$	6,841,434	$	6,163,455

F-23

NOTE E

COMMITMENTS AND CONTINGENCIES

In connection with the purchase of certain oil and gas interests, the Company, by agreement, assumed certain plugging and abandonment, reclamation, restoration, and clean up liabilities and obligations related thereto. To secure these liabilities and certain accounts payable liabilities, the Company maintains $625,000 in letters of credit, maturing September 2008, and at December 31, 2007 and 2006, the Company maintains $945,604 and $534,060, respectively, in restricted cash for this purpose.

NOTE F

RELATED PARTY TRANSACTIONS

During 2006, the Company entered into an agreement for an affiliate to provide administrative services. The agreement, expiring in September 2011, requires the Company to reimburse the affiliate for the actual general and administrative expenses incurred for the benefit of the Company, not to exceed $25,000 per month. During the years ended December 31, 2007 and 2006, the affiliate charged the Company $-0- and $129,931, respectively, for these services.

The Company has amounts due to affiliates totaling $339,460 and $76,214 at December 31, 2007 and 2006, respectively. These amounts are unsecured, non-interest bearing, and are due on demand.

NOTE G

EMPLOYMENT AGREEMENTS

The Company has entered into employment contracts with key employees. These contracts are a joint commitment with an affiliate company. The gross compensation commitments expire as follows:


Years Ending December 31,
2008	$	290,000
2009		241,667
	$	531,667

F-24

NOTE G

EMPLOYMENT AGREEMENTS (Continued)

As of December 31, 2007, Membership Interest Rights were vested 39% of the 15% membership interest of the Company. Compensation costs associated with the vesting during 2007 amounted to $1,517.

NOTE H

SUPPLEMENTAL INFORMATION (UNAUDITED)

Proved Oil and Gas Reserves

Proved oil and gas reserves were estimated by independent petroleum engineers. The reserves were based on the following assumptions:

Future revenues were based on year-end oil and gas prices. Future price changes were included only to the extent provided by existing contractual agreements.

Production and development costs were computed using year-end costs assuming no change in present economic conditions.

Future net cash flows were discounted at an annual rate of 10%.

Reserve estimates are inherently imprecise and these estimates are expected to change as future information becomes available.

The following summarizes the Company’s estimated total proved reserves:


	Gas (MCF)	Oil (BBLS)	MCFE
Estimated at December 31, 2005	--	--	--

Purchase, Discoveries, Extensions, and Improved Recovery, Net of Revisions of Previous Estimates	7,692,000	1,602,000	17,308,000

Production	(658,000)	(72,000)	(1,092,000)

Estimated at December 31, 2006	7,034,000	1,530,000	16,216,000

Purchase, Discoveries, Extensions, and Improved Recovery, Net of Revisions of Previous Estimates	2,663,000	230,000	4,043,000

Production	(2,015,000)	(308,000)	(3,863,000)

Estimated at December 31, 2007	7,682,000	1,452,000	16,396,000

F-25

NOTE H

SUPPLEMENTAL INFORMATION (UNAUDITED) (Continued)

At December 31, 2007, the approximate undiscounted and discounted (using a discount rate of 10%) future net cash flows before income taxes related to the Company’s proved oil and gas reserves were $97,601,000 and $82,294,000, respectively. The future net cash flows were calculated utilizing NYMEX futures base prices for oil and Henry Hub base gas prices.

Capitalized Costs Relating to Oil and Gas Producing Activities


	2007		2006
Proved Properties	$	12,872,677	$	13,576,267
Unproved Properties		--		--
Accumulated Depreciation, Depletion and Amortization		(4,297,215)		(862,103)
Net Capitalized Costs	$	8,575,462	$	12,714,164

Costs Incurred in Oil and Gas Producing Activities


	2007		2006
Acquisitions	$	--	$	8,927,108
Reimbursement of Escrow Held in Acquisition		(5,182,321)		--
Overriding Royalty Interest Given up to Lender		--		(3,425,374)
Capitalized Plug and Abandonment Costs		--		5,988,247
Exploration		--		--
Development		4,478,731		2,086,286
Costs Incurred	$	(703,590)	$	13,576,267

Results of Operations for Oil and Gas Producing Activities


	2007		2006
Oil and Gas Sales	$	29,461,573	$	5,333,700
Production Costs		(10,812,272)		(1,153,790)
Exploration Expenses		--		--
Depreciation, Depletion, and Amortization		(3,435,112)		(862,103)
Results of Operations for Oil and Gas Producing Activities (Excluding Corporate Overhead and Financing Costs)	$	15,214,189	$	3,317,807

F-26

NOTE H

SUPPLEMENTAL INFORMATION (UNAUDITED) (Continued)

Standardized Measure of Discounted Future Net Cash Flows Relating to Reserves

The following information has been developed utilizing procedures prescribed by Statement of Financial Accounting Standards No. 69 (FAS 69), Disclosures about Oil and Gas Producing Activities. It may be useful for certain comparative purposes, but should not be solely relied upon in evaluating the Company or its performance. Further, information contained in the following table should not be considered as representative of realistic assessments of future cash flows, nor should the Standardized Measure of Discounted Future Net Cash Flows be viewed as representative of the current value of the Company.

The standardized measure of discounted future net cash flows is computed by applying year-end prices of oil and gas (with consideration of price changes only to the extent provided by contractual arrangements) to the estimated future production of proved oil and gas reserves, less estimated future expenditures (based on year-end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax expenses (based on year-end statutory tax rates, with consideration of future tax rates already legislated) to be incurred on pretax net cash flows less tax basis of the properties and available credits, and assuming continuation of existing economic conditions. The estimated future net cash flows are then discounted using a rate of 10 percent a year to reflect the estimated timing of the future cash flows.


(Dollars in Thousands)
	2007		2006
Future Cash Inflows	$	164,713	$	121,072
Future Production Costs		(46,663)		(46,722)
Future Development Costs		(20,449)		(17,496)
Future Net Cash Flows		97,601		56,854
10% Annual Discount for Estimated Timing of Cash Flows		(15,307)		(4,951)

Standardized Measure of Discounted Future Net Cash Flows	$	82,294	$	51,903

F-27

NOTE H

SUPPLEMENTAL INFORMATION (UNAUDITED) (Continued)

The following reconciles the change in the standardized measure of discounted future net cash flows applicable to proved oil and gas reserves:


	2007
Beginning of Year	$	51,903
Sales of Oil and Gas Produced, Net of Production Costs		(18,649)
Net Changes in Prices and Production Costs		35,677
Extensions, discoveries, and Improved Recovery, Less Related Costs		16,414
Development Costs Incurred During the Year Which were Previously Estimated		2,252
Net Change in Estimated Future Development Costs		(5,207)
Revisions of Previous Quantity Estimates		(759)
Net Change from Purchases and Sales of Minerals in Place		--
Accretion of Discount		663
Other		-
End of Year	$	82,294

NOTE I

SUBSEQUENT EVENT

On October 24, 2007, Saratoga Resources, Inc. entered into a Purchase and Sale Agreement with the Company to purchase all of the membership interests in the Company for $29 million, subject to certain potential adjustments and performance obligations. This agreement expires February 29, 2008.

F-28

NOTE J

EVENT SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT AUDITOR (UNAUDITED)

F-29

HARVEST OIL & GAS, LLC

BALANCE SHEET

March 31, 2008

ASSETS


CURRENT ASSETS
Cash	$	3,173,360
Sales and Marketing Receivables		3,616,616
Joint Interest and Other Receivables		396,730
Prepaid Expenses		884,040

Total Current Assets		8,070,746

PROPERTY AND EQUIPMENT, at Cost
Successful Efforts Used for Oil and Gas Properties:
Oil and Gas Property and Equipment - Proved		29,496,382
Furniture, Fixtures, Equipment and Other		125,313

		29,621,695
Less: Accumulated Depreciation,
Depletion and Amortization		8,365,965

Property and Equipment, Net		21,255,730


Total Assets	$	29,326,476

See and accompanying notes to financial statements.

F-30

LIABILITIES AND STOCKHOLDERS' EQUITY


CURRENT LIABILITIES
Accounts Payable	$	2,845,638
Accrued Expenses Payable		1,472,105
Line of Credit Payable		149,800
Note Payable (Net of Debt Discount of $8,016,171 in 2008)		29,234,646
Hedging Liability - Current Portion		5,210,040
Due to Affiliates		757,884

Total Current Liabilities		39,670,113

LONG-TERM LIABILITIES
Hedging Liability - Long-Term Portion		10,727,148
Asset Retirement Obligations		5,787,083

Total Long-Term Liabilities		16,514,231

Total Liabilities		56,184,344

MEMBERS' DEFICIT
Members' Distribution		(731,153)
Retained Deficit		(26,126,715)

Total Members' Deficit		(26,857,868)


Total Liabilities and Members' Deficit	$	29,326,476

See accompanying notes to financial statements.

F-31

HARVEST OIL & GAS, LLC

STATEMENT OF OPERATIONS

For the Three Months Ended March 31, 2008


REVENUE
Oil and Gas Revenue, Net of Royalties	$	5,405,220
Derivative Expense		(5,114,609)
Other Income		351,123

Total Revenue		641,734

COSTS AND EXPENSES
Lease Operating Expenses		2,229,616
Depreciation, Depletion, and Amortization		648,428
Plug and Abandonment Provision		252,586
Other Selling, General and Administrative Expenses		2,160,597

Total Cost and Expenses		5,291,227

Operating Loss		(4,649,493)

OTHER INCOME (EXPENSE)
Interest Income		8,610
Interest Expense		(1,811,768)

Total Other Income (Expense)		(1,803,158)


NET LOSS	$	(6,452,651)

See accompanying notes to financial statements.

F-32

HARVEST OIL & GAS, LLC

STATEMENT OF CHANGES IN MEMBERS' DEFICIT

For the Three Months Ended March 31, 2008


	Members'		Retained
	Distributions		Deficit		Total
BALANCE - December 31, 2007	$	(645,722)	$	(19,674,064)	$	(20,319,786)

Members' Distributions		(85,431)		-		(85,431)

Net Loss		-		(6,452,651)		(6,452,651)

BALANCE - March 31, 2008	$	(731,153)	$	(26,126,715)	$	(26,857,868)

See accompanying notes to financial statements.

F-33

HARVEST OIL & GAS, LLC

STATEMENT OF CASH FLOWS

For the Three Months Ended March 31, 2008


CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss	$	(6,452,651)
Adjustments to Reconcile Net Loss to Net
Cash Provided by Operating Activities:
Depreciation, Depletion and Amortization		648,428
Amortization of Debt Discount		842,346
Plug and Abandonment Provision		252,586
Loss on Derivative Instruments		5,114,609
Decrease in Receivables		1,367,062
Increase in Prepaid Expenses and
Other Assets		(234,945)
Increase in Due to Affiliate		779,934
Increase in Accounts Payable and
Accrued Expenses and Other Liabilities		2,038,608

Net Cash Provided by Operating Activities		4,355,977

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Oil and Gas Property and Equipment		(1,612,219)
Purchases of Furniture, Fixtures, Equipment and Other		(3,883)
Net Proceeds from Settlement of Derivative Instruments		(1,430,593)

Net Cash Used in Investing Activities		(3,046,695)

CASH FLOWS FROM FINANCING ACTIVITIES
Members' Distributions		(85,431)
Net Borrowings on Long-Term Debt		168,131

Net Cash Provided by Financing Activities		82,700

NET INCREASE IN CASH AND CASH EQUIVALENTS		1,391,982

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		1,781,378

CASH AND CASH EQUIVALENTS AT END OF YEAR	$	3,173,360

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Period for Interest	$	1,068,273

See accompanying notes to financial statements.

F-34

HARVEST OIL & GAS, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE A

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

HARVEST OIL & GAS, LLC (the Company), is an independent oil and gas company engaged in the acquisition, development and exploration of oil and natural gas. The Company’s principal areas of operation are in the Gulf of Mexico. The Company is a limited liability company.

USE OF ESTIMATES

REVENUE RECOGNITION

HEDGING AGREEMENTS

The Company manages the potential impact of changes in the price of oil and natural gas by entering into derivatives commodity instruments (hedges), but does not use them for speculative purposes.

The Company accounts for hedging agreements in accordance with SFAS No. 133, as amended, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires the Company to recognize all derivative instruments on the balance sheets as either an asset or liability, measured at fair value, and requires that changes in a derivative’s fair value be realized currently in earnings, unless hedge accounting criteria are met. If the derivative is a qualifying hedge, depending on the nature of the hedge, changes in the fair value will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings.

CONCENTRATION OF CREDIT RISK

F-35

HARVEST OIL & GAS, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE A

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

CONCENTRATION OF CREDIT RISK (Continued)

During the three months ended March 31, 2008, the Company sold 100% of its products to one customer. At March 31, 2008, amounts due from that customer totaled $3,616,616.

During the three months ended March 31, 2008, the Company maintained cash balances in a financial institution in excess of federally insured limits.

ACCOUNTS RECEIVABLE

PROPERTY AND EQUIPMENT

Depreciation, depletion, and amortization (DD&A) is computed on the units-of-production method separately on each individual property. DD&A expense includes the accrual of future plugging and abandonment costs. The Company accounts for future plugging and abandonment costs in accordance with SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires legal obligations associated with the retirement of long-lived assets (i.e., future plugging and abandonment costs) to be recognized at their fair value at the time the obligations are incurred. Upon initial recognition of the liability, that cost should be capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. The estimate of future plugging and abandonment costs is highly subjective. Management’s current estimate of the Company’s share of such costs is approximately $14,075,000 as of March 31, 2008. The DD&A expense per equivalent MCF of production for the three months ended March 31, 2008 was $1.18.

Furniture, fixtures, equipment, and other are depreciated using the straight-line method over the estimated useful lives of the assets.

F-36

HARVEST OIL & GAS, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE A

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

LONG-LIVED ASSETS

The Company evaluates the recoverability of its long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which superseded SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. Impairment losses are based on the difference between fair value, which was calculated using the discounted future cash flows of the related properties, and the net book value of those properties. The discounted future cash flows are derived from reserve estimates of independent petroleum engineers. There were no impairment losses recognized during the three months ended March 31, 2008.

CASH AND CASH EQUIVALENTS

For the purpose of the Statements of Cash Flows, the Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents.

INCOME TAXES

NOTE B

NOTES PAYABLE AND LONG-TERM DEBT

The Company has an unsecured line of credit with a bank, payable on demand, in the amount of $150,000. The line requires monthly interest payments at prime, 5.25% as of March 31, 2008. As of March 31, 2008, the balance of the line of credit was $149,800. The line is guaranteed by the members of the Company.

At March 31, 2008, the Company’s long-term debt included borrowings under a Credit Agreement dated August 17, 2005, in an amount up to $50,000,000. During the year ended December 31, 2006, the Credit Agreement was increased to $60,000,000. The balance outstanding as of March 31, 2008, was $37,250,817. The Credit Agreement is scheduled to mature August 17, 2010. The loan requires monthly interest payments that are accrued on the principal balance at prime plus 4%, which at March 31, 2008, was 9.25%. Principal reductions will result if the lender’s sweep of the Company’s net operating cash flows exceeds interest and fees payable to the lender. The loan is collateralized by all of the real and personal property of the Company, and the membership interests.

F-37

HARVEST OIL & GAS, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE B

NOTES PAYABLE AND LONG-TERM DEBT (Continued)

The Company is subject to certain restrictive financial covenants under the credit facility, including an interest coverage ratio of at least 2.5 to 1.0, a current ratio of at least 1.0 to 1.0, and an adjusted present value ratio of not less than 2.0 to 1.0, as defined in the Credit Agreement. The credit facility also includes customary restrictions with respect to liens, indebtedness, loans and investments, material changes in the Company’s business, asset sales or leases or transfers of assets, restricted payments, such as distributions and dividends, mergers or consolidations, transactions with affiliates and rate management transactions. Under the terms of the agreement, the loan is considered in default if the Company is in violation of any restrictive covenant. For the year ended December 31, 2007, the bank has not waived the covenants and, accordingly, the entire amount of the note, $37,250,817 at March 31, 2008, was included in current liabilities. It is not known at this time what action the bank may take, if any.

As part of the loan agreement, the Company conveyed to the lender a 50% overriding royalty interest (ORRI) in all of its oil and gas properties, commencing on August 17, 2008. As a result, $16,856,174, the fair value, was allocated to the property conveyance, thereby reducing capitalized costs and recording a debt discount. The debt discount is being amortized over the life of the loan. Included in interest expense for the three months ended March 31, 2008 was $842,346 related to the amortization of the debt discount.

NOTE C

HEDGING AGREEMENTS

The Company entered into hedging agreements to reduce the impact of changes in the prices of oil and natural gas. Under SFAS No. 133, as amended, the nature of a derivative instrument must be evaluated to determine if it qualifies for hedge accounting treatment. Instruments qualifying for hedge accounting treatment are recorded as an asset or liability measured at fair value, and subsequent changes in fair value are recognized in equity through other comprehensive income, to the extent the hedge is effective. The cash settlements of cash flow hedges are recorded into revenue. Instruments not qualifying for hedge accounting treatment are recorded in the balance sheet and changes in fair value are recognized in earnings as derivative (loss) gain. During the three months ended March 31, 2008, the Company recognized a net derivative loss of $1,479,642 in the Statements of Operations, as the result of hedges settled during the periods and $3,634,967 in the Statements of Operations, as the result of market value fluctuations.

F-38

HARVEST OIL & GAS, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE C

HEDGING AGREEMENTS (Continued)

As of March 31, 2008, the Company had the following oil and gas hedge contracts accounted for as cash flow hedges, still in place:


	Instrument
Production Period	Type	Volume		Price
Crude Oil:
2008	Swap	85,445	Bbls	$58.50
2009	Swap	95,697	Bbls	$57.80
2010	Swap	81,093	Bbls	$56.19
2011	Swap	68,461	Bbls	$56.19
2008	Put	14,823	Bbls	$50.00
2009	Put	26,484	Bbls	$50.00
2010	Put	26,484	Bbls	$50.00
2011	Put	26,484	Bbls	$50.00

Natural Gas:
2008	Swap	352,558	Mmbtu	$7.38
2008	Swap	445,182	Mmbtu	$8.50
2009	Swap	389,234	Mmbtu	$7.10
2010	Swap	321,335	Mmbtu	$6.85
2011	Swap	265,717	Mmbtu	$6.85
2008	Put	94,500	Mmbtu	$6.50
2009	Put	143,100	Mmbtu	$6.50
2010	Put	143,100	Mmbtu	$6.50
2011	Put	143,100	Mmbtu	$6.50

At March 31, 2008, the Company recognized liabilities of $15,937,188, related to the estimated fair value of these derivative instruments.

F-39

HARVEST OIL & GAS, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE D

ASSET RETIREMENT OBLIGATIONS

The Company accounts for plugging and abandonment costs in accordance with SFAS 143, Accounting for Asset Retirement Obligations.

A reconciliation of the beginning and ending aggregate carrying amount of asset retirement obligations at March 31, 2008 is as follows:


Beginning Balance	$	5,534,497
Liabilities Incurred		--
Accretion Expense		252,586
Revisions		--

Ending Balance	$	5,787,083

NOTE E

COMMITMENTS AND CONTINGENCIES

The Company is involved in litigation with a former customer regarding payment for oil and gas products marketed by that customer. While the Company maintains its position, it has fully reserved for amounts owed by the customer and any outcome regarding this matter will not have an adverse effect on the Company’s financial position or results of operations.

In connection with the purchase of certain oil and gas interests, the Company, by agreement, assumed certain plugging and abandonment, reclamation, restoration, and clean up liabilities and obligations related thereto. To secure these liabilities and certain accounts payable liabilities, the Company maintains $11.6 million at March 31, 2008 in letters of credit with its primary lender, maturing in May and August 2008. The letters of credit are secured by the various oil and gas properties maintained by HARVEST OIL & GAS, LLC.

NOTE F

RELATED PARTY TRANSACTIONS

During 2006, the Company entered into an agreement to provide administrative services for an affiliate. The agreement, expiring in September 2011, requires the affiliate to reimburse the Company for the actual general and administrative expenses incurred for the benefit of the affiliate, not to exceed $25,000 per month. During the three months ended March 31, 2008, the Company charged the affiliate $-0- for these services.

The Company has an amount due to affiliate totaling $757,884 at March 31, 2008. This amount is unsecured, non-interest bearing, and due on demand.

F-40

HARVEST OIL & GAS, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE F

RELATED PARTY TRANSACTIONS (Continued)

The Company leases office space from a related party. Minimum future rental payments on operating leases for the year ended December 31, are:


2008	$	90,000
2009		120,000
2010		110,000

Total	$	320,000

Rent expense charged to operations totaled $31,869 for the three months ended March 31, 2008.

NOTE G

EMPLOYMENT AGREEMENTS

The Company has entered into employment contracts with key employees. These contracts are a joint commitment with an affiliate company. The gross compensation commitments expire as follows:


Years Ending December 31,
2008	$	217,500
2009		241,667

	$	459,167

In addition, the Company entered into Phantom Membership Interest Rights agreements as an incentive to retain key employees. The rights granted under the agreements entitle the holder, following a “Change in Control”, as defined in the agreement, to payment of the value of the designated phantom membership interest rights at that time, or in the event of other vesting or terminating events, as defined in the agreement, to payment of the value of the designated phantom membership interest rights over 3 years.

NOTE H

SUBSEQUENT EVENT

F-41

[f8k071808003.jpg]

To the Members

HARVEST OIL & GAS, LLC

Report of Independent Registered Public Accounting Firm

We have audited the accompanying balance sheets of HARVEST OIL & GAS, LLC (the Company) as of December 31, 2007 and 2006, and the related statements of operations, changes in members’ deficit and cash flows for years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of HARVEST OIL & GAS, LLC as of December 31, 2007 and 2006, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ LaPorte, Sehrt, Romig and Hand

A Professional Accounting Corporation

Metairie, LA

February 6, 2008

F-42

[f8k071808004.jpg]

HARVEST OIL & GAS, LLC

BALANCE SHEETS

ASSETS


	December 31,
	2007		2006
CURRENT ASSETS
Cash	$	1,781,378	$	209,097
Sales and Marketing Receivables		4,133,857		3,838,902
Joint Interest and Other Receivables		956,573		3,519,880
Prepaid Expenses		649,095		1,183,164
Other Receivable		173,812		550,000
Due from Affiliates		59,285		76,215

Total Current Assets		7,754,000		9,377,258

PROPERTY AND EQUIPMENT, At Cost
Successful Efforts Used for Oil and Gas Properties:
Oil and Gas Property and Equipment - Proved		27,884,163		24,414,497
Furniture, Fixtures, Equipment and Other		121,430		108,637

		28,005,593		24,523,134
Less: Accumulated Depreciation,
Depletion and Amortization		7,717,537		3,751,729

Property and Equipment, Net		20,288,056		20,771,405


	$	28,042,056	$	30,148,663

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

F-43

LIABILITIES AND STOCKHOLDERS' EQUITY


	December 31,
	2007		2006
CURRENT LIABILITIES
Accounts Payable	$	972,395	$	828,633
Accrued Expenses Payable		1,223,175		3,422,867
Line of Credit Payable		149,800		148,856
Note Payable (Net of Debt Discount of $8,858,517 in 2007and $12,227,900 in 2006)		28,224,169		21,938,324
Hedging Liability		12,253,172		2,706,040

Total Current Liabilities		42,822,711		29,044,720

LONG-TERM LIABILITIES
Asset Retirement Obligations		5,534,497		4,986,033

Total Long-Term Liabilities		5,534,497		4,986,033

Total Liabilities		48,357,208		34,030,753

MEMBERS' DEFICIT
Members' (Distribution) Contribution		(645,722)		137,800
Retained Deficit		(19,669,430)		(4,019,890)

Total Members' Deficit		(20,315,152)		(3,882,090)


	$	28,042,056	$	30,148,663

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

F-44

HARVEST OIL & GAS, LLC

STATEMENTS OF OPERATIONS


	Year Ended December 31,
	2007		2006
REVENUE
Oil and Gas Revenue, Net of Royalties	$	22,183,499	$	20,310,017
Derivative (Loss) Gain		(9,612,811)		3,112,532
Other Income		266,933		450,964

Total Revenue		12,837,621		23,873,513

COSTS AND EXPENSES
Lease Operating Expenses		13,094,936		6,555,788
Workover Expenses		1,273,523		964,903
Depreciation, Depletion, and Amortization		3,965,810		3,478,835
Plug and Abandonment Provision		548,464		531,476
Other Selling, General and Administrative Expenses		1,912,964		1,668,712

Total Cost and Expenses		20,795,697		13,199,714

Operating (Loss) Income		(7,958,076)		10,673,799

OTHER INCOME (EXPENSE)
Interest Income		32,564		38,510
Other Income		-		550,000
Interest Expense		(7,724,028)		(7,361,833)

Total Other Income (Expenses)		(7,691,464)		(6,773,323)


NET (LOSS) INCOME	$	(15,649,540)	$	3,900,476

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

F-45

HARVEST OIL & GAS, LLC

STATEMENT OF CHANGES IN MEMBERS' DEFICIT


	Members'
	Contributions		Retained
	(Distributions)		Deficit		Total
BALANCE - December 31, 2005	$	137,800	$	(7,920,366)	$	(7,782,566)

Net Income		-		3,900,476		3,900,476

BALANCE - December 31, 2006		137,800		(4,019,890)		(3,882,090)

Members' Distributions		(783,522)		-		(783,522)

Net Loss		-		(15,649,540)		(15,649,540)

BALANCE - December 31, 2007	$	(645,722)	$	(19,669,430)	$	(20,315,152)

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

F-46

HARVEST OIL & GAS, LLC

STATEMENTS OF CASH FLOWS


	Year Ended December 31,
	2007		2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss) Income	$	(15,649,540)	$	3,900,476
Adjustments to Reconcile Net (Loss) Income to Net
Cash Provided by Operating Activities:
Depreciation, Depletion and Amortization		3,965,810		3,478,835
Amortization of Financing Costs		303,833		303,833
Amortization of Debt Discount		3,369,384		3,369,384
Plug and Abandonment Provision		548,464		531,476
Loss (Income) on Derivative Instruments		9,612,811		(3,112,532)
Decrease (Increase) in Receivables		2,644,540		(1,905,139)
Decrease (Increase) in Prepaid Expenses and Other Assets		534,066		(757,797)
Decrease (Increase) in Due from Affiliate		16,930		(76,215)
(Decrease) Increase in Accounts Payable and Accrued Expenses and Other Liabilities		(2,055,930)		527,773

Net Cash Provided by Operating Activities		3,290,368		6,260,094

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Oil and Gas Property and Equipment		(3,469,665)		(13,279,956)
Purchases of Furniture, Fixtures, Equipment and Other		(12,793)		(52,066)
Net Proceeds from Settlement of Derivative Instruments		(65,679)		406,039

Net Cash Used in Investing Activities		(3,548,137)		(12,925,983)

CASH FLOWS FROM FINANCING ACTIVITIES
Members' Distributions		(783,522)		-
Net Borrowings on Long-Term Debt		2,916,461		6,547,630
Net Borrowings (Repayments) on Line of Credit		944		(1,144)
Financing Costs		(303,833)		(303,833)

Net Cash Provided by Financing Activities		1,830,050		6,242,653

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		1,572,281		(423,236)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		209,097		632,333

CASH AND CASH EQUIVALENTS AT END OF YEAR	$	1,781,378	$	209,097

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Year for Interest	$	4,330,283	$	3,911,170

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

F-47

HARVEST OIL & GAS, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE A

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

REVENUE RECOGNITION

HEDGING AGREEMENTS

The Company manages the potential impact of changes in the price of oil and natural gas by entering into derivatives commodity instruments (hedges), but does not use them for speculative purposes.

The Company accounts for hedging agreements in accordance with SFAS No. 133, as amended, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires the Company to recognize all derivative instruments on the balance sheets as either an asset or liability, measured at fair value, and requires that changes in a derivative’s fair value be realized currently in earnings, unless hedge accounting criteria are met. If the derivative is a qualifying hedge, depending on the nature of the hedge, changes in the fair value will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings.

CONCENTRATION OF CREDIT RISK

F-48

HARVEST OIL & GAS, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE A

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

CONCENTRATION OF CREDIT RISK (Continued)

During the years ended December 31, 2006, and for the period from inception to December 31, 2005, the Company sold 100% of its products to one customer. At December 31, 2006 and 2005, amounts due from that customer totaled $4,133,857 and $3,838,902, respectively.

During the years ended December 31, 2007 and 2006, the Company maintained cash balances in a financial institution in excess of federally insured limits.

ACCOUNTS RECEIVABLE

PROPERTY AND EQUIPMENT

Depreciation, depletion, and amortization (DD&A) is computed on the units-of-production method separately on each individual property. DD&A expense includes the accrual of future plugging and abandonment costs. The Company accounts for future plugging and abandonment costs in accordance with SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires legal obligations associated with the retirement of long-lived assets (i.e., future plugging and abandonment costs) to be recognized at their fair value at the time the obligations are incurred. Upon initial recognition of the liability, that cost should be capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. The estimate of future plugging and abandonment costs is highly subjective. Management’s current estimate of the Company’s share of such costs is approximately $14,075,000 and $13,895,000 as of December 31, 2007 and 2006, respectively. The DD&A expense per equivalent MCF of production for the years ended December 31, 2007 and 2006, was $1.35 and $1.07, respectively.

Furniture, fixtures, equipment, and other are depreciated using the straight-line method over the estimated useful lives of the assets.

F-49

HARVEST OIL & GAS, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE A

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

LONG-LIVED ASSETS

The Company evaluates the recoverability of its long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which superseded SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Impairment losses are based on the difference between fair value, which was calculated using the discounted future cash flows of the related properties, and the net book value of those properties. The discounted future cash flows are derived from reserve estimates of independent petroleum engineers. There were no impairment losses recognized during the years ended December 31, 2007 and 2006.

CASH AND CASH EQUIVALENTS

For the purpose of the Statements of Cash Flows, the Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents.

INCOME TAXES

NOTE B

NOTES PAYABLE AND LONG-TERM DEBT

The Company has an unsecured line of credit with a bank, payable on demand, in the amount of $150,000. The line requires monthly interest payments at prime, 7.25% as of December 31, 2007. As of December 31, 2007 and 2006, the balance of the line of credit was $149,800 and $148,856, respectively. The line is guaranteed by the members of the Company.

At December 31, 2007 and 2006, the Company’s long-term debt included borrowings under a Credit Agreement dated August 17, 2005, in an amount up to $50,000,000. During the year ended December 31, 2006, the Credit Agreement was increased to $60,000,000. The balance outstanding as of December 31, 2007 and 2006, was $37,082,686 and $34,166,225, respectively. The Credit Agreement is scheduled to mature August 17, 2010. The loan requires monthly interest payments that are accrued on the principal balance at prime plus 4%, which at December 31, 2007, was 11.25%. Principal reductions will result if the lender’s sweep of the Company’s net operating cash flows exceeds interest and fees payable to the lender. The loan is collateralized by all of the real and personal property of the Company, and the membership interests.

F-50

HARVEST OIL & GAS, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE B

NOTES PAYABLE AND LONG-TERM DEBT (Continued)

The Company is subject to certain restrictive financial covenants under the credit facility, including an interest coverage ratio of at least 2.5 to 1.0, a current ratio of at least 1.0 to 1.0, and an adjusted present value ratio of not less than 1.75 to 1.0 as of December 31, 2006, and 2.0 to 1.0 thereafter, all as defined in the Credit Agreement. The credit facility also includes customary restrictions with respect to liens, indebtedness, loans and investments, material changes in the Company’s business, asset sales or leases or transfers of assets, restricted payments, such as distributions and dividends, mergers or consolidations, transactions with affiliates and rate management transactions. Under the terms of the agreement, the loan is considered in default if the Company is in violation of any restrictive covenant. For the years ended December 31, 2007 and 2006, the bank has not waived the covenants and, accordingly, the entire amount of the note, $28,224,169 at December 31, 2007 and $21,938,324 at December 31, 2006, has been included in current liabilities. It is not known at this time what action the bank may take, if any.

As part of the loan agreement, the Company conveyed to the lender a 50% overriding royalty interest (ORRI) in all of its oil and gas properties, commencing on August 17, 2008. As a result, $16,856,174, the fair value, was allocated to the property conveyance, thereby reducing capitalized costs and recording a debt discount. The debt discount is being amortized over the life of the loan. Included in interest expense for the years ended December 31, 2007 and 2006 was $3,369,384 and $3,369,384, respectively, related to the amortization of the debt discount.

NOTE C

HEDGING AGREEMENTS

The Company entered into hedging agreements to reduce the impact of changes in the prices of oil and natural gas. Under SFAS No. 133, as amended, the nature of a derivative instrument must be evaluated to determine if it qualifies for hedge accounting treatment. Instruments qualifying for hedge accounting treatment are recorded as an asset or liability measured at fair value, and subsequent changes in fair value are recognized in equity through other comprehensive income, to the extent the hedge is effective. The cash settlements of cash flow hedges are recorded into revenue. Instruments not qualifying for hedge accounting treatment are recorded in the balance sheet and changes in fair value are recognized in earnings as derivative (loss) gain. During the year ended December 31, 2007, the Company recognized a net derivative loss of $279,964 and during the year ended December 31, 2006, the Company recognized a net derivative gain of $253,201 in the Statements of Operations, as the result of hedges settled during the periods. During the year ended December 31, 2007, the Company recognized net derivative loss of $9,332,847 and during the year ended December 31, 2006, the Company recognized a net derivative gain of $2,859,331 in the Statements of Operations, as the result of market value fluctuations.

F-51

HARVEST OIL & GAS, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE C

HEDGING AGREEMENTS (Continued)

As of December 31, 2007, the Company had the following oil and gas hedge contracts accounted for as cash flow hedges, still in place:


	Instrument
Production Period	Type	Volume		Price
Crude Oil:
2008	Swap	116,582	Bbls	$58.50
2009	Swap	95,697	Bbls	$57.80
2010	Swap	81,093	Bbls	$56.19
2011	Swap	68,461	Bbls	$56.19
2008	Put	19,764	Bbls	$50.00
2009	Put	26,484	Bbls	$50.00
2010	Put	26,484	Bbls	$50.00
2011	Put	26,484	Bbls	$50.00

Natural Gas:
2008	Swap	481,790	Mmbtu	$7.38
2008	Swap	445,182	Mmbtu	$8.50
2009	Swap	389,234	Mmbtu	$7.10
2010	Swap	321,335	Mmbtu	$6.85
2011	Swap	265,717	Mmbtu	$6.85
2008	Put	126,000	Mmbtu	$6.50
2009	Put	143,100	Mmbtu	$6.50
2010	Put	143,100	Mmbtu	$6.50
2011	Put	143,100	Mmbtu	$6.50

At December 31, 2007 and 2006, the Company recognized liabilities of $12.3 and $2.7 million, respectively, related to the estimated fair value of these derivative instruments.

F-52

HARVEST OIL & GAS, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE D

ASSET RETIREMENT OBLIGATIONS

The Company accounts for plugging and abandonment costs in accordance with SFAS 143, Accounting for Asset Retirement Obligations.

A reconciliation of the beginning and ending aggregate carrying amount of asset retirement obligations is as follows:


	2007		2006
Beginning Balance	$	4,986,033	$	2,844,396
Liabilities Incurred		--		1,610,161
Accretion Expense		548,464		531,476
Revisions		--		--

Estimated at December 31	$	5,534,497	$	4,986,033

NOTE E

COMMITMENTS AND CONTINGENCIES

The Company is subject to claims and complaints, which arise in the ordinary course of business. In January 2007, a settlement was reached for fees in dispute with a former vendor, and an accrual is included in the balance sheet at December 31, 2006, for $167,500. The Company also settled a lawsuit for fees owed to them for a commission earned totaling $550,000. This settlement is included in Other Receivable on the balance sheet as of December 31, 2006.

It is the opinion of management that the outcome of any other outstanding matters will not have a material adverse effect on the Company’s financial position or results of operations.

In connection with the purchase of certain oil and gas interests, the Company, by agreement, assumed certain plugging and abandonment, reclamation, restoration, and clean up liabilities and obligations related thereto. To secure these liabilities and certain accounts payable liabilities, the Company maintains $11.6 million at December 31, 2007 and 2006 in letters of credit with its primary lender, maturing in May and August 2008. The letters of credit are secured by the various oil and gas properties maintained by HARVEST OIL & GAS, LLC.

NOTE F

RELATED PARTY TRANSACTIONS

During 2006, the Company entered into an agreement to provide administrative services for an affiliate. The agreement, expiring in September 2011, requires the affiliate to reimburse the Company for the actual general and administrative expenses incurred for the benefit of the affiliate, not to exceed $25,000 per month. During the years ended December 31, 2007 and 2006, the Company charged the affiliate $-0- and $129,931, respectively, for these services.

F-53

HARVEST OIL & GAS, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE F

RELATED PARTY TRANSACTIONS (Continued)

The Company leases office space from a related party. Minimum future rental payments on operating leases having remaining terms in excess of one year as of December 31, 2007, are:


2008	$	120,000
2009		120,000
2010		110,000

Total	$	350,000

Rent expense charged to operations totaled $127,475 for the year ended December 31, 2007.

NOTE G

HURRICANE RELATED ISSUES

During 2005, the area in which the Company operates was impacted by a major hurricane. The Company’s facilities sustained damage as a result of the hurricane, and have insurance coverage adequate to make the necessary repairs. At December 31, 2007 and 2006, the Company had recorded $-0-, and $2,876,507, respectively, in insurance receivables.

NOTE H

EMPLOYMENT AGREEMENTS

The Company has entered into employment contracts with key employees. These contracts are a joint commitment with an affiliate company. The gross compensation commitments expire as follows:


Years Ending December 31,
2008	$	290,000
2009		241,667

	$	531,667

During the year ended December 31, 2006, Phantom Membership Interest Rights for 15% of the membership interest of the Company were granted. The rights vest monthly, over 36 months.

F-54

HARVEST OIL & GAS, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE I

SUPPLEMENTAL INFORMATION (UNAUDITED)

Proved Oil and Gas Reserves

Proved oil and gas reserves were estimated by independent petroleum engineers. The reserves were based on the following assumptions:

Future revenues were based on year-end oil and gas prices. Future price changes were included only to the extent provided by existing contractual agreements.

Production and development costs were computed using year-end costs assuming no change in present economic conditions.

Future net cash flows were discounted at an annual rate of 10%.

Reserve estimates are inherently imprecise and these estimates are expected to change as future information becomes available.

Proved Oil and Gas Reserves (Continued)

The following summarizes the Company’s estimated total proved reserves at December 31, 2007 and 2006:


	Gas (MCF)	Oil (BBLS)	MCFE
Estimated at December 31, 2005	10,414,000	1,888,000	21,742,000

Purchase, Discoveries, Extensions, and Improved Recovery, Net of Revisions of Previous Estimates	3,912,000	259,000	5,466,000

Production	(1,247,000)	(331,000)	(3,233,000)

Estimated at December 31, 2006	13,079,000	1,816,000	23,975,000

Purchase, Discoveries, Extensions, and Improved Recovery, Net of Revisions of Previous Estimates	25,149,000	789,000	29,883,000

Production	(1,068,000)	(308,000)	(2,916,000)

Estimated at December 31, 2007	37,160,000	2,297,000	50,942,000

At December 31, 2007 and 2006, the approximate undiscounted and discounted (using a discount rate of 10%) future net cash flows before income taxes related to the Company’s proved oil and gas reserves were $317,603,000 and $217,773,000, respectively. The future net cash flows were calculated utilizing NYMEX futures base prices for oil and Henry Hub base gas prices.

F-55

HARVEST OIL & GAS, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE I

SUPPLEMENTAL INFORMATION (UNAUDITED) (Continued)

Capitalized Costs Relating to Oil and Gas Producing Activities


	2007		2006
Proved Properties	$	27,884,163	$	24,414,497
Unproved Properties		--		--
Accumulated Depreciation, Depletion and Amortization		(7,665,910)		(3,727,157)
Net Capitalized Costs	$	20,218,253	$	20,687,340

Costs Incurred in Oil and Gas Producing Activities


	2007		2006
Acquisitions	$	--	$	3,048,410
Capitalized Plug and Abandonment Costs		--		1,610,161
Exploration		--		--
Development		3,469,666		10,231,546
Costs Incurred	$	3,469,666	$	14,890,117

Results of Operations for Oil and Gas Producing Activities


	2007		2006
Oil and Gas Sales	$	22,183,499	$	20,310,017
Production Costs		(14,368,459)		(7,520,691)
Exploration Expenses		--		--
Depreciation, Depletion, and Amortization		(3,938,755)		(3,456,346)
Results of Operations for Oil and Gas Producing Activities (Excluding Corporate Overhead and Financing Costs)	$	3,876,285	$	9,332,980

Standardized Measure of Discounted Future Net Cash Flows Relating to Reserves

F-56

HARVEST OIL & GAS, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE I

SUPPLEMENTAL INFORMATION (UNAUDITED) (Continued)


(Dollars in Thousands)
	2007		2006
Future Cash Inflows	$	444,079	$	197,659
Future Production Costs		(62,505)		(50,738)
Future Development Costs		(63,971)		(28,389)
Future Net Cash Flows		317,603		118,532
10% Annual Discount for Estimated Timing of Cash Flows		(99,830)		(25,011)

Standardized Measure of Discounted Future Net Cash Flows	$	217,773	$	93,521

The following reconciles the change in the standardized measure of discounted future net cash flows applicable to proved oil and gas reserves:


	2007		2006
Beginning of Year	$	93,521	$	89,364
Sales of Oil and Gas Produced, Net of Production Costs		(7,814)		(12,789)
Net Changes in Prices and Production Costs		42,255		(17,046)
Extensions, discoveries, and Improved Recovery, Less Related Costs		137,662		35,784
Development Costs Incurred During the Year Which were Previously Estimated		53		6,302
Net Change in Estimated Future Development Costs		(35,634)		(11,169)
Revisions of Previous Quantity Estimates		(7,997)		(8,494)
Net Change from Purchases and Sales of Minerals in Place		--		3,048
Accretion of Discount		945		1,014
Other		(5,218)		7,507
End of Year	$	217,773	$	93,521

EVENT SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT AUDITOR (UNAUDITED)

F-57

HARVEST OIL & GAS, LLC

NOTES TO FINANCIAL STATEMENTS

NOTE J

SUBSEQUENT EVENT

On October 24, 2007, Saratoga Resources, Inc. entered into a Purchase and Sale Agreement with the Company to purchase all of the membership interests in the Company for $116 million, subject to certain potential adjustments and performance obligations. This agreement expires February 29, 2008.

EVENT SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT AUDITOR (UNAUDITED)

F-58

Pro Forma Combined Financial Data

The following unaudited pro forma combined financial information gives effect to the acquisition on July 14, 2008, by Saratoga Resources, Inc. of The Harvest Group, LLC and Harvest Oil & Gas, LLC (together, the "Harvest Companies"), both limited liability companies based in South Louisiana. The acquisition and related transactions involved $105.7 million in cash and issuance of 4,900,000 shares of Saratoga Resources, Inc. valued at $12.3 million. For the three months ended March 31, 2008, the Harvest Companies, reported net revenues of approximately $10.5 million and net loss of $ 3.0 million. For the year ended December 31, 2007, the Harvest Companies, reported net revenues of approximately $40.1 million and a net loss of $6.9 million.

The unaudited pro forma combined financial information is for illustrative purposes only and reflects certain estimates and assumptions. These unaudited pro forma combined financial statements should be read in conjunction with the accompanying notes, our historical consolidated financial statements and the Harvest Company's historical financial statements, including the notes thereto, all of which are included elsewhere in this 8-K.

The unaudited pro forma combined statements of operation for the three months ended March 31, 2008 and the year ended December 31, 2007 give effect to the acquisition of the Harvest Companies as if it had been completed on January 1, 2007. Saratoga's results will reflect the results of operations of the Harvest Companies after its acquisition date of July 14, 2008. The Harvest column for the periods presented includes the Harvest Companies results and balances for the periods prior to its acquisition by Saratoga Resources, Inc. for the dates shown.

The unaudited pro forma combined statements of operation and statement of financial position for the three months ended March 31, 2008 and the year ended December 31, 2007 gives effect to the issuance by us of 4,900,000 shares in common stock in connection with this acquisition and the additional debt issued to finance the acquisition and related closing cost, as if it had occurred at January 1, 2007. The pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable.

The acquisition and related transactions will be recorded under the purchase method of accounting for business combinations and the assets and liabilities assumed will be recorded at their fair values. The allocations of the purchase price are only preliminary allocations based on estimates of fair value and may change when actual fair values are determined.

The unaudited pro forma combined financial statements are not necessarily indicative of operating results which would have been achieved had the foregoing transaction actually been completed at the beginning of the subject periods and should not be construed as representative of future operating results.

F-59

Pro Forma Combined Financial Data

SARATOGA RESOURCES, INC. AND SUBSIDIARIES

PRO FORMA CONSOLIDATED BALANCE SHEETS

(Unaudited)


	March 31, 2008
	Saratoga		HOG		THG		Harvest Companies			Pro-Forma Adjustments		As Adjusted
	(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	-	$	3,173	$	6,303	$	9,476	(1)	$	110,000	$	15,143
									(2)		(104,333)
Accounts receivables		49		3,617		7,277		10,894					10,943
Joint interest and other receivables		-		397		1,804		2,201					2,201
Prepaid expenses and other assets		-		884		848		1,732					1,732
		49		8,071		16,232		24,303			5,667		30,019
Property and Equipment:
Oil and gas properties-under successful efforts		-		29,496		13,189		42,685	(3)		101,905		131,314
									(4)		(13,276)
Other property and equipment		27		125		145		270					297
Total property and equipment		27		29,621		13,334		42,955			88,629		131,611
Less accumulated depreciation, depletion and amortization		(27)		(8,366)		(4,910)		(13,276)	(4)		13,276		(27)
Property and Equipment –net		-		21,255		8,424		29,679			101,905		131,584
Other noncurrent assets:
Deferred charges – Harvest acquisition		1,048		-		-		-	(5)		(1,048)		-
Restricted cash		-		-		946		946			-		946
Total Assets	$	1,097	$	29,326	$	25,602	$	54,928		$	106,524	$	162,549

LIABILITIES AND STOCKHOLDERS’ CAPITAL
Current Liabilities:
Revolving credit with Macquarie Bank	$	-	$	29,385	$	513	$	29,898	(6)	$	(29,898)	$	12,500
									(7)		12,500
Accounts payable		1,110		2,844		4,701		7,545	(8)		(1,800)		6,855
Accrued liabilities		270		1,472		1,009		2,481					2,751
Current portion of hedging liability		-		5,210		111		5,321					5,321
		1,380		38,911		6,334		45,245			(19,198)		27,427
Long-term debt with Wayzata Investment Partners		-		-		-		-	(9)		97,500		97,500
Hedging liability		-		10,727		1,862		12,589					12,589
Asset retirement liability		-		5,787		7,022		12,809					12,809
Due to (from) related parties		562		758		(501)		257			-		819
		1,942		56,183		14,717		70,900			78,302		151,144
Stockholders’ Capital:
Preferred stock		-		-		-		-					-
Common stock		11		-		-		-					11
Paid-in capital (Members’ Contributions/Distributions)		3,049		(731)		(2,770)		(3,501)	(10)		3,501		15,299
									(11)		12,250
Accumulated other comprehensive loss		-		-		-		-			-		-
Retained earnings (deficit)		(3,905)		(26,126)		13,655		(12,471)	(10)		12,471		(3,905)
		(845)		(26,857)		10,885		(15,972)			28,222		11,405
Total Liabilities and Stockholders’ Capital	$	1,097	$	29,326	$	25,602	$	54,928		$	106,524	$	162,549

_______

(1)

Represents funds from borrowings under new line of credit and loan from Wayzata Investment Partners to fund acquisition of Harvest Companies.

(2)

Represents acquisition price of Harvest and retirement of Harvest outstanding debt had the closing occurred March 31, 2008.

(3)

Represents the excess of total consideration over the book value of net assets acquired from the Harvest Companies.

(4)

To eliminate processor DD&A on property and equipment acquired to show beginning balances at net book value.

(5)

To capitalize deferred charges on Saratoga related to Harvest acquisition.

(6)

To repay outstanding loans with Macquarie Bank on Harvest per Purchase and Sales Agreement.

(7)

Represents new borrowing under revolving line of credit with Macquarie Bank.

(8)

Represents reduction in account payable for fees and expenses paid at closing that were in accounts payable.

(9)

Represents new long-term loan from Wayzata Investment Partners for $97.5 million at 20% interest to help fund the acquisition of the Harvest Companies.

(10)

To close out member's distributions and the retained loss on the Harvest Companies.

(11)

To record the 4,900,000 shares of Saratoga issued in connection with the transactions to acquire the Harvest Companies valued at a price of $2.50 per share on July 14, 2008, the effective date of the acquisition.

F-60

SARATOGA RESOURCES, INC. AND SUBSIDIARIES

PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended March 31, 2008
	Saratoga		HOG		THG		Harvest Companies		ProForma Adjustments			As Adjusted
	(In thousands, except for per share data)
REVENUE:
Oil and gas sales, net	$	31	$	5,405	$	10,256	$	15,661	$	495	(1)	$	16,187
Other income				351		285		636					636
Realized and unrealized losses on hedging contracts				(5,115)	$	(658)	$	(5,773)					(5,773)
		31		641		9,883		10,524		495			11,050
COST AND EXPENSES:
Lease operating expense		3		2,230		5,130		7,360		-			7,363
Depreciation, Depletion & Amortization		-		648		605		1,253		(1,253)	(2)		5,300
										5,300	(2)
Plug and Abandonment provision				253		180		433					433
General and administrative		229		2,160		547		2,707		-			2,936
Total operating expenses		232		5,291		6,462		11,753		4,047			16,032
Operating (loss) income		(201)		(4,650)		3,421		(1,229)		(3,552)			(4,982)
Interest expense, net of interest income		14		1,803		-		1,803		(1,803)	(3)		5,044
										5,030	(3)
(Loss) income before income taxes		(215)		(6,453)		3,421		(3,032)		(6,779)			(10,026)
Benefit (provision) for income taxes		-		-		-		-		-			-
Net (loss) income	$	(215)	$	(6,453)	$	3,421	$	(3,032)	$	(6,779)		$	(10,026)
Basic and diluted loss per share	$	(0.02)											(0.59)
Weighted average number of common shares outstanding		10,645,292									(4)		16,865,292

F-61

SARATOGA RESOURCES, INC. AND SUBSIDIARIES

PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS


	Year Ended December 31, 2007
	Saratoga		HOG		THG		Harvest Companies		Pro Forma Adjustments			As Adjusted
	(Audited)						(Audited)					(Unaudited)
	(In thousands, except for per share data)
REVENUES:
Oil and gas sales, net	$	30	$	22,529	$	29,572	$	52,101	$	1,298	(1)	$	53,429
Realized and unrealized losses on hedging contracts				(9,613)		(2,407)		(12,020)					(12,020)
		30		12,916		27,165		40,081		1,298			41,409
EXPENSES:
Lease operating expense (including P&A)		22		15,001		11,491		26,492		0			26,514
Depreciation, Depletion & Amortization		0		3,966		3,437		7,403		21,100	(2)		21,100
										(7,403)	(2)
General and administrative		609		1,912		258		2,170		0			2,779
Total operating expenses		631		20,879		15,186		36,065		13,697			50,393
Operating (loss) income		(601)		(7,963)		11,979		4,016		(12,399)			(8,984)
Interest expense, net of interest income		51		7,691		3,266		10,957		20,125	(3)		20,176
										(10,957)	(3)
Loss before income taxes		(652)		(15,654)		8,713		(6,941)		(21,567)			(29,160)
Benefit (provision) for income taxes		0		0		0		0		0			0
Net (loss) income		(652)		(15,654)		8,713		(6,941)		(21,567)			(29,160)

Basic and diluted loss per share	$	(0.08)										$	(1.73)
Weighted average number of common shares outstanding		8,242,098									(4)		16,865,292

________

(1)

Reflects elimination of the 4% overriding royalty interest held by Macquarie and that was converted to back to a NPI after repayment of Harvest loans in connection with the acquisition of the Harvest Companies

(2)

Represents an estimate to record DD&A on the step up of Oil and Gas properties to fair values from Saratoga's acquisition of the Harvest Companies.

(3)

Represents an estimate to record interest expense on the additional borrowing under the new revolving credit facility with Macquarie Bank and the new $97.5 million loan from Wayzata at 20% interest.

(4)

Includes 4,900,000 additional shares issued by Saratoga as part of the transaction to acquire the Harvest Companies and 1,040 shares of restricted stock issued to Harvest employees.

F-62