SARATOGA RESOURCES INC, 10KSB, 1996-07-31

SARATOGA RESOURCES INC
10KSB, 1996-07-31
CRUDE PETROLEUM & NATURAL GAS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-KSB

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1995

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]

Commission file number 0-11498

SARATOGA RESOURCES, INC.
(Name of small business issuer in its charter)

Delaware 76-0453392
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

2000 Dairy Ashford S., Suite 410
Houston, Texas 77077
(Address of principal executive offices) (Zip Code)

Issuer's Telephone number (713) 531-0022

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

Securities registered under Section 12(g) of the Exchange Act:

Common stock, $.001 par value
(Title of class)

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

Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

The Registrant's revenues for the calendar year ended December 31, 1995 were
$2,856,000.

The aggregate market value of the voting stock of the registrant held by
non-affiliates as of July 19 , 1996 was not ascertainable as there was no
established trading market at such date.

As of July 19, 1996 there were outstanding 6,809,400 shares of Common Stock,
$.001 par value per share, of the registrant.

Transitional Small Business Disclosure Format (check one). Yes [ ] No [X]

SARATOGA RESOURCES, INC. FORM 10-KSB 2 of 45

PART I

ITEM 1. DESCRIPTION OF BUSINESS.

GENERAL

Saratoga Resources, Inc., a Delaware corporation (successor to
Sterling Resources Corporation, a Utah corporation, hereafter "Sterling" ), and
herein called "Saratoga", "Company" or "Registrant", is an oil and gas company
whose main historical focus has until recently been the development of and
exploration for oil and natural gas reserves, primarily in the Gulf Coast area
of the United States. Saratoga has historically attempted to accumulate oil and
gas reserves by identifying areas of development potential associated with
established producing fields, purchasing interests in those fields and
conducting additional developmental activities thereon. The Company has
historically solicited participation from other oil and gas companies to drill
and develop exploration projects and typically retained a reversionary or
carried interest.

RECENT DEVELOPMENTS

FORECLOSURE OF ASSETS. On May 7, 1996, the Company
entered into an Agreement and related documents (the "Agreement") by and among
the Company, Saratoga Resources, Inc., a Texas corporation ("Saratoga-Texas"),
Lobo Operating, Inc., a Texas corporation ("LOI"), Lobo Energy, Inc., a Texas
corporation ("LEI"), (the Company and Saratoga-Texas, LOI and LEI, its direct or
indirect subsidiaries being sometimes collectively referred to herein as the
"Saratoga Companies"), Thomas F. Cooke ("Cooke"), Joseph T. Kaminski
("Kaminski"), Randall F. Dryer ("Dryer"),the Saratoga Companies, Cooke, Kaminski
and Dryer sometimes referred to herein as the "Saratoga Parties", PrimeEnergy
Corporation, a Delaware corporation ("PrimeEnergy"), and Internationale
Nederlanden (U.S.) Capital Corporation, a Delaware corporation ("ING").

The Agreement provided for a Foreclosure Sale of virtually all
of the assets (the "Interests") of Saratoga-Texas, LOI and LEI (Saratoga-Texas,
LOI and LEI sometimes collectively referred to herein as the "Saratoga
Entities") to ING pursuant to ING's rights under that certain Credit Agreement
and related documents (collectively the "Credit Agreement") dated March 30,
1995, by and among the Company, Saratoga-Texas, LEI and ING. Upon completion of
the Foreclosure Sale on May 7, 1996, at which ING was the highest bidder, ING
concurrently sold the Interests to PrimeEnergy for cash consideration of
$7,180,000 and additional consideration as provided in that certain Purchase and
Sale Agreement dated May 7, 1996, by and between ING and PrimeEnergy.

Upon receipt of the cash proceeds from the sale of the Interests
by ING to PrimeEnergy, ING deposited approximately $5,500,000 with the Trustee
under that certain Disbursement Agreement dated May 7, 1996 (the "Disbursement
Agreement"), of which approximately $4,000,000 was set aside for the settlement
of outstanding vendor debt and other related liabilities of the Saratoga
Companies, and $1,500,000 was paid to the Company. Upon the settlement of all
such liabilities, the Company anticipates it will have no material liabilities
going forward, other than those incurred since May 7, 1996, in the ordinary
course of business. As a result, its

SARATOGA RESOURCES, INC. FORM 10-KSB 3 of 45

principal asset consisted of approximately $1,500,000 in cash which is available
for the pursuit of new business opportunities or for other proper corporate
purposes.

BACKGROUND OF FORECLOSURE. The Company, Saratoga-Texas, LEI and
ING entered into the Credit Agreement to facilitate the acquisition by Saratoga-
Texas of the LEI assets previously owned by Peter P. Pickup ("Pickup"). Under
the terms of the Credit Agreement, ING established two credit facilities in
favor of Saratoga-Texas in the combined maximum principal amount of $19,000,000,
subject to the borrowing base limitations set forth therein. All oil and gas
properties (the "Properties") owned by the Saratoga Entities were pledged as
collateral under the Credit Agreement and all obligations to ING were also
guaranteed by the Company and all of its subsidiaries. Funds obtained from these
credit facilities were anticipated to be used for the development of the
Properties by the Company.

Subsequent to entering into the Credit Agreement, the Company
engaged Internationale Nederlanden (U.S.) Securities Corporation ("ING
Securities"), a subsidiary of ING, to assist the Company in a private placement
of Company stock. It was anticipated that funds raised from such private
placement would enable the Company to meet its financial obligations under the
Credit Agreement, develop the Properties and potentially acquire additional
properties. The private placement efforts were not successful. Additionally,
funds necessary for the development of the Properties were not provided by ING
under the Credit Agreement.

The failure of the private placement efforts combined with the
lack of availability of funds necessary for the development of its Properties
placed the Company in a severe financial crisis. In an attempt to salvage the
maximum value of the Saratoga Companies for the benefit of the other creditors
(the "Other Creditors") and the Company and its shareholders, the Saratoga
Companies spent several months examining and pursuing various alternatives with
respect to (i) the possible refinancing and/or restructuring of the debt of the
Saratoga Companies, (ii) the sale of the Saratoga Companies or their underlying
assets, and (iii) the prosecution or settlement of certain potential claims
against ING.

Unable to meet its financial obligations under the Credit
Agreement, the Company regularly received notices of default from ING during the
period from approximately October 1995 to April 1996, whereupon ING threatened
to foreclose its perfected first lien security interests in the Properties and
Interests. At the same time the Company was receiving notices of default from
ING, the Company was attempting to negotiate a transaction with PrimeEnergy
involving either a merger of the two entities or a sale of the assets of the
Saratoga Entities to PrimeEnergy. The situation with ING complicated the
Company's efforts with PrimeEnergy, as it had with other companies with which
the Company had been involved in similar negotiations.

Facing what the Company believed to be an eminent foreclosure
action by ING which would restrict the Company's objectives and its ability to
consummate negotiations with PrimeEnergy, in April of 1996, the Saratoga
Companies filed a lawsuit against ING and ING Securities, the principal relief
sought therein being injunctive relief from the threatened foreclosure.
Subsequently , the Company and ING entered into discussions in an attempt to
reach a final resolution of ING's rights under the Credit Agreement and the
Company's asserted claims.

SARATOGA RESOURCES, INC. FORM 10-KSB 4 of 45

In reviewing its options, the Company believed that the proceeds
from a contested foreclosure by ING would be substantially less than the debt
owed ING under the Credit Agreement, and that the Saratoga Companies would have
no, or virtually no, assets, the Other Creditors of the Saratoga Companies would
not be paid, and the stock of the Company would be worthless. Accordingly,
exercising its best business judgment, the Company determined that the best (and
in all probability the only) alternative available to the Saratoga Companies to
preserve value for the Other Creditors, the Company and its shareholders was to
consent, on its own behalf and as sole shareholder (directly or indirectly) of
the Saratoga Entities, to the compromise and settlement of the claims against
ING and ING Securities, and in connection therewith, the foreclosure by ING with
respect to all of the assets of the Saratoga Entities, all in accordance with
the terms and provisions of the Agreement.

PLAN OF BUSINESS. The Board of Directors of the Company is in the
process of re-evaluating its business plan going forward. Among the alternatives
being considered are: (i) re-building the management team and continuing in the
oil and gas business; (ii) entering into a business combination with one or more
businesses, some of which are oil and gas companies and the remainder of which
are in unrelated businesses; and (iii) various other potential alternatives. The
Company has already begun a search for suitable business combination candidates.
The Board intends to carefully evaluate all such alternatives before making a
final recommendation of a business plan to the shareholders.

The Company is contractually obligated to hold a meeting of the
shareholders as soon as practicable to ratify certain of the transactions set
forth above. To hold such a meeting, the Company will be required to file with
the Securities and Exchange Commission a proxy statement and mail such proxy
statement to the shareholders in definitive form. It is required that the proxy
statement be accompanied or preceded by an annual report including the Company's
audited financial statements for the year ended December 31, 1995. It is
anticipated that, to the extent the Board has approved any material change in
its business plan, such change will be submitted to the shareholders for
approval or ratification at such time. The Company expects the shareholders
meeting to be held on or after August 24, 1996.

HISTORY

On September 8, 1993, the Company (which was then known as
"Sterling Resources Corporation") underwent a comprehensive change in management
and was recapitalized through the acquisition of Saratoga Resources, Inc., a
Texas corporation ("Saratoga-Texas"). Through this transaction, the then
existing five stockholders of Saratoga-Texas, exchanged 100% of Saratoga- Texas
stock for over 90% of the outstanding voting rights of Sterling and provided new
management for the Company. Prior to this date, the Company was a "shell" with
virtually no business assets or capital. In January 1994, the Company changed
its domicile from Utah to Delaware and changed its name to Saratoga Resources,
Inc.

On November 12, 1993, the Company entered into a Purchase and
Sale Agreement (the "Hunter Agreement") with Hunter Petroleum, Inc. ("Hunter")
pursuant to which the Company acquired certain oil and gas interests in South
Texas (the "Hunter Properties"). Financing for this

SARATOGA RESOURCES, INC. FORM 10-KSB 5 of 45

acquisition was provided pursuant to a Loan Agreement with BankOne Texas, N.A.
("BankOne") under which the bank agreed to provide Saratoga with a $20 million
revolving credit facility.

On May 25, 1994, the Company established a new lending
relationship with ING, by executing a credit agreement and related documents
(the "Pre-existing Credit Agreement"). As of that date, the various credit
facilities that were provided by ING were used to acquire 57.15% of the
outstanding common stock of LEI, pay off all debt associated with those
properties at the time of acquisition, retire all credit facilities at BankOne,
develop existing oil and gas properties and provide general working capital. A
new credit agreement, the "Credit Agreement" with ING, was executed on March 30,
1995 to refinance the existing debt to ING, to purchase the remaining LEI common
stock and provide additional money for acquisitions of additional properties.
Additional disclosures related to this credit relationship with ING are
described in detail in the Notes to the Consolidated Financial Statements of the
Company.

On May 25, 1994, Saratoga-Texas executed a Stock Purchase
Agreement and related documents ("Lobo Purchase Agreement"). Under the terms of
the Lobo Purchase Agreement, Saratoga-Texas acquired 57.15% of the outstanding
common stock of LEI which owns oil and gas properties located in South Texas
("Lobo Properties") formerly owned by Lobo Resources, Ltd., a Texas limited
partnership. Saratoga-Texas paid a purchase price of $6,000,375 for the LEI
common stock.

In anticipation of acquiring 57.15% of the LEI assets as
described above, the Company entered into an agreement with Pickup dated May 6,
1994 (the "Stockholder Agreement") which provided Pickup with several options as
to the 4,285 shares of LEI common stock (representing the remaining 42.85% of
the LEI stock) which he owned at that date. The options, which were granted by
the Company to obtain Pickup's consent to the May 25, 1994 acquisition, could be
exercised by Pickup on or before the first anniversary date of Saratoga-Texas's
acquisition of the 5,715 shares of LEI's common stock.

On October 20, 1994, Pickup sent written notice to Saratoga-Texas
and ING of his intent to exercise one of his options under the Stockholder
Agreement. The Company and Pickup disagreed as to the interpretation of the
Stockholder Agreement. On December 17, 1994 Pickup filed a lawsuit in Webb
County, Texas against the Company, its affiliates and ING on behalf of himself
and LEI. The Company filed a lawsuit against Pickup in Harris County, Texas.

On March 31, 1995 the Company acquired the remaining 42.85% of
the common stock of LEI from Pickup. This acquisition took place concurrently
with the closing (the "Closing") of certain transactions set forth under a
Mutual Release and Settlement Agreement and related documents (collectively the
"Pickup Agreement") dated effective as of March 29, 1995 by and among Pickup,
LEI, Saratoga-Texas, the Company, Kaminski , Cooke, and LOI (Saratoga-Texas, the
Company, Kaminski, Cooke, LEI and LOI being sometimes collectively referred to
as the "Saratoga Parties"), and ING, all of the foregoing being collectively
sometimes herein referred to as the "Parties". The acquisition of the LEI assets
by Saratoga-Texas was in the form of an acquisition from Pickup of all of the
issued and outstanding common stock of LEI which was not already owned by
Saratoga-Texas. In connection with the Pickup Agreement, the Parties also
dismissed with prejudice the aforementioned litigation among Pickup, the
Saratoga Parties and ING.

SARATOGA RESOURCES, INC. FORM 10-KSB 6 of 45

Under the terms of the Pickup Agreement, Saratoga-Texas acquired
4,285 shares of common stock of LEI from Pickup. As a result of this
acquisition, Saratoga-Texas controls 100% of the common stock outstanding of
LEI. Concurrently with the purchase of the LEI common stock, LEI assigned to
Saratoga-Texas all of LEI's oil and gas assets. The total price to be paid by
Saratoga- Texas for the purchase was $5,401,000 and was comprised of the
following (the "Purchase Price"):

1) A cash payment of $2,186,000 made by Saratoga-Texas on March
31, 1995 (reduced to $2,085,000 by reason of a concurrent payment
of a note payable by Pickup to Saratoga- Texas.)

2) A promissory note in the sum of $346,458 issued to Pickup by
Saratoga-Texas and guaranteed by the Company and its subsidiaries
(the "Note"). The Note bears interest at the rate of 9.375% per
annum. Interest on the unpaid principal balance was paid on the
last day of each month beginning April 30, 1995 to and including
September 30, 1995. On the last day of each month beginning
October 31, 1995 the Note's principal balance is to be paid,
along with accrued interest, in eighteen equal monthly
installments. The Note was secured by 57.15% of LEI's portion of
a potential increase in production which is attributable to a
waterflood program on the Moore's Orchard Field in Fort Bend
County, Texas.

3) The agreement of Saratoga-Texas to pay up to a maximum of
$468,542 from the net profits from any production attributable to
42.85% of LEI's current portion of increased production which is
attributable to a waterflood program on the Moore's Orchard Field
(the "Net Profits Production Payment").

4) At the closing, the Registrant also refinanced $2,400,000 in
debt due ING allocable to LEI and its properties.

The foregoing were subject to various covenants and agreements
among the various Parties, and Pickup also was entitled to receive or retain
various noncash items of consideration set forth in the Pickup Agreement. In
connection with the Closing, the Parties also dismissed and released all
litigation and related claims among Pickup, the Saratoga Parties and ING.

MARKETING

The Company's oil and gas production has been traditionally
marketed to third parties consistent with industry practices. Typically, oil is
sold at the wellhead at field posted prices and gas is sold under spot or
short-term contracts at negotiated prices. See Notes to the Consolidated
Financial Statements of the Company for information as to principal customers.

MARKET FOR NATURAL GAS

The Company has historically placed emphasis on the development
of natural gas reserves due, in part, to management's belief that the demand for
natural gas in the United States will increase in the future.

The long term U.S. market potential for natural gas production is
affected by federal and state governmental regulations, access to the U.S.
market by exports from Canada and Mexico, and prices.

SARATOGA RESOURCES, INC. FORM 10-KSB 7 of 45

The price at which natural gas may be sold will continue to be affected by a
number of factors, including 1) the price of alternative fuels such as oil and
coal, 2) the competition among various gas producing regions, and 3) various
factors that effect the consumption of gas, such as weather patterns.

Various factors beyond the Company's control continue to affect
oil and gas prices. Such factors include, among other things, the domestic
supplies of oil and gas, the cost of imported international production, the
level of consumer demand, the cost and availability of transportation, and
changes in federal and state regulations. Government regulations may reduce the
benefit of price increases by, among other things, fixing rates of production.
To stabilize the uncertainty of what future prices the Company received for its
production, in the past the Company has historically entered into several swap
agreements with ING Securities which established a set price on a portion of the
Company's production for a specified period of time. See Note 1 of the
Consolidated Financial Statements for a more detailed discussion of these swap
agreements .

COMPETITION

The oil and gas industry is highly competitive in all of its
phases. The Company's competition in the areas of exploration, development,
production and acquisition of oil and gas reserves include numerous major and
independent oil and gas companies, individual proprietors, drilling and income
programs and partnerships. Most of these competitors possess financial and
personnel resources substantially in excess of those available to the Company
and may, therefore, be able to define, evaluate, bid, purchase and develop a
greater number of oil and gas properties.

GOVERNMENT REGULATION

The Company feels that its daily operations have been in material
compliance with all applicable laws, rules and regulations (collectively
"Regulations") promulgated by various government regulatory agencies. The
failure to comply with Regulations can result in the assessment of substantial
civil or criminal penalties, fines and damages. Accordingly, the Company's
management monitors the applicable Regulations and any proposals to amend them
to assure the Company's compliance with all such Regulations. The Regulations
which the Company must observe relate to, among other things, drilling and
spacing of wells, production rates, prevention of waste, conservation, and
pollution control.

PRICE REGULATION

The federal government has at various times in the past regulated
the prices at which gas and oil could be sold. However, the government is
currently allowing a free market economy to determine the price of oil and gas .

STATE REGULATION

State regulatory authorities have established rules and
regulations requiring permits for drilling operations, drilling and operating
bonds and reports concerning operations and other matters. Texas and Louisiana,
in which Saratoga expects to focus operations, have Regulations governing all
phases of exploration and production activities. The states may, in addition,
move to restrict the

SARATOGA RESOURCES, INC. FORM 10-KSB 8 of 45

amount of production reaching the market through control of well output or
transportation. Allowable rates of production are assigned by the state to each
well or proration unit.

ENVIRONMENTAL REGULATION

The Company's operations have historically been subject to
regulations governing the discharge of materials into the environment, and any
other operational impact on the quality of water, air and soil. These
regulations are especially sensitive to any potential adverse impact on certain
lands lying within wetlands, wilderness and other protected areas. Most wastes
produced from oil and gas operations are managed under state regulatory programs
and are not covered by hazardous waste management requirements under the federal
Resource Conservation and Recovery Act. A large number of environmental
regulations have been proposed and are under consideration by the various
federal agencies and Congress. Many of these proposed regulations could have the
effect of imposing new regulatory requirements on the oil and gas industry. In
addition, several major federal environmental statutes are due for
reauthorization and have the potential of creating additional complex and
expensive compliance requirements.

TRANSPORTATION REGULATION

Due to the physical attributes of natural gas, companies which
explore for and produce gas are largely dependent upon pipelines for
transportation. Until recently, the profitability of a gas well was, in large
part, dependent upon proximity to a pipeline, the rates charged by the pipeline
company and the allocation of capacity to the operator by the pipeline company.
Due to the adoption of FERC Order No. 500 and FERC Order No. 636 the Company's
dependency on a pipeline company's purchase of the Company's gas production has
been lessened, but the availability of pipeline transportation is still one of
the most crucial problems for the Company after a successful gas well has been
completed.

FEDERAL INCOME TAXATION

The Company is currently subject to regular income tax rates up
to a maximum 34% rate on its taxable income. The Internal Revenue Code ("IRC")
provides for certain tax preference items which could subject the Company to an
"Alternative Minimum Tax". These preferences include but are not limited to
certain intangible drilling cost ("IDC") deductions and the amount of
accelerated depreciation that is in excess of straight line depreciation.

There are tax regulations, under the IRC, which are unique to
resource extraction firms such as the Company. The IRC permits the Company to
deduct depletion and IDC from taxable income. Depletion may be calculated as the
greater of "cost" or "percentage" depletion with some limitations. Cost
depletion is computed by writing off the capital costs over the productive life
of the well. Independent producers such as the Company are allowed to use a
percentage depletion calculation which takes 15% of the gross revenue as an
expense in lieu of writing off actual capital costs. Percentage depletion can
not cause a net tax loss when calculated on a well by well basis. The Company
does qualify for use of the percentage depletion method. In addition, under the
IRC, the Company can expense for tax purposes its IDC rather than having to
capitalize and depreciate it over the life of the well. IDC generally includes
all costs of drilling a well, except for tangible equipment.

SARATOGA RESOURCES, INC. FORM 10-KSB 9 of 45

EMPLOYEES

At July 15 , 1996, the Company employed a total of two full time
employees consisting of one executive officer (the Chief Executive Officer) and
an office manager.

ITEM 2. PROPERTIES.

RESERVES REPORTED TO FEDERAL AGENCIES

The Company did not provide an estimate of total proved net oil
and gas reserves to any Federal authority or agency during the year ended
December 31, 1995. Below is a summary of Saratoga's net share of oil and gas
reserves as of December 31, 1995, 1994 and 1993. After May 7, 1996, the Company
no longer had any significant oil and gas properties.

SARATOGA'S NET RESERVES

DECEMBER 31, SEPTEMBER 30,
----------------- -------------
1995 1994 1994
----- ----- -----

Proven reserves oil (Mbbls) 601 994 1,202

Proven reserves gas (Mmcf) 5,305 7,026 8,924

Proven reserves total (MBOE) 1,415 2,165 2,689

Future net cash flows* (millions $) $12.8 $12.2 $15.7

Discounted future net cash

flows* (millions $) $ 9.1 $ 8.8 $10.1

*SEC Case
Mbbls - thousand barrels
Mmcf - millions of cubic feet
MBOE - thousands of barrels of oil equivalent

Production

THE COMPANY DOES NOT PRESENTLY OWN ANY MAJOR PRODUCING PROPERTIES
EFFECTIVE WITH THE FORECLOSURE SALE DATED MAY 7, 1996 AS FURTHER DESCRIBED
HEREINABOVE.

As of December 31, 1995, the Company's production was primarily
from the following principal fields:

SARATOGA RESOURCES, INC. FORM 10-KSB 10 of 45

HEMPHILL FIELD - The Hemphill Field located in Sabine County,
Texas was the first acquisition undertaken by the Company. The Company had
approximately 2,650 acres under lease in this field which produces from the
Saratoga Formation.

BROOKELAND FIELD - The Brookeland Field is located in Sabine
County, Texas and is part of a large productive area being developed with
horizontal wells in the Austin Chalk Formation. The Company entered into an Area
of Mutual Interest ("AMI") with BEXCO et al covering approximately 22,000 acres
to exploit the Austin Chalk.

BOOTH RANCH, TOMAS & LAS TIENDAS FIELDS - These Fields covered
approximately 7,000 acres of mineral leases in Webb County, Texas.At December
31, 1995, fifteen (15) wells produced natural gas from the Olmos Sand at 6,500
feet in depth.

EL MESQUITE & BENNETT RANCH FIELDS - These Fields encompass 51
wells on approximately 6,500 acres in Duval County, Texas. Production is from
the Third Cook Mountain Sand at 5,200 feet in depth.

GUERRA FIELD - The Guerra Field located in Webb and Duval
Counties, Texas produces from multiple Wilcox Sands between 9,000 feet and
11,000 feet in depth. The Company had an interest in fourteen (14) completions
in this field and a twenty-five (25%) percent interest in an AMI with Dalen
Resources covering approximately 20,000 acres in the area.

SEGNO FIELD - This Field, containing approximately 5,000 acres
located in Polk County, Texas, along with producing wells and a significant
amount of geological and geophysical data, was purchased from Chevron in 1992 by
Lobo Resources, Ltd. Morgan Guaranty Trust Company of New York, Trustee provided
part of the purchase price and is an 80% interest owner.

MOORE'S ORCHARD FIELD - The Company's portion of this Field,
which is located in Ft. Bend County, Texas was acquired through a farmout from
Chevron U.S.A. Inc. by Lobo Resources, Ltd. The Company drilled eight oil and
gas development wells on the 2,810 acre farmout. These wells produce from traps
surrounding a salt piercement dome. The productive formations are the Miocene,
Frio, Vicksburg, Yegua and Cook Mountain. The Company also commenced a
waterflood program in 1995 to increase production from the older oil wells in
the Yegua formation.

For the year ended December 31, 1995, and the transition period from October 1,
1994 to December 31, 1994, and for the year ended September 30, 1994, the
Registrant averaged the following production:

SARATOGA RESOURCES, INC. FORM 10-KSB 11 of 45

SELECTED AVERAGES NET TO SARATOGA

DECEMBER 31, SEPTEMBER 30,
------------------ -------------
1995 1994 1994
-------- -------- ------

Daily oil prod.(Bbls) 230.1 157.11 91.18
Daily gas prod.(Mcf) 2,280.43 1,720.12 907.55
Price per Bbl of oil $17.23 $16.25 $15.89
Price per Mcf of gas $ 1.64 $ 1.61 $ 1.95
Price per BOE $12.82 $11.96 $13.28
Production cost per BOE $ 7.15 $ 8.87(1) $ 5.83
Depletion exp. per BOE $10.82 $ 6.38 $ 5.67

Bbl - barrel
Mcf - thousand cubic feet
BOE - barrels of oil equivalent
(1) - Includes total 1994 ad valorem tax accrual for Lobo Properties acquired.

SELECTED AVERAGES NET TO SARATOGA

This production information is relative to the Company's
properties which were primarily located in the onshore Texas Gulf Coast.

PRODUCTIVE WELLS AND ACREAGE (PRIOR TO THE MAY 7, 1996 FORECLOSURE SALE)

GROSS NET
----- ---
Oil Wells 117 41
Gas Wells 47 21
Total Wells 164 62

SARATOGA'S PRODUCTIVE WELLS

As of March 15, 1996, Saratoga had an inventory of developed
mineral leases consisting of approximately 22,000 gross acres which were held by
production, with approximately 7,000 acres net to Saratoga. The chart shows the
number of Saratoga's productive wells. As of March 15, 1996 Saratoga's wholly
owned subsidiary, LOI operated 164 wells in 15 fields.

UNDEVELOPED LEASE ACREAGE (PRIOR TO THE MAY 7, 1996 FORECLOSURE SALE)

In addition to the productive wells and acreage described above,
as of March 15, 1996, the Company had onshore Texas Gulf Coast mineral leases on
approximately 10,000 gross undeveloped acres, of which approximately 4,000 acres
were net to the Company. The leases were both private and public leases with an
average term of 3-5 years.

SARATOGA RESOURCES, INC. FORM 10-KSB 12 of 45

DRILLING ACTIVITY

The Company's main focus has historically been in acquiring
producing properties with significant associated proved undeveloped reserves.
During the most recent three year period the Company and its subsidiaries have
had the following level of drilling activity to develop these reserves.

NET WELLS DRILLED
Year Ended Three Months Ended Year Ended
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
------------ ------------ -------------
1995 1994 1994
---- ---- ----
EXPLORATORY
- -----------
Net Productive Wells -0- -0- -0-
Net Dry Wells .37 .37 .74

DEVELOPMENT
- -----------
Net Productive Wells .80 -0- .8670
Net Dry Wells -0- -0- -0-

PRESENT ACTIVITIES

The Board of Directors of the Company is in the process of
re-evaluating its business plan going forward. Among the alternatives being
considered are: (i) re-building the management team and continuing in the oil
and gas business; (ii) entering into a business combination with one or more
businesses, some of which are oil and gas companies and the remainder of which
are in unrelated businesses; and (iii) various other potential alternatives. The
Company has already begun a search for suitable business combination candidates.
The Board intends to carefully evaluate all such alternatives before making a
final recommendation of a business plan to the shareholders.

ITEM 3. LEGAL PROCEEDINGS.

(1) On May 13, 1996, the Company, along with two of its three
directors, Cooke and Dryer, filed a lawsuit (the "Company Lawsuit"), as amended,
against the remaining director, Kaminski ("Kaminski") [Cause No. 96-05540,
SARATOGA RESOURCES, INC., THOMAS F. COOKE AND RANDALL F. DRYER V. JOSEPH T.
KAMINSKI, 261st Judicial District Court, Travis County, Texas]. The Company has
filed this lawsuit against Kaminski alleging fraud, breach of fiduciary duty,
intentional and negligent misrepresentation, and other claims.

(2) On May 15, 1996, Kaminski filed a lawsuit (the "Kaminski
Lawsuit"), as amended, against Cooke, Dryer, Dryer, Ltd. and the Company [Cause
No. 96-24469, JOSEPH T. KAMINSKI V. THOMAS F. COOKE, RANDALL F. DRYER, SARATOGA
RESOURCES, INC., AND DRYER, LTD., A TEXAS FAMILY PARTNERSHIP, 113th Judicial
District Court, Harris County, Texas]. Kaminski has filed this

SARATOGA RESOURCES, INC. FORM 10-KSB 13 of 45

lawsuit individually and derivatively as a shareholder of the Company and has
alleged fraud, breach of fiduciary duty, gross negligence, slander, libel per
se, and other claims on the part of Cooke and Dryer individually and as
directors of the Company.

Additional numerous lawsuits relating to vendor claims have been
filed against the Company. Notice of these lawsuits has been given to the
Trustee of the Disbursement Account for further handling in accordance with the
terms of the Disbursement Agreement. The Company believes such lawsuits and
related claims will be settled in the ordinary course under the Disbursement
Agreement and, as a result, believes they will be resolved without a material
adverse impact on the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

There were no matters submitted to a vote of the security holders
of the Company through the solicitation of proxies or otherwise during the
calendar year ended December 31, 1995.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company's common stock is not listed on any stock exchange
but from time to time has been included in the "Pink Sheets" basis and
transactions are reported by the NASD on the OTC Bulletin Board under the symbol
"SRIK". According to quotations from the "Pink Sheets" and the OTC Bulletin
Board (represents prices between dealers and does not include retail markup,
markdown or commission, and may not represent actual transactions), the range of
high and low bid information of the shares of the Company's common stock for the
periods indicated, were as follows:

COMMON STOCK
------------------
HIGH LOW
------- -----
YEAR ENDED SEPTEMBER 30, 1994
First Quarter $ 1-1/2 $3/10
Second Quarter 1-7/8 6/10
Third Quarter Not available
Fourth Quarter 1-5/8 1-5/8
TRANSITION PERIOD ENDED DECEMBER 31, 1994 1-5/8 1/4
YEAR ENDED DECEMBER 31, 1995
First Quarter 1-1/4 1/4
Second Quarter 1-1/4 1/20
Third Quarter 1-3/4 1/20
Fourth Quarter 1-3/8 3/8

SARATOGA RESOURCES, INC. FORM 10-KSB 14 of 45

YEAR ENDING DECEMBER 31, 1996
First Quarter 3/4 1/8
Second Quarter 5/8 1/8

All amounts have been restated to reflect the 1 for 30 reverse
stock split effected January 21, 1994. As of July 19, 1996, 6,809,400 shares of
the Company's common stock were issued and outstanding and held by 1,385 holders
of record.

The Company has never paid dividends. The Company does not intend
to pay dividends for the foreseeable future, but rather expects to retain future
earnings, if any, to support the Company's growth. Any future determination as
to the payment of dividends on the Common Stock will be at the discretion of the
Board of Directors and will depend upon the Company's operating results,
financial condition, capital requirements, restrictions imposed by lenders and
such other factors as the Board of Directors may deem relevant.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

On March 30, 1995, the Company, Saratoga-Texas, LEI and ING
entered into the Credit Agreement to facilitate the settlement of a lawsuit
brought by Pickup against the Company and ING, and fund the acquisition by
Saratoga-Texas of the LEI assets previously owned by Pickup. Under the terms of
the Credit Agreement, ING established two credit facilities in favor of
Saratoga-Texas in the combined maximum principal amount of $19,000,000, subject
to the borrowing base limitations set forth therein. All of the Properties owned
by the "Saratoga Entities" were pledged as collateral under the Credit Agreement
and all obligations to ING were also guaranteed by the Company and all of its
subsidiaries. Funds obtained from these credit facilities were anticipated to be
used for the development of the Properties by the Company.

Subsequent to entering into the Credit Agreement, the Company
engaged ING Securities, a subsidiary of ING, to assist the Company in a private
placement of Company stock. It was anticipated that funds raised from such
private placement would enable the Company to meet its financial obligations
under the Credit Agreement. The private placement efforts were not successful.
Additionally, funds necessary for the development of the Properties were not
provided by ING under the Credit Agreement.

The failure of the private placement efforts combined with the
lack of availability of funds necessary for the development of its Properties
placed the Company in a severe financial crisis. In an attempt to salvage the
maximum value of the Saratoga companies for the benefit of the other creditors
(the "Other Creditors") and the Company and its shareholders, the Saratoga
Companies spent several months examining and pursing various alternatives with
respect to (i) the possible refinancing and/or restructuring of the debt of the
Saratoga Companies, (ii) the sale of the Saratoga Companies or their underlying
assets, and (iii) the prosecution or settlement of certain potential claims
against ING.

Unable to meet its financial obligations under the Credit
Agreement, the Company received notices of default from ING, whereupon ING
threatened to foreclose its perfected first lien security interests in the
Properties and Interests. At the same time the Company was receiving notices of

SARATOGA RESOURCES, INC. FORM 10-KSB 15 of 45

default from ING, the Company was attempting to negotiate a transaction with
PrimeEnergy involving either a merger of the two entities or a sale of the
assets of the Saratoga Entities to PrimeEnergy. The situation with ING obviously
complicated the Company's efforts with PrimeEnergy, as it had with other
companies with which the Company had been involved in similar negotiations.

Facing what the Company believed to be an eminent foreclosure
action by ING which would restrict the Company's objectives and its ability to
consummate negotiations with PrimeEnergy, in April of 1996, the Saratoga
Companies filed an Original Petition and Application for Injunctive Relief
against ING and ING Securities, C96-399-D3 in the 341st Judicial District Court
of Webb County, Texas . Subsequently , the Company and ING entered into
discussions in an attempt to reach a final resolution of ING's rights under the
Credit Agreement and the Company's asserted claims .

The Agreement provided for a Foreclosure Sale of a majority of
the assets (the "Interests") of the Saratoga Entities to ING pursuant to ING's
rights under the Credit Agreement. Upon completion of the Foreclosure Sale on
May 7, 1996, at which ING was the highest bidder, ING concurrently sold the
Interests to PrimeEnergy for $7,180,000 in cash and additional consideration as
provided in that certain Purchase and Sale Agreement dated May 7, 1996, by and
between ING and PrimeEnergy.

Upon receipt of the cash proceeds from the sale of the Interests
by ING to PrimeEnergy, ING deposited approximately $5,500,000 with the Trustee,
of which approximately $4,000,000 was set aside under the Disbursement Agreement
for the settlement of outstanding vendor debt and other related liabilities of
the Saratoga Companies. Upon the settlement of all such liabilities, the Company
anticipates that there will be no material liabilities going forward, other than
those incurred since May 7, 1996, in the ordinary course of business and certain
liabilities with respect to prior matters which the Company does not believe are
material (See "Note 5 to Consolidated Financial Statements"). The Company was
paid the remaining $1,500,000 by ING, which amount is available to pursue new
business opportunities or for other proper corporate purposes.

The Board of Directors of the Company is in the process of
re-evaluating its business plan going forward. Among the alternatives being
considered are: (i) rebuilding the management team and continuing in the oil and
gas business; (ii) entering into a business combination with one or more
businesses, some of which are oil and gas companies and the remainder of which
are in unrelated

SARATOGA RESOURCES, INC. FORM 10-KSB 16 of 45

businesses; and (iii) various other potential alternatives. The Company has
already begun a search for suitable business combination candidates. The Board
intends to carefully evaluate all such alternatives before making a final
recommendation of its business plan to the shareholders.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX TO FINANCIAL STATEMENTS

PAGE

Independent Auditor's Report - 17

Consolidated Balance Sheet - December 31, 1995 18

Consolidated Statements of Operations 20
-For the year ended December 31, 1995 and
transition period ended December 31, 1994 and year
ended September 30, 1994

Consolidated Statements of Changes in Stockholders' Equity (Deficit) 21

-For the year ended December 31, 1995 and transition
period ended December 31, 1994 and year ended
September 30, 1994

Consolidated Statements of Cash Flows 22
-For the year ended December 31, 1995 and transition
period ended December 31, 1994 and year ended
September 30, 1994

Notes to Consolidated Financial Statements 24

Supplemental Oil and Gas Properties and Related Reserves Data (Unaudited) 36

SARATOGA RESOURCES, INC. FORM 10-KSB 17 of 45

INDEPENDENT AUDITOR'S REPORT

Board of Directors and Stockholders
Saratoga Resources, Inc. and Subsidiaries
Houston, Texas

We have audited the accompanying consolidated balance sheet of Saratoga
Resources, Inc. and subsidiaries as of December 31, 1995 and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the year 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 upon our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 Saratoga Resources, Inc. and
subsidiaries as of December 31, 1995 and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.

As discussed in Note 11, in connection with a Foreclosure Sale and Compromise
and Settlement Agreement dated May 7, 1996, a majority of the assets of
Saratoga-Texas, Lobo Operating, Inc. and Lobo Energy, Inc. were sold to a lender
in exchange for forgiveness of certain debt obligations and other consideration.
All debt obligations related to the Foreclosure Sale have been classified as
current in the accompanying consolidated balance sheet. The consolidated
financial statements do not include any other adjustments that will result from
the disposal of assets and settlement of liabilities under the terms of the
Compromise and Settlement Agreement.

As discussed in Note 1 to the financial statements, in the year ended September
30, 1994 the Company changed its method of accounting for income taxes.

Hein + Associates LLP
Certified Public Accountants

Houston, Texas
July 3, 1996

SARATOGA RESOURCES, INC. FORM 10-KSB 18 of 45

SARATOGA RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

DECEMBER 31, 1995

ASSETS (in thousands)

Current assets:

Cash .............................................. $ 604
Accounts receivable, net of allowance for doubtful
accounts of $160,000 ............................. 399
Prepaid expenses .................................. 105
Other ............................................. 15
--------
Total current assets ............................................. 1,123

Property and equipment:

Oil and gas properties, full cost method .......... 17,582
Equipment ......................................... 255

17,837
--------
Less accumulated depletion, depreciation,
amortization, and provision for impairment ........ (10,847)
--------
6,990

Other assets, net of accumulated amortization of $68,000 ......... 254
--------

Total Assets ..................................................... $ 8,367
========

See Notes to Consolidated Financial Statements

SARATOGA RESOURCES, INC. FORM 10-KSB 19 of 45

SARATOGA RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995

LIABILITIES AND STOCKHOLDERS' DEFICIT (in thousands)

Current liabilities:

Accounts payable and accrued liabilities ........ $ 2,800
Legal suspense .................................. 288
Royalties payable ............................... 237
Interest payable ................................ 685
Advances from partners .......................... 73
Debt ............................................ 13,698
--------
Total current liabilities ...................................... 17,781

Commitments and contingencies (Notes 6, 9 and 11)

Stockholders' deficit

Preferred stock, $.001 par value;
5,000,000 shares authorized ................ --
Common stock, $.001 par value;
50,000,000 shares authorized,
6,699,400 shares issued and
outstanding ................................ 7
Additional paid-in capital ...................... 2,909
Accumulated deficit ............................. (12,328)
Treasury stock at cost .......................... (2)
--------
Total stockholders' deficit .................................... (9,414)

Total Liabilities and Stockholders' Deficit .................... $ 8,367
========

See Notes to Consolidated Financial Statements

SARATOGA RESOURCES, INC. FORM 10-KSB 20 of 45

SARATOGA RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Transition Period
Year Ended Ended Year Ended
DECEMBER 31,1995 DECEMBER 31, 1994 SEPTEMBER 30, 1994
-------- ------- -------
<S> <C> <C> <C>
Revenues:
Oil and gas ......................... $ 2,856 $ 492 $ 1,175
Other ............................... 22 14 37
-------- ------- -------
2,878 506 1,212
Costs and expenses:
Production .......................... 1,437 365 516
Severance tax ....................... 156 28 65
Depletion, depreciation, amortization
and provision for impairment ...... 9,988 554 502
General and administrative .......... 1,079 192 477
Interest expense .................... 1,592 234 344
Financing cost ...................... -- -- 100
-------- ------- -------
14,252 1,373 2,004
-------- ------- -------
Net loss before taxes and cumulative
effect of change in accounting for income taxes .. (11,374) (867) (792)
Income tax benefit ................................. 199 319 264
-------- ------- -------
Net loss before cumulative effect of
change in accounting for income taxes ............ (11,175) (548) (528)
Cumulative effect of change in accounting
for income taxes ................................. -- -- (79)
-------- ------- -------
Net loss ........................................... $(11,175) $ (548) $ (607)
======== ======= =======
Net loss per share ................................. $ (1.67) $ (.08) $ (.13)
======== ======= =======
Weighted average number of common
shares outstanding ............................... 6,700 6,680 4,799
======== ======= =======
</TABLE>

See Notes to Consolidated Financial Statements

SARATOGA RESOURCES, INC. FORM 10-KSB 21 of 45

SARATOGA RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK STOCK RIGHTS PREFERRED STOCK
SHARES PAR SHARES AMOUNT SHARES AMOUNT
-------- -- ---- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, SEPTEMBER 30, 1993 (AS RESTATED) ................ 503 $1 690 $ 344 1,000 $ 1

Conversion of preferred to common 5-1 ..................... 5,000 5 -- -- (1,000) (1)
Conversion of stock rights to common stock ................ 690 1 (690) (344) -- --
Issuance of stock for oil and gas properties .............. 172 - -- -- -- --
Issuance of stock in lieu of consulting
fees and compensation ................................... 145 - -- -- -- --
Issuance of stock for operating rights .................... 150 - -- -- -- --
Issuance of stock for capital contribution ................ 20 - -- -- -- --
Issuance of stock options for debt guarantee .............. -- - -- -- -- --
Issuance of stock warrants for commitment fee ............. -- -- -- -- -- --
Net loss .................................................. $ -- --
-------- -- ---- ------ ------- -------
BALANCES, SEPTEMBER 30, 1994 .............................. 6,680 $7 -- $-- $-- $ --

Net loss .................................................. -- - -- -- -- --
-------- -- ---- ------ ------- -------
BALANCES, DECEMBER 31, 1994 ............................... 6,680 $7 -- $-- $-- $ --
======== == ==== ====== ======= =======

Issuance of stock warrants for commitment fee ........... -- - -- --
Issuance of stock in lieu of compensation ............... 20 - -- --
Purchase of treasury stock .............................. (1) - -- -- --
Net loss ........................................... -- -
-------- -- ---- ------ ------- -------
BALANCES, DECEMBER 31, 1995 ........................ 6,699 $7 -- $-- $-- $ --
======== == ==== ====== ======= =======
</TABLE>

<TABLE>
<CAPTION>
Additional Retained Earnings
Paid-In Accumulated Treasury
CAPITAL (DEFICIT) STOCK
------- -------- -----
<S> <C> <C> <C>
BALANCES, SEPTEMBER 30, 1993 (AS RESTATED) .... $ 907 $ 2 --

Conversion of preferred to common 5-1 ......... (4) -- --
Conversion of stock rights to common stock .... 344 -- --
Issuance of stock for oil and gas properties .. 345 -- --
Issuance of stock in lieu of consulting
fees and compensation ....................... 293 -- --
Issuance of stock for operating rights ........ 300 -- --
Issuance of stock for capital contribution .... 40 -- --
Issuance of stock options for debt guarantee .. 100 -- --
Issuance of stock warrants for commitment fee . 430 -- --
Net loss ...................................... $ (607)
------- -------- -----
BALANCES, SEPTEMBER 30, 1994 .................. $ 2,755 $ (605) --

Net loss ...................................... -- (548) --
------- -------- -----
BALANCES, DECEMBER 31, 1994 ................... $ 2,755 $ (1,153) --
======= ======== =====

Issuance of stock warrants for commitment fee 114 -- --
Issuance of stock in lieu of compensation ... 40 -- --
Purchase of treasury stock .................. -- -- (2)
Net loss ............................... (11,175) --
------- -------- -----
BALANCES, DECEMBER 31, 1995 ............ $ 2,909 $(12,328) $ (2)
======= ======== =====
</TABLE>

See Notes to Consolidated Financial Statements

SARATOGA RESOURCES, INC. FORM 10-KSB 22 of 45

SARATOGA RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Transition Period
Year Ended Ended Year Ended
DECEMBER 31, 1995 DECEMBER 31, 1994 SEPTEMBER 30, 1994
-------- ----- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................... $(11,175) $(548) $ (607)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion, amortization and provision ........... 9,988 554 503
for impairment
Amortization of debt discount ................................. 106 35 35
Other non cash expenses ....................................... -- -- 168
Provision for doubtful accounts ............................... 266 -- --
Deferred income taxes, including the cumulative
effect of change in accounting for income taxes ........... (199) (319) (185)
Changes in operating assets and liabilities:
Increase in accounts receivable .............................. 66 (31) (172)
Increase in note receivable .................................. -- (2) (91)
Increase in prepaids ......................................... (73) -- --
Increase in accounts payable and accrued liabilities ......... 1,735 241 57
Increase in other assets ..................................... -- (80) (124)
Other, net ................................................... (56) (208) (153)
-------- ----- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ................ 658 (358) (569)
-------- ----- -------

CASH FLOWS FROM INVESTING ACTIVITIES:

Property and equipment additions ................................... (1,283) (449) (1,443)
Net proceeds from sale of assets ................................... 13 -- 202
Acquisition of oil and gas properties .............................. (2,240) -- (6,176)
Cash acquired with operating rights ................................ -- -- 1,227
Organization cost additions ........................................ (105) -- --
-------- ----- -------
NET CASH USED IN INVESTING ACTIVITIES .............................. (3,615) (449) (6,190)
-------- ----- -------

CASH FLOWS FROM FINANCING ACTIVITIES:

Payments on stockholders notes ..................................... -- -- (253)
Proceeds from borrowings ........................................... 2,954 508 7,919
Payments on borrowings ............................................. (63) -- --
Capital contribution ............................................... -- -- 40
-------- ----- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES .......................... 2,891 508 7,706
-------- ----- -------

NET INCREASE (DECREASE) IN CASH .................................... (66) (299) 947

CASH AT BEGINNING OF YEAR .......................................... 670 969 22
-------- ----- -------
CASH AT END OF YEAR ................................................ $ 604 $ 670 $ 969
======== ===== =======
</TABLE>

See Notes to Consolidated Financial Statements

SARATOGA RESOURCES, INC. FORM 10-KSB 23 of 45

<TABLE>
<CAPTION>
Transition Period
Year Ended Ended Year Ended
DECEMBER 31, 1995 DECEMBER 31, 1994 SEPTEMBER 30, 1994
------------ -------------- ------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of stock for oil and gas properties ....................... -- -- 345
Issuance of stock for operating rights ............................. -- -- 300
Issuance of stock warrants for commitment fee ...................... 114 -- 430
Issuance of common stock for
consulting fees and compensation ................................. 40 -- 221
Acquisition of oil and gas properties in exchange for
debt and other consideration ..................................... 3,148 -- --
</TABLE>

See Notes to Consolidated Financial Statements

SARATOGA RESOURCES, INC. FORM 10-KSB 24 of 45

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Saratoga Resources, Inc., a Delaware corporation, (the "Company",
"Saratoga", or the "Registrant") was merged with Sterling Resources Corporation
("Sterling") in February 1994. Sterling, formerly Primo Corporation, had been
incorporated in Utah on September 21, 1972.

The Company has been engaged in oil and gas exploration and
development of properties located in far southwest and east Texas and in
Louisiana. Sterling had been a passive organization with no assets nor
liabilities until September 8, 1993. At that time, Sterling acquired all of the
outstanding shares of Saratoga Resources, Inc., a Texas corporation
("Saratoga-Texas"). The stockholders of Saratoga-Texas received 1,000,000 shares
of Sterling preferred stock and 100,000 shares of Sterling common stock. Shares
belonging to various Sterling stockholders were placed in a voting trust which,
along with voting rights of the stock issued to former Saratoga-Texas
stockholders, resulted in the former Saratoga-Texas stockholders exercising
voting control over 90% of the votes of Sterling's security holders. The
acquisition resulted in a complete reorganization of the Company and a change in
management. On January 22, 1994 the stockholders of the Company voted to 1)
change the name of the Company to Saratoga Resources, Inc.; 2) relocate the
domicile of the Company from Utah to Delaware; and, 3) institute a 1 for 30
reverse stock split on the Company's common stock. In addition, the preferred
stock of Sterling was converted into common stock.

The consolidated financial statements included herein are those
of the Company and its subsidiaries, all of which are wholly owned. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

On January 30, 1995 the Company elected to change its fiscal year
end from September 30 to December 31.

CASH AND CASH EQUIVALENTS: The Company considers cash equivalents
to include all cash items, such as time deposits and short term investments,
with maturities of three months or less upon acquisition.

OIL AND GAS PROPERTIES: The Company follows the full-cost method
of accounting for oil and gas properties. Under the full-cost method, all direct
costs and certain indirect costs associated with property acquisition,
exploration, and development activities are capitalized. Capitalized costs
include lease acquisitions, geological and geophysical work, delay rentals, and
costs of drilling, completing and equipping successful and unsuccessful oil and
gas wells. General and administrative costs associated with property
acquisition, exploration and development activities, which were capitalized,
amounted to $292,783 for the year ended December 31, 1995, $126,826 for the
transition period ended December 31, 1994; and $468,249 for the fiscal year
ended September 30, 1994. Gains or losses are not recognized on the sale or
other disposition of oil and gas properties, unless significant.

SARATOGA RESOURCES, INC. FORM 10-KSB 25 of 45

The capitalized costs of oil and gas properties, plus estimated
future development costs relating to proved reserves, are amortized on a
unit-of-production method over the estimated productive life of the proved oil
and gas reserves. Depletion expense per barrel of oil equivalent was $10.82 for
the year ended December 31, 1995; $6.38 for the transition period ended December
31, 1994; and $5.67 for the fiscal year ended September 30, 1994.

Capitalized oil and gas property costs, less accumulated
amortization and related deferred income taxes, are limited to an amount (the
ceiling limitation) equal to the present value of estimated future net revenues
from the projected production of proved oil and gas reserves, calculated at
prices in effect as of the balance sheet date (with consideration of price
changes only to the extent provided by contractual arrangements) and a discount
factor of 10% less the income tax effects related to differences between the
book and tax basis of the properties. At December 31, 1995, the Company reduced
the capitalized costs of its oil and gas properties by $7,185,548 due to the
decline in the estimate of the present value of future estimated net revenues at
December 31, 1995 and based on the subsequent event discussed in Note 11. All
oil and gas properties were conveyed to Internationale Nederlanden (U.S.)
Capital Corporation (ING) on May 7, 1996, but effective as of January 1, 1996,
as described in Note 11.

OTHER PROPERTY AND EQUIPMENT: Depreciation of property and
equipment, other than oil and gas properties, is generally provided on the
straight-line basis over the estimated useful lives of the assets as follows:

Office equipment 5 - 10 years
Leasehold improvements 3 - 5 years
Automobiles 5 years

Ordinary maintenance and repairs are charged to expense, and
expenditures which extend the physical or economic life of the assets are
capitalized. Gains or losses on disposition of assets other than oil and gas
properties and equipment are recognized in income and the related assets and
accumulated depreciation accounts are adjusted accordingly.

OTHER NON-CURRENT ASSETS: Other non-current assets include
organization costs, which are being amortized over five years.

CONCENTRATION OF CREDIT RISK: . Prior to the Foreclosure Sale
dated May 7, 1996, substantially all of the Company's receivables were due from
oil and gas companies related to properties located in southwest and east Texas
and in Louisiana. The Company generally requires no collateral from its
customers. The Company assesses its credit risk and provides an allowance for
doubtful accounts for any accounts which it deems doubtful of collection.

INCOME TAXES: As of October 1, 1993, the Company adopted
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes
("Statement 109"). Statement 109 requires a change from the deferred method of
accounting for income taxes of APB Opinion No. 11 to the asset and liability
method of accounting for income taxes. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable

SARATOGA RESOURCES, INC. FORM 10-KSB 26 of 45

to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates during the periods they are
expected to be recovered or settled.

DERIVATIVE FINANCIAL INSTRUMENTS: To reduce price sensitivity of
the cash flows for periods subsequent to June 30, 1994, the Company entered into
a Swap Agreement with Internationale Nederlanden (U.S.) Securities Corporation
("ING Securities"), an affiliate of Internationale Nederlanden (U.S.) Capital
Corporation ("ING"). This Swap Agreement hedged 4,400 barrels of oil per month
from July to December 1994 and 3,400 barrels of oil per month from January to
December 1995 at $18.15 per barrel. On April 11, 1995, two new transactions were
entered into under the Swap Agreement. Under the terms, the Company agreed to
sell 2,000 barrels of oil per month from May 1, 1995 to October 31, 1996, at a
price of $18.47 per barrel, and agreed to sell 3,000 barrels of oil per month
from June 1, 1995 to May 31, 1996, at a price of $18.40 per barrel. In addition,
on April 20, 1995, the Company agreed to sell 60,000 MMBtu's of natural gas per
month from July 1, 1995 to March 31, 1997, at a price of $1.85 per MMBtu.

The hedged volumes represented approximately 93% and 94% of the
Company's December 1995 and 1994 equivalent mcf production, respectively. The
price differential (gain or loss) is included in oil revenues and was
immaterial. The payables at December 31, 1995 and the receivables at December
31, 1994 and September 30, 1994 were immaterial.

OIL AND GAS REVENUES: The Company recognizes oil and gas revenues
as sales occur. Oil and gas sold is not significantly different from the
Company's share of production. The Company currently has no significant
production imbalances.

FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company's financial
instruments consist of trade receivables and liabilities and various notes
payable. The Company believes the carrying value of these financial instruments
approximate their estimated fair value subject to the Compromise and Settlement
Agreement discussed in Note 11, INFRA.

NET LOSS PER SHARE: Net loss per share was computed by dividing
net loss by the weighted average common shares and common stock equivalents
outstanding.

USE OF ESTIMATES: The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting principles
requires the Company's management to make estimates and assumptions that affect
the amounts reported in these financial statements and accompanying notes.
Actual amounts could differ from those estimates.

RECLASSIFICATIONS: Certain reclassifications have been made to
prior year amounts to conform to the current year's presentation.

SARATOGA RESOURCES, INC. FORM 10-KSB 27 of 45

NOTE 2 - ACQUISITIONS

HUNTER PETROLEUM, INC. PROPERTIES

On November 12, 1993, the Company completed its acquisition of
properties from Hunter Petroleum Inc. ("Hunter") for approximately $1,100,000 in
cash and 150,000 shares of common stock, with an effective date of September 1,
1993. Results of operations from September 1, 1993 to November 12, 1993 were
included as a purchase adjustment. The Company made an initial payment of
$600,000 at closing and a second payment on April 28, 1994 in the amount of
$100,000. The final payment of $100,000 was made to Hunter in May 1994.

Dr. Dryer, Mr. Kaminski and Mr. Cooke (stockholders of the
Company) acted as individual guarantors of $500,000 of the Company's debt
associated with the acquisition. In consideration for the stockholders'
guarantee, the Board of Directors of the Company granted Dr. Dryer, Mr. Kaminski
and Mr. Cooke options to purchase the Company's common stock of 50,000, 100,000,
and 100,000 shares, respectively, at $1.60 per share. The difference between the
option price of $1.60 and the estimated market price of $2.00 was reflected as
financing costs on the September 30, 1994 income statement. These options were
exercisable immediately and for a period of five years beginning May 11, 1994.
As of December 31, 1995, none of the individuals had exercised their options.

LOBO ENERGY , INC. ACQUISITION

On May 25, 1994 Saratoga-Texas and Roberto R. Salinas, Thermo
Resources Corporation, the Raymundo O. Salinas, Jr. Trust, the Rogelio Salinas,
Jr. Trust, the Ismael O. Salinas Trust, the Octavio Salinas, II Trust, the
Yvonne Salinas Gonzalez Trust and the Sandra Salinas Garcia Trust, (collectively
"Salinas") executed a Stock Purchase Agreement and related documents ("Purchase
Agreement") effective as of May 25, 1994.

Under the terms of the Purchase Agreement, Saratoga-Texas
acquired 5,715 shares of common stock of LEI, Inc. ("LEI"). The shares acquired
by Saratoga-Texas gave the Company 57.15% of the common stock of LEI in exchange
for a purchase price of $6,000,375 cash which was used to pay Salinas and LEI's
lenders at closing. Saratoga-Texas was indemnified for accrued liabilities
exceeding $1,500,000.

Prior to the change in ownership and a resultant change in
management, LEI sold all of its rights to operate its oil and gas properties to
a newly formed Texas corporation, Lobo Operating, Inc. ("LOI"), which is wholly
owned by the Company. LOI was capitalized by the Company with the issuance of
150,000 shares of the Company's common stock, which LOI in turn transferred to
LEI as compensation for the operating rights of the properties. LOI functions as
the operator for all of the Company's properties, including the LEI properties.

On March 31, 1995, Saratoga-Texas acquired 4,285 shares of common
stock of LEI from Peter P. Pickup ("Pickup"). As a result of this acquisition,
Saratoga-Texas controlled 100% of the common stock outstanding of LEI.
Concurrent with the purchase of the LEI common stock, LEI assigned to
Saratoga-Texas all of LEI's oil and gas assets. The total price paid by
Saratoga-Texas

SARATOGA RESOURCES, INC. FORM 10-KSB 28 of 45

for the purchase was approximately $5,406,000 and is comprised of the following
(the "Purchase Price").

1) A cash payment of $2,180,000 made by Saratoga-Texas on March
31, 1995 (reduced to $2,085,000 by reason of a concurrent payment
of a note payable by Pickup to Saratoga- Texas of $95,000.)

2) A promissory note in the sum of $346,458 issued to Pickup by
Saratoga-Texas and guaranteed by the Company and its subsidiaries
(the "Note"). The Note bears interest at the rate of 9.375% per
annum. Interest on the unpaid principal balance is to be paid on
the last day of each month beginning April 30, 1995 to and
including September 30, 1995. On the last day of each month
beginning October 31, 1995 the Note's principal balance is to be
paid, along with accrued interest, in eighteen equal monthly
installments. The Note is secured by 57.15% of LEI's current
portion of a potential increase in production which is
attributable to a waterflood program on the Moore's Orchard Field
in Fort Bend County, Texas. At December 31, 1995, the outstanding
balance of the note was approximately $289,000, as referenced in
Note 4.

4) At the closing, the Registrant also refinanced approximately
$2,411,000 in debt due ING allocable to LEI and its properties.

These LEI acquisitions were accounted for on the purchase method
of accounting. The Company's consolidated statements of operations as of
December 31, 1994 and September 30, 1994 reflect Saratoga-Texas' proportional
consolidation of LEI's assets, liabilities, revenues and costs. With the
acquisition of the remaining 42.85% of the common stock of LEI, the Company's
consolidated statement of operations for the year ended December 31, 1995
reflects 100% of LEI's revenues and costs from April 1, 1995 to December 31,
1995.

UNAUDITED PRO FORMA RESULTS

Had the acquisitions of Hunter and 57.15% of LEI occurred at
October 1, 1993, unaudited pro forma revenues, net loss and net loss per share
would have been approximately $2,587,000, $632,000, and $.12, respectively, for
the year ended September 30, 1994. The unaudited pro forma results are based
upon certain assumptions and estimates which the Company believes are
reasonable. The unaudited pro forma results do not purport to be indicative of
results that actually would have been obtained had the acquisition occurred on
October 1, 1993, nor are they intended to be a projection of future results.

SARATOGA RESOURCES, INC. FORM 10-KSB 29 of 45

NOTE 3 - ACCOUNTS RECEIVABLE

The following is a detail of accounts receivable at December 31, 1995 (in
thousands):

Oil and gas production $ 272
Joint interest billings 118
Advances to partners 9
------
$ 399
======

NOTE 4 - DEBT

Debt consists of the following at December 31, 1995 (in thousands):

ING:

Facility A $ 9,397
Facility B 4,000
Note payable to an individual 289
Note payable to a stockholder 4
Other 8
--------
Total debt $13,698
========

ING CREDIT AGREEMENT

On March 30, 1995 Saratoga-Texas executed a Credit Agreement
("Credit Agreement") with ING which refinanced the existing LEI debt to ING. The
cash portion of the purchase price for the acquisition of LEI described in Note
2 was paid out of the proceeds of the loan evidenced by the Credit Agreement. In
the Credit Agreement, ING established two credit facilities in favor of
Saratoga-Texas in the combined maximum principal amount of $19,000,000, subject
to the borrowing base limitations set forth therein. At December 31, 1995 an
aggregate of $15,500,000 was available under these facilities; $13,765,721 was
advanced; and $13,397,410 was outstanding, net of unamortized loan commitment
fees of $368,311. All oil and gas properties owned by the Company are pledged as
collateral under the Credit Agreement and all obligations to ING are also
guaranteed by the Company and all of its subsidiaries.

The terms of the two credit facilities are summarized as follows:

FACILITY A

At March 31, 1995, the Company borrowed $9,765,721 under the
terms of Facility A, a revolving line of credit established in the face amount
of $15,000,000. Facility A was used by Saratoga-Texas for the purchase of the
remaining 42.85% of the common stock of LEI, to retire all outstanding
indebtedness owed by LEI and Saratoga-Texas to ING, and to provide working
capital.

SARATOGA RESOURCES, INC. FORM 10-KSB 30 of 45

The terms of Facility A provided that the unpaid principal
balance outstanding at December 31,1995 of $9,397,410 was due and payable in
forty-eight equal monthly installments beginning January 2, 1996 and continuing
regularly thereafter on the first day of each month until December 1, 1999.
Interest was payable on the first day of each month commencing April 1, 1995, in
addition to these installments, and accrued at the election of the Company, at a
rate equal to 3.5% over the London Interbank Offered Rate ("LIBOR") or a fixed
rate based on the prime rate plus 1.75%. Until July 3, 1995 the Company elected
a fixed interest rate of 9.75% and thereafter the rate was equal to 3.5% over
Libor.

FACILITY B

Facility B was a term promissory note that provided for a single
advance at March 31, 1995 of $4,000,000 which was used in conjunction with
Facility A to repay in full the principal and interest associated with the
existing Saratoga-Texas debt to ING. The principal balance was payable in full
on January 2, 1996. Facility B was subject to an annual rate of 16%. Interest
was payable on the first day of each month commencing April 1, 1995.

MATTERS RELATED TO BOTH FACILITY A AND B

1) Saratoga-Texas paid a loan commitment fee to ING under the
Credit Agreement in the form of warrants which allowed ING to
acquire 178,620 shares of common stock of the Company in addition
to the warrants for 671,380 shares which had been granted
pursuant to the terms of the pre-existing Saratoga-Texas debt to
ING. The combined total warrants for 850,000 shares were
exercisable for $1.36 per share, the number of shares and
exercise price being subject to adjustment pursuant to the
anti-dilution provisions of the warrants. The warrants would
expire if not exercised by July 31, 2001. The difference between
the estimated market price of the Registrant's stock and the
warrant price was recorded as debt discount and additional
paid-in-capital.

2) The Credit Agreement contained numerous covenants with respect
to the operation of the Company. One of the covenants provided
that at no time shall the Company's current liabilities, without
including payments required under the Credit Agreement, exceed
the Company's current assets. Additionally, the Company's net
worth, (essentially defined as total tangible assets less total
liabilities, minus half of the net proceeds of an equity
transaction), was not to fall below $1,500,000. Also, the
Company's general and administrative expenses actually incurred
and paid during any fiscal year was not to exceed $1,600,000. At
December 31, 1995, the Company was in default of numerous
covenants associated with this Credit Agreement.

As discussed in Note 11, on May 7, 1996, in connection with a
Foreclosure Sale and Compromise and Settlement Agreement, a majority of the
assets (the "Interests") of Saratoga-Texas, LOI and LEI were sold to ING in
exchange for ING's forgiveness of all debt owed by the Company to ING. The
remainder of the Company's debt, consisting of a note payable to a stockholder,
note payable to an individual, and other note payable, will be settled with each
lender by the Trustee from the cash proceeds of the

SARATOGA RESOURCES, INC. FORM 10-KSB 31 of 45

Foreclosure Sale, pursuant to the Disbursement Agreement dated May 7, 1996, also
discussed in Note 11.

NOTE 5 - TRANSACTIONS WITH RELATED PARTIES

Pursuant to the terms of a Joint Venture Agreement and related
documents dated September 30, 1993, by and between the Company and Cooke,
Kaminski and Dryer, Kaminski agreed to contribute and assign to the Company
rights in certain seismic data and seismic license agreements. Additionally,
Cooke, Kaminski and Dryer agreed to forgive debt by the Company in the amounts
of $492,564, $320,000 and $196,990 respectively. In exchange for the forgiveness
of debt by Cooke, Kaminski and Dryer, and the assignment of the seismic data and
rights under the seismic licenses, the Company issued stock rights to 1,379,108
shares of common stock to the joint venture. During 1994 the stock rights were
converted to common stock and issued to Cooke, Kaminski and Dryer. The
assignment of the seismic data and license agreements by Kaminski to the Company
is one of the principal issues involved in the litigation currently pending as
further discussed in Item 3. Legal Proceedings (1), SUPRA.

On December 31, 1993, Dr. Randall Dryer, a director of the
Company, was issued 20,000 shares of common stock in exchange for his working
interest in the Angelina County Prospect. In addition, Dr. Dryer was issued
20,000 shares of common stock for his $40,000 equity contribution on December 1,
1993. Dr. Dryer is also the owner of a portion of the mineral leases in several
wells owned and operated by the Company and is billed his share of operating
expenses relating to these properties.

During the fiscal year ended September 30, 1994, the Company paid
Mr. Ron F. Bearden and E Corp, former affiliates of the Company, $50,000 and
$45,000, respectively, in exchange for consulting services in connection with
the acquisition of Saratoga-Texas. The Company also awarded Mr. Bearden warrants
to purchase 6,667 shares of common stock, issuable after December 31, 1993, for
120% of the share price that is offered to the public in any public offering of
the common stock after that date. In exchange, Mr. Bearden agreed to cancel the
warrants which he had previously received. Mr. Bearden and Mr. L. Srinivasan, an
officer and principal in E Corp, served the Company as members of the Board of
Directors until January 22, 1994.

Consulting fees for engineering services were paid to Capital
Resource Management, Inc., a stockholder in the Company, in the amount of
$54,000 for the year ended December 31, 1995, $39,000 for the transition period
ended December 31, 1994; and $41,000 for the fiscal year ended September 30,
1994.

During the fiscal year ended September 30, 1994, the Company
issued 34,138 shares of common stock in lieu of salary and expenses of $68,276
to Mr. Kaminski, as CEO and President. As of December 31, 1995, the Company had
a payable due the President of the Company for unpaid compensation and travel
expenses of $52,000 for services provided from January 1, 1995 through April 30,
1995, plus interest at 10% from July 15, 1995.

SARATOGA RESOURCES, INC. FORM 10-KSB 32 of 45

As of December 31, 1994 and September 30, 1994 the Company had an
account receivable due from Kaminski 90-1 Joint Venture ("Kaminski 90-1"), of
which Kaminski, a stockholder of Saratoga, was the joint venture manager.
Kaminski 90-1 is the owner of a portion of the mineral leases in several wells
owned and operated by the Company and is billed its share of the operating
expenses to these properties. The balance due at December 31, 1994 and September
30, 1994 amounted to $78,000 and $59,917, respectively. At December 31, 1995,
the outstanding balance of $107,240 was written off as uncollectible.

On March 31, 1995, the Company's note receivable due from Peter
P. Pickup of $95,000 was applied as additional purchase price consideration for
the remaining 4,285 shares of common stock of LEI acquired from Pickup (see Note
2, SUPRA).

During 1995, the Company issued 20,000 shares of common stock to
an employee as compensation for services rendered to the Company.

NOTE 6 - LEASE OBLIGATIONS

The Company leases office space in Houston, Texas for its
corporate office; in Austin, Texas for its operations office; and in Hemphill,
Texas for its east Texas field office. The Company entered into a four-year
operating lease with a primary term ending in January 1998, with renewal options
and escalation clauses, related to its Houston office on May 12, 1994. During
June 1994, the Company's prior Houston office lease expired. Rent on the Austin
lease is $400 per month on a month to month basis. The Hemphill field office is
leased for $260 per month on a month to month basis.

Rental expense was $111,000 for the year ended December, 31,
1995, $40,000 for the transition period October 1 to December 31, 1994; and
$63,000 for the fiscal year ended September 30, 1994.

Future minimum payments due under all non-cancelable operating
leases having initial terms of one year or more are as follows (in thousands):

1996 169
1997 152
1998 14
----
Total minimum lease payments $ 335
====

As discussed in Note 11, pursuant to the Disbursement Agreement
dated May 7, 1996, all lease obligations of the Company will be settled by the
Trustee from cash proceeds from the Foreclosure Sale.

NOTE 7 - INCOME TAXES

As discussed in Note 1, the Company adopted Statement 109 as of
October 1, 1993. The cumulative effect of this change in accounting for income
taxes of $79,000 or $.02 per share, was

SARATOGA RESOURCES, INC. FORM 10-KSB 33 of 45

determined as of October 1, 1993 and is reported separately as a cumulative
effect of change in accounting in the consolidated statement of operations for
the fiscal year ended September 30, 1994.

Deferred income taxes result from timing differences in the
recognition of income and expense items for income tax and financial reporting
purposes. The timing differences consist primarily of the difference in
capitalization and depletion of oil and gas properties and the reduction of
deferred tax liabilities from current year net operating loss.

The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities are
presented below (in thousands):

DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1994 1994
------- ----- -----

Deferred tax assets:

Accrued expenses/ other .............. $ -- $ 21 $ 21
Net operating loss carry forwards .... 647 728 456
Oil and gas properties, principally
due to differences in capitalized
drilling costs and depletion ........ 2,176 -- --
Other ................................ -- -- --
------- ----- -----
Total gross deferred tax assets ...... 2,823 749 477
Less valuation allowance ............. (2,823) -- --
------- ----- -----
Net deferred tax assets .............. -- 749 477

Deferred tax liabilities:
Oil and gas properties, principally
due to differences in capitalized
drilling costs and depletion ...... -- (917) (967)
Other ............................. -- (10) (7)
------- ----- -----
Total gross deferred tax liabilities . -- (927) (974)
------- ----- -----
Net deferred tax liability ........... $ -- $(178) $(497)
======= ===== =====

As of December 31, 1995 the Company has approximately $2 million
in net operating loss carry forwards which begin to expire in the year 2008.

NOTE 8 - MAJOR CUSTOMERS

The Company's revenues from customers accounting for at least 10%
of the Company's total revenues are as follows:

SARATOGA RESOURCES, INC. FORM 10-KSB 34 of 45

Transition Period
Year Ended Ended Year Ended
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1994 1994
--------- ------------- --------
CUSTOMER
Cerrito Gas Marketing, Ltd. -- -- 17%
Gulfmark Energy, Inc. 26% 24% 14%
HPL Resources Company 24% 26% 15%
Scurlock Permian Corporation 19% 16% 10%
Texon Corporation -- -- 17%
Dalen Resources Oil & Gas Co. -- 11% --

Customers accounting for ten percent (10%) or more of the
Company's accounts receivable as of December 31, 1995 consisted of five
customers totaling $289,000.

NOTE 9 - LITIGATION

On May 13, 1996, the Company, along with two of its three
directors, Thomas F. Cooke ("Cooke") and Randall F. Dryer ("Dryer"), filed a
lawsuit (the "Company Lawsuit"), as amended, against the remaining director,
Joseph T. Kaminski ("Kaminski") [Cause No. 96-05540, SARATOGA RESOURCES, INC.,
THOMAS F. COOKE AND RANDALL F. DRYER V. JOSEPH T. KAMINSKI, 261st Judicial
District Court, Travis County, Texas]. The Company has filed this lawsuit
against Kaminski alleging fraud, breach of fiduciary duty, intentional and
negligent misrepresentation, and other claims.

On May 13, 1996, at the same time the "Company Lawsuit" was being
filed, Cooke and Dryer advised Kaminski that Kaminski was being terminated as
President of Saratoga, Kaminski having previously been terminated as Chief
Executive Officer of Saratoga by the Board of Directors on April 3, 1996. By
action of the Board of Directors on May 21, 1996, Kaminski was dismissed for
cause as President of Saratoga and its subsidiaries.

On May 15, 1996, Kaminski filed a lawsuit (the "Kaminski
Lawsuit"), as amended, against Cooke, Dryer, Dryer, Ltd. and the Company [Cause
No. 96-24469, JOSEPH T. KAMINSKI V. THOMAS F. COOKE, RANDALL F. DRYER, SARATOGA
RESOURCES, INC., AND DRYER, LTD., A TEXAS FAMILY PARTNERSHIP, 113th Judicial
District Court, Harris County, Texas]. Kaminski has filed this lawsuit
individually and derivatively as a shareholder of the Company and has alleged
fraud, breach of fiduciary duty, gross negligence, slander, libel per se, and
other claims on the part of Cooke and Dryer individually and as directors of the
Company.

The Company continues to conduct its affairs in the ordinary
course of business pursuant to the terms and provisions of an Agreed Temporary
Injunction presented to the Court in the "Kaminski Lawsuit" on May 20, 1996.

The "Company Lawsuit" and "Kaminski Lawsuit" are both in the
early stages of development. While management of the Company believes at this
time that neither lawsuit will have

SARATOGA RESOURCES, INC. FORM 10-KSB 35 of 45

a material adverse effect on the Company, it is too early to make an accurate
evaluation of potentially adverse effects, if any.

NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT)

On January 22, 1994, the stockholders of the Company voted to
institute a 1 for 30 reverse stock split on the Company's common stock. Also, on
January 22, 1994, the stockholders approved an amendment to the Company's
Certificate of Incorporation to increase the number of shares of common stock
authorized from 20,000,000 to 50,000,000, and decrease the par value per share
of common stock from $.25 to $.001. All presentation of shares, per share, and
weighted average share amounts were restated to give effect to the reverse stock
split and the change in par value. On that same date, the stockholders approved
the authorization of 5,000,000 shares of preferred stock with a par value of
$.001 per share. The preferred stock may be issued from time to time in one or
more series. Prior to each issuance, the Board of Directors is authorized to
determine the number of shares, relative powers, preferences, rights and
qualifications, limitations or restrictions of all shares of such series. Shares
of any series of preferred stock which have been acquired by the Company or
which, if convertible or exchangeable, have been converted into or exchanged for
shares of stock of another class, would have the status of authorized and
unissued shares of preferred stock, subject to the conditions adopted by the
Board of Directors.

During 1995, the Company purchased 1,000 small lot shares for
$2.00 per share from stockholders.

NOTE 11 - SUBSEQUENT EVENT

As of May 7, 1996, The Company owed $13,765,721 plus accrued
interest to ING under the Credit Agreement described in Note 4. The Company was
in default under the Credit Agreement and all obligations were due and payable
in full.

In connection with a Foreclosure Sale and pursuant to the terms
and provisions of a Compromise and Settlement Agreement dated May 7, 1996, a
majority of the assets (the "Interests") of Saratoga-Texas, LOI and LEI were
sold to ING in exchange for ING's forgiveness of all amounts owed under the
Credit Agreement .

Upon completion of the Foreclosure Sale on May 7, 1996, at which
ING was the highest bidder, ING concurrently sold the Interests to PrimeEnergy
for cash consideration in the amount of $7,180,000 less an adjustment for net
revenue due the purchaser from the effective date of the purchase (January 1,
1996) through May 7, 1996, not to exceed $372,000, plus additional consideration
as provided in that certain Purchase and Sale Agreement dated May 7, 1996, by
and between ING and PrimeEnergy.

SARATOGA RESOURCES, INC. FORM 10-KSB 36 of 45

$1,500,000 has been paid to the Company and will be available for the Company to
pursue other business opportunities.

As a result of the above transaction, all amounts owed to ING
have been classified as current in the accompanying consolidated balance sheet.
The consolidated financial statements do not include any other adjustments that
would result from the disposal of assets and settlement of liabilities under the
terms of the Compromise and Settlement Agreement.

SUPPLEMENTAL OIL AND GAS PROPERTIES AND RELATED RESERVES DATA
(UNAUDITED)

CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES -

An analysis of the capitalized oil and gas property costs and
related accumulated depletion and depreciation at December 31, 1995 (in
thousands):

Proved oil and gas properties $17,582
Equipment 255
-------
17,837
Less:
Accumulated depletion and depreciation (10,847)
-------
Net capitalized costs $ 6,990
=======

COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT
ACTIVITIES -

The following costs, whether capitalized or expensed, were incurred in oil and
gas activities (in thousands):

Transition Period
Year Ended Ended Year Ended
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1994 1994
------------ ------------ -------------

Acquisition of proved properties $ 5,377 $ -0- $7,574
Development 1,294 449 669
------ --- ------
$ 6,671 $ 449 $8,243
======= ======= ======

RESULTS OF OPERATIONS -

Oil and gas activities represent substantially all of the
business activities of the Company and these activities are located
substantially in a single geographic area; therefore, reference should be made
to the Consolidated Statements of Operations for the Company's results of
operations.

SARATOGA RESOURCES, INC. FORM 10-KSB 37 of 45

ESTIMATED QUANTITIES OF OIL AND GAS RESERVES -

The following table summarizes the Company's net interest in
estimated proved oil and gas reserve quantities, all of which are located within
the United States. The estimates are based on geological and engineering data
which demonstrate with reasonable certainty oil and gas expected to be recovered
in future years from known reservoirs under existing economic and operating
conditions.

The estimate of proved reserves as shown in the table, while
based on engineering, geological and geophysical data and techniques which are
believed to be sound, is nevertheless not subject to precise determination.
Accordingly, the estimates will change as future pricing, development,
production and reservoir information becomes available. Such changes could be
significant.

PROVED DEVELOPED AND UNDEVELOPED RESERVES

OIL (BBLS) GAS (MCF)
---------- -----------
Balance at September 30, 1993 ......... 667,477 739,039

Production ............................ (33,280) (331,254)
Revisions ............................. (456,768) (8,003,706)**
Extensions and discoveries ............ 21,640 737,716
Purchases of minerals in place ........ 1,002,486 15,782,137
---------- -----------
Balance at September 30, 1994 ......... 1,201,555 8,923,932

Production ............................ (15,053) (156,531)
Revisions ............................. (192,341) (1,741,532)
---------- -----------
Balance at December 31, 1994 .......... 994,161 7,025,869***

Production ............................ (92,209) (928,475)
Revisions ............................. (580,950) (2,949,185)
Purchase of minerals in place, net .... 280,029 2,156,791
---------- -----------
Balance at December 31, 1995 .......... 601,031 *** 5,305,000 ***
========== ===========
Proved Developed Reserves:

At September 30, 1994 ................. 600,374 5,194,471
At December 31, 1994 .................. 452,106 3,852,986
At December 31, 1995 .................. 473,567*** 3,951,300***

**The majority of the downward revision (7,938,000) in proved gas reserve
volumes is due to the exclusion of several proved undeveloped properties that,
at prices in effect at September 30, 1994, are considered uneconomical to
develop.

SARATOGA RESOURCES, INC. FORM 10-KSB 38 of 45

***As discussed in Note 11 to the financial statements, on May 7, 1996 in
connection with a Foreclosure Sale and Compromise and Settlement Agreement, a
majority of the assets (the "Interests") of Saratoga-Texas, LOI and LEI were
sold to ING in exchange for ING's forgiveness of all amounts owed under the
Credit Agreement .

DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES -

Standardized measure of discounted future net cash flows and
changes therein relating to proved oil and gas reserves is as follows (in
thousands):

DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1994 1994
------- -------- ---------
Future cash inflows $21,427 $ 25,971 $ 31,324
Future production costs (5,762) (8,935) (11,106)
Future development costs (2,081) (3,782) (3,673)
Future income taxes (809) (679) (540)
------- -------- ---------
Future net cash flows 12,775 12,575 16,005

Less: 10% annual discount
for estimated timing of cash flows 3,629 3,738 5,919
------- -------- --------
Standardized measure of discounted
future net cash flows $ 9,146 $ 8,837 $10,086
======= ======== =======

In accordance with regulations prescribed by the Securities and
Exchange Commission, future cash flows are computed using year-end costs and
prices adjusted for contractual increases and other fixed and determinable
escalations discounted at 10%. Product prices actually received at the leases as
of December 31, 1995, December 31, 1994 and September 30, 1994 were used in the
estimates of cash flows. The standardized measure of discounted future cash
flows does not purport to represent the fair market value of the Company's oil
and gas properties (See Note 11).

Future income tax expenses are computed using year-end statutory
tax rates (adjusted for permanent differences that relate to existing proved oil
and gas reserves in which the enterprise has mineral interests). The following
are the principal changes in the standardized measure of discounted future net
cash flows (in thousands):

SARATOGA RESOURCES, INC. FORM 10-KSB 39 of 45

<TABLE>
<CAPTION>
Year Ended Transition Period Year Ended
December 31, December 31, September 30,
1995 1994 1994
------- -------- --------
<S> <C> <C> <C>
Balance at beginning of period .............. $ 8,837 $ 10,086 $ 3,057
Sales and transfers of oil and gas
produced, net of production costs ....... (1,263) (99) (594)
Net change in prices ........................ 4,276 601 (5,416)
Revisions to previous quantity estimates** .. (8,098) (2,552) (7,287)
Extensions, discoveries, and improved
recovery less related costs ............. -- -- 588
Changes in estimated future development costs (407) (629) 2,511
Development costs incurred .................. 1,294 449 669
Changes in estimated future income taxes .... (566) (139) 2,297
Purchases of reserves ....................... 3,955 -- 14,619
Accretion of discount ....................... 884 1,009 306
Other, including changes in timing .......... 234 111 (664)
------- -------- --------
Balance at end of period .................... $ 9,146*** $ 8,837 $ 10,086
======= ======== ========
</TABLE>

**The majority of the downward revision for the year ended September 30, 1994
(74%) is due to the exclusion of several proved undeveloped properties that, at
current prices, are considered uneconomical to develop.

***As discussed in Note 11 to the financial statements, on May 7, 1996, in
connection with a Foreclosure Sale and Compromise and Settlement Agreement, a
majority of the assets (the "Interests") of Saratoga-Texas, Lobo Operating, Inc.
and LEI, Inc. , including all related reserves, were sold to ING in exchange for
ING's forgiveness of all amounts owed under the Credit Agreement.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

On August 2, 1994, the Registrant engaged Ernst & Young LLP to
audit the Registrant's financial statements for the fiscal year ending September
30, 1994. The engagement of Ernst & Young LLP was approved by the Board of
Directors of the Registrant in a meeting on May 11, 1994.

Hein + Associates LLP's report on the Registrant's financial
statements for the year ended September 30, 1993 did not contain an adverse
opinion or a disclaimer of opinion, and was not qualified as to uncertainty,
audit scope or accounting principles. The Company had no disagreements with Hein
+ Associates LLP during the year ended September 30, 1993 or any interim periods
on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure which, if not resolved, would have
required reference in Hein + Associates LLP's report. In addition, during such
period, Hein + Associates LLP did not advise the Company of any "reportable
events" requiring disclosure by Item 304 of Regulation S-K.

SARATOGA RESOURCES, INC. FORM 10-KSB 40 of 45

By approval of the Board of Directors effective as of June 10,
1996, the Company has (i) retained the services of Hein + Associates LLP, 5075
Westheimer, Suite 970, Houston, Texas 77056, as principal accountant and auditor
for the purpose of auditing the Company's financial statements and (ii)
dismissed Ernst & Young LLP. Previously, Ernst & Young LLP served as the
Company's principal accountant and auditor. This change has been occasioned
after careful consideration by the Company, and as further explained under
"Background" hereinbelow.

A copy of the "Independent Auditor's Report" (the "Report") dated
May 2, 1995, which was prepared by Ernst & Young LLP, was included in the
Company's Form 10-KSB for the fiscal period from October 1, 1994 to December 31,
1994. The Report expressed doubt about the Company's ability to continue as a
going concern based upon several factors as outlined in the Report: (i) the
Company had incurred an operating loss for the transition period October 1 to
December 31, 1994 and the year ended September 30, 1994 (ii) the Company had a
working capital deficiency for said periods (iii) the Company projected an
operating loss for the twelve months ending December 31, 1995, and (iv) the
Company was not in compliance with certain covenants under a Credit Agreement
with its principal lender.

For the prior audited periods and subsequent unaudited periods,
the Company is not aware of any material disagreements or reportable events with
Ernst & Young LLP regarding accounting principles or practices, financial
statement disclosure, or auditing scope or procedure.

BACKGROUND. As set forth in Item 2 hereof, under the terms and
provisions of the Agreement, a majority of the assets of the Saratoga Entities
were ultimately acquired by PrimeEnergy on May 7, 1996. As a result, the Company
has no, or virtually no, assets other than approximately $1,500,000 out of the
$5,500,000 originally deposited by ING into Escrow. This represents a
significant change for the Company. Previously, the Company had been actively
engaged in the production and development of oil and gas properties. As such,
the Company had been able to financially support the retention of Ernst & Young
LLP as its principal accountant and auditor. Hein + Associates LLP has agreed to
perform the audit for substantially lower fees than Ernst & Young LLP.
Presently, the Company is in a position which requires it to make efficient use
of its reduced financial resources in an attempt to maintain the Company as a
viable business entity going forward.

Accordingly, the Company has determined that the cost required to
continue to retain the services of such a large public accounting firm as Ernst
& Young, LLP as the Company's principal accountant and auditor, giving due
consideration to the Company's current financial and business affairs, would not
be the most prudent use of Company assets.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

Executive Officers of the Company and its wholly owned
subsidiaries serve at the pleasure of the Board of Directors and are elected
annually at a meeting of the Board of Directors. Set forth are the directors and
executive officers at July 15, 1996:

SARATOGA RESOURCES, INC. FORM 10-KSB 41 of 45

NAME POSITION AGE

Thomas F. Cooke Chairman, Chief Executive Officer and 47
Chief Operating Officer

Joseph T. Kaminski Director 46

Dr. Randall F. Dryer Director 43

BIOGRAPHICAL INFORMATION

As of July 15, 1996, the following provides information as to
each executive officer and director of the Company, including age, principal
occupation and business experience during the last five years:

THOMAS F. COOKE, CHAIRMAN, CHIEF EXECUTIVE OFFICER AND CHIEF OPERATING OFFICER,
age 47, was one of the co-founders of Saratoga Resources, Inc. in 1990. Mr.
Cooke has been a self employed independent oil and gas producer for the last 16
years. Sterling acquired Saratoga-Texas in September 1993, at which time Mr.
Cooke was elected Chairman of the Board and Chief Operating Officer of Sterling.
Mr. Cooke is an Explorer Member of the Texas Independent Producer and Royalty
Owner Association and serves as Director and Chairman of the North American
Energy Issues Committee. Mr. Cooke replaced Mr. Kaminski as Chief Executive
Officer on April 3, 1996.

DR. RANDALL F. DRYER, DIRECTOR, age 43, became a member of the Board of
Directors of the Company on January 22, 1994. Dr. Dryer has been in the private
medical practice of Spinal Surgery for over ten years and serves on the Medical
Advisory Board of a publicly traded company, U.S. Medical, Inc. He is actively
involved with The Texas Independent Producers and Royalty Owners Association.

JOSEPH T. KAMINSKI, DIRECTOR, age 46, started his career as a geophysicist for
Amoco and has served as an exploration geophysicist for three independent
exploration firms. Mr. Kaminski co-founded Seitel, Inc. in 1983 and during the
time that he was CEO and Chairman of the Board, from 1982 through 1987, Seitel
grew from a start-up company to having assets in excess of $20,000,000. Mr.
Kaminski and Mr. Cooke jointly founded Saratoga-Texas in July of 1990. After the
Company acquired Saratoga-Texas in September of 1993, Mr. Kaminski became a
member of the Board and was elected Chief Executive Officer and President,
serving in those capacities until April 3, 1996 and May 21, 1996 respectively.

ITEM 10. EXECUTIVE COMPENSATION.

The following Summary Compensation Table sets forth all cash
compensation paid, distributed or accrued for services, including salary and
bonus amounts rendered in all capacities for

SARATOGA RESOURCES, INC. FORM 10-KSB 42 of 45

the Company during the and fiscal years ended December 31, 1995, 1994 and, 1993.
All other tables required to be reported have been omitted as there has been no
compensation awarded to, earned by or paid to any of the Company's executives in
any fiscal year covered by the tables.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------- -------- -------
OTHER
NAME ANNUAL RESTRICTED ALL OTHER
AND FISCAL COMPEN- STOCK LTIP COMPEN-
PRINCIPAL YEAR SATION AWARD(S) OPTIONS/ PAYOUTS SATION
POSITION ENDED SALARY($) BONUS($) ($) ($) SARS(#) ($) ($)
- -------- ----- --------- -------- ------- ---------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CEO
Kaminski,
Joseph (1)

Dec. 31 (2) 1995 $107,100 None None None None None None
Oct. - Dec. 31 1994 30,000 None $2,100 None None None None
Sept. 30 1994 96,300 None None None None None None

COO
Cooke,
Thomas

Dec. 31 1995 $106,000 None None None None None None
Oct. - Dec. 31 1994 30,000 None None None None None None
</TABLE>

(3)

(1) Mr. Kaminski received no cash, property or stock compensation for the first
three months of fiscal 1994 during which time a compensation amount of $2,100
per month was imputed in accordance with generally accepted accounting
principles (SAB 2B). His compensation for the remainder of the fiscal year 1994
was $10,000 per month. He received $2,100 in rental income from the Company. He
received $50,000 in common stock valued at $2.00 per share and the remainder in
cash. This table does not include 100,000 stock warrants at an exercisable price
of $1.60 per share, exercisable immediately and expiring May 11, 1999. These
warrants were granted in connection with the guarantee of the Company's debt to
Hunter Petroleum, Inc. and not in connection with his services as an officer.

(2) An additional $52,000 plus interest, in deferred compensation and expenses
is claimed by Mr. Kaminski.

(3) None of the other executive officers of the Company had aggregate salary and
bonus in excess of $100,000 for the fiscal years indicated.

ITEM 11. SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth information concerning the shares
of the Company's common stock beneficially owned by each director of the Company
and all directors and officers as a group and each holder of over five percent
of the outstanding common stock as of July 15, 1996. The mailing address for all
officers and directors other than Mr. Kaminski is Saratoga Resources, Inc., 2000
Dairy Ashford S., Suite 410 , Houston, Texas 77077. Mr. Kaminski's mailing
address is 531 Hidden Harbor, Houston, Texas 77079.

SARATOGA RESOURCES, INC. FORM 10-KSB 43 of 45

NUMBER
NAME OF BENEFICIAL OWNER SHARES(1) PERCENT

Joseph T. Kaminski 2,552,721 37.49%
Thomas F. Cooke 2,211,274 32.47%
Dryer Family Limited Partnership 920,737 13.52%
------

All executive officers and
directors as a group (3 persons) 5,684,732 83.48%

(1) Includes shares purchasable under warrants exercisable within 60 days and
expire if not exercised by May 11, 1999:

Joseph T. Kaminski 100,000
Thomas F. Cooke 100,000
Randall F. Dryer, M.D. 50,000
---------
Total 250,000

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Cooke, Kaminski and Dryer acted as individual guarantors of
$500,000 of the Company's debt associated with the Hunter acquisition (See
Consolidated Financial Statements, Note 2-Acquisitions, SUPRA). In consideration
for the stockholders' guarantee, the Board of Directors of the Company granted
Dryer, Kaminski and Cooke options to purchase the Company's common stock of
50,000, 100,000, and 100,000 shares, respectively, at $1.60 per share. These
options were exercisable May 11, 1995 and expire five years thereafter.

Dryer was issued 20,000 shares of common stock in exchange for
his working interest in the Angelina County Prospect. In addition, Dryer was
issued 20,000 shares of common stock for his $40,000 equity contribution on
December 1, 1993. Dryer is also the owner of a portion of the mineral leases in
several wells formerly owned and operated by the Company and is billed his share
of operating expenses relating to these properties.

SARATOGA RESOURCES, INC. FORM 10-KSB 44 of 45

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(A) EXHIBITS.

NO. EXHIBIT DESCRIPTION

(3) ARTICLES OF INCORPORATION AND BY-LAWS:

3.1 Certificate of Incorporation of Registrant, Saratoga
Resources, Inc., filed with the Office of the Secretary
of the State of Delaware on January 19, 1994.
Incorporated by reference to the Form 10-KSB filed
February 3, 1995, filed as Exhibit 3.1 thereto.

3.2 By-Laws of Registrant, Saratoga Resources, Inc., a
Delaware Corporation, adopted January 20, 1994.
Incorporated by reference to the Form 10-KSB filed
February 3, 1995 and filed as Exhibit 3.2 thereto.

(10) MATERIAL CONTRACTS:

10.1 Compromise and Settlement Agreement dated May 7, 1996,
by and between Saratoga Resources, Inc. a Delaware
corporation, Saratoga Resources, Inc., a Texas
corporation, Lobo Operating, Inc., a Texas corporation,
LEI, Inc., a Texas corporation, Thomas F. Cooke, Joseph
T. Kaminski, Randall F. Dryer, and Internationale
Nederlanden (U.S.) Capital Corporation, filed as Exhibit
1 to the Company's Report on 8-K dated May 7, 1996 and
incorporated herein by reference.

10.2 Purchase and Sale Agreement dated May 7, 1996, by and
between Internationale Nederlanden (U.S.) Capital
Corporation and PrimeEnergy Corporation, filed as
Exhibit 2 to the Company's Report on 8-K dated May 7,
1996 and incorporated herein by reference.

10.3 Assignment and Bill of Sale dated May 7, 1996, by and
between Saratoga Resources, Inc., a Delaware corporation
and PrimeEnergy Corporation, filed as Exhibit 3 to the
Company's Report on 8-K dated May 7, 1996 and
incorporated herein by reference.

(B) REPORTS ON FORM 8-K

(1) A Form 8-K dated May 7, 1996 was filed with the Securities and
Exchange Commission on July 16, 1996, reporting Item 2-Acquisition or
Disposition of Assets, Item 4 - Change in Registrant's Certifying
Accountant , and Item 5-Other Events- Pending Litigation.

SARATOGA RESOURCES, INC. FORM 10-KSB 45 of 45

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

SARATOGA RESOURCES, INC.

By: _______________________ Date: _________________
Thomas F. Cooke,
Chairman and Chief Executive Officer

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, AS AMENDED, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED.

By: _______________________ Date: _________________
Thomas F. Cooke,
Chairman, Chief Executive Officer
and Principal Accounting and Financial Officer

By: _______________________ Date: _________________
Joseph T. Kaminski,
Director

By: _______________________ Date: _________________
Randall F. Dryer,
Director