10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED March 31, 2012

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

FOR THE TRANSITION PERIOD FROM ___________ TO _____________.

 Commission file number: 000-28015

TREATY ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

Nevada	86-0884116
(State or other Jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

201 St. Charles Ave., Suite 2558

New Orleans, LA 70170

(Address of principal executive offices)

(504) 599-5684

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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   þ No o

Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	þ
(do not check if a smaller reporting company)

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

The number of shares of the registrant’s common stock outstanding as of June 20, 2012, was 737,449,069.

TREATY ENERGY CORPORATION

FORM 10-Q

INDEX

PART I – FINANCIAL INFORMATION	3
Item 1 – Financial Statements	3
Item 2 - Management’s Discussion And Analysis Of Financial Condition And Results Of Operations	19
Item 3 - Quantitive And Qualitative Disclosures About Market Risk	20
Item 4 – Controls and Procedures	20
PART II – OTHER INFORMATION	22
Item 1 – Legal Proceedings	22
Item 1A – Risk Factors	22
Item 2 - Unregistered Sales of Equity Securities	23
Item 3 – Defaults Upon Senior Securities	23
Item 4 - Submission of Matters to a Vote of Security Holders	23
Item 5 – Other Information	23
Item 6 – Exhibits	24
SIGNATURES	25

2

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

TREATY ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

	March 31, 2012			December 31,
	(Unaudited)			2011
ASSETS
Cash and equivalents	$	25,941		$	14,716
Accounts receivable		16,400			23,438
Total current assets		42,341			38,154
Oil and gas properties (successful efforts)		105,494			105,494
Oil and gas properties (unproved)		48,075			48,075
Oilfield support equipment		1,141,701			1,141,701
Less: accumulated depreciation, depletion and amortization		(173,492	)		(125,439	)
Net oil and gas properties and support equipment		1,121,778			1,169,831
Property, plant and equipment, net		593,701			494,473
Other Assets		205,363			65,363
Carved out interest, net		74,509			76,005
TOTAL ASSETS	$	2,037,692		$	1,843,826
LIABILITIES
Accounts payable and accrued liabilities	$	692,514		$	717,612
Notes and accrued interest payable		823,583			829,095
Cash Call Liability		74,200			-
Purchase Option Liability		25,000			25,000
Total current liabilities		1,615,297			1,571,707
Deferred revenue		520,839			545,507
Asset retirement obligation		131,573			130,397
TOTAL LIABILITIES	$	2,267,709		$	2,247,611
Convertible Redeemable Class A Preferred Stock (12,000 issued and outstanding
at March 31, 2012 and December 31, 2011, respectively, $5 redemption value )		60,000			60,000

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

3

TREATY ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(Continued)

	March 31, 2012			December 31,
	(Unaudited)			2011
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock - par value $0.001, 50 million shares authorized, none issued or outstanding at March 31, 2012 and December 31, 2011		-			-
Common stock – par value $0.001, 750 million shares authorized, 746,449,069  issued  at March 31, 2012 and December 31, 2011, and 737,449,069 shares outstanding  at March 31, 2012 and December 31, 2011, respectively		746,449			746,449
Treasury Stock		(355,500	)		(355,500	)
Additional paid in capital		9,704,088			8,730,631
Common stock payable		85,875			85,875
Accumulated loss - pre exploration stage		(644,829	)		(644,829	)
Accumulated loss		(9,733,131	)		(8,963,829	)
Accumulated other comprehensive income		390			390
Total stockholders' equity (deficit)		(196,658	)		(400,813	)
Non-Controlling Interest		(93,359	)		(62,972	)
Total Controlled Stockholder's equity (deficit)		(290,017	)		(463,785	)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)	$	2,037,692		$	1,843,826

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

4

TREATY ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended March 3
	2012			2011
	(Unaudited)			(Unaudited)
REVENUES
Oil and gas revenues		57,016		$	-
Total revenues		57,016			-
EXPENSES
Lease operating expenses		77,491			106,715
Direct drilling costs		73,672			-
Land lease costs		20,000			-
Production taxes		3,741			-
General and administrative		551,816			142,548
Depreciation, depletion and amortization		78,265			2,346
Accretion of asset retirement  obligation		1,176			-
Interest expense		43,190			11,403
Total expenses		849,351			263,012
Operating Loss		(792,335	)		(263,012	)

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

5

TREATY ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(continued)

OTHER INCOME AND EXPENSE ITEMS
Gain (Loss) on retirement of debt		-			17,287
Gain (Loss) on sale of assets		(7,354	)
NET LOSS	$	(799,689	)	$	(245,725	)
Less: loss attributable to non-controlling interests		30,387			-
Net loss attributable to the Company	$	769,302		$	245,725
Net loss per common shares - basic and diluted	$	(0.00	)	$	(0.00	)
Weighted average common shares
outstanding - basic and diluted		737,449,069			515,356,400

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

6

TREATY ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended March 31,
	2012			2011
	(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(799,689	)	$	(245,725	)
Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:
Depreciation, depletion and amortization		78,265			2,346
Loss on sale of assets		7,354			-
Loss on conversion of debt for equity		-			(17,287	)
Amortization of discount on notes payable		3,983			5,313
Accretion of asset retirement obligation		1,176			-
Stock based compensation (shares issued and owed)		-			42,200
Interest imputed on related-party notes		1,953			1,953
Amortization of deferred revenue		(24,668	)		-
Changes in operating assets and liabilities:
Accounts receivable		7,038			-
Prepaid expenses & other assets		-			(50,000	)
Accounts payable & accrued expenses		(26,115	)		(24,874	)
Officer and director liabilities		3,000			30,000
Cash Call Liability		74,200			-
Interest payable		19,601			(1,863	)
Net cash used in operating activities		(653,902	)		(257,937	)

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

(continued)

7

TREATY ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(continued)

	Three Months Ended March 31,
	2012			2011
	(Unaudited)			(Unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES
Deposit on equipment lease purchase		(8,000	)		-
Purchases of other fixed assets		(127,298	)		(34,718	)
Net cash used in investing activities		(135,298	)		(34,718	)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from related parties, net		831,505			231,757
Proceeds from notes payable		150,000			-
Principal payments on notes payable		(179,097	)		-
Common Stock issued for cash		-			60,750
Bank overdraft		(1,982	)		-
Net cash provided by  financing activities		800,426			292,507
Net increase / (decrease) in cash and cash equivalents		11,226			(148	)
Cash and cash equivalents, beginning of period		14,715			148
Cash and cash equivalents, end of period	$	25,941		$	-

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest	$	17,508	$	6,000
Shares issued for retirement of debt		-		622,732
Acquisition of oil & gas properties with related party debt		-		19,500
Acquisition of other assets with stock		-		72,250
Related Party notes payable forgiven		971,504		-
Shares issued by related party on behalf of company for potential acquisition		140,000		-

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

8

TREATY ENERGY CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

Information Regarding Forward-Looking Statements

This report contains forward-looking statements that involve risks and uncertainties. We generally use words such as "believe," "may," "could," "will," "intend," "expect," "anticipate," "plan," and similar expressions to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks described below and elsewhere in this report. Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made, and our future results, levels of activity, performance or achievements may not meet these expectations. We do not intend to update any of the forward-looking statements after the date of this document to conform these statements to actual results or to changes in our expectations, except as required by law.

History

Treaty Energy Corporation, formerly known as Alternate Energy Corp., (“Treaty”, “the Company”, “we”, or “us”) was incorporated as COI Solutions, Inc. in the State of Nevada in August, 1997.

We incorporated as COI Solutions, Inc. on August 1, 1997 as a Nevada corporation. On May 22, 2003, we acquired all the assets of AEC I Inc., formerly known as Alternate Energy Corporation, and changed our name to Alternate Energy Corp. We commenced active business operations on June 1, 2003 and were a development stage company under Codification Topic No. 915 developing alternate renewable energy sources.

The Company merged with Treaty Petroleum, Inc., a Texas Corporation under a transaction commonly referred to as a reverse merger.  With the change in ownership in December 2008, we embarked on a new business plan, focusing on oil and gas production.

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Treaty Energy Drilling, C&C Petroleum Management, LLC,, and Treaty Belize Energy, Ltd., in which the Company holds a 76% interest.  All significant intercompany transactions have been eliminated.

The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of financial information for the interim periods presented.  These adjustments are of a normal recurring nature and include appropriate estimated provisions.

9

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates underlying these consolidated financial statements include the estimated quantities of proved oil reserves used to compute depletion of oil and natural gas properties and the estimated fair value of asset retirement obligations.

All of the Company’s accounting policies are not included in this Form 10-Q.  A more comprehensive set of accounting policies adopted by the Company are included on our Form 10-K as of December 31, 2011 and are herein incorporated by reference.

Revenue Recognition

The Company recognizes oil, gas and natural gas condensate revenue in the period of delivery. Settlement on sales occurs anywhere from two weeks to two months after the delivery date. The Company recognizes revenue when an arrangement exists, the product has been delivered, the sales price is fixed or determinable, and collectability is reasonably assured.

The Company recognizes drilling revenue in the period services are rendered.  The Company recognizes revenue when a drilling engagement exists, the service has been rendered, the contract fee is fixed or determinable, and collectability is reasonably assured.

Stock-Based Compensation

In December of 2004, the Financial Accounting Standards Board (FASB) issued guidance now codified as Topic 718 (“Topic 18”) which applies to transactions in which an entity exchanges its equity instruments for goods or services and also applies to liabilities an entity may incur for goods or services that are based on the fair value of those equity instruments. For any unvested portion of previously issued and outstanding awards, compensation expense is required to be recorded based on the previously disclosed Topic 18 methodology and amounts.  Prior periods presented are not required to be restated. The Company adopted Topic 18 at its inception and applied the standard using the modified prospective method.

Class A Convertible Preferred shares

During the quarter ended June 30, 2011 the Company issued 36,000 shares of Class A Convertible Preferred shares. These shares have a stated value of $5 per share. The preferred shares are convertible into common stock at varying rates for each third (12,000 shares) of the preferred stock issued. The first tranche is convertible according to the stated value of the preferred shares divided by $0.03, the second tranche at $0.05, and the final tranche at $0.10. These preferred shares are also to be repaid to the holder in the event that the Company’s share price does not exceed the conversion value during the 24 months from the issuance date. The preferred shares are redeemable at their stated value of $5 per share on April 8, 2013 if this event occurs.

Based on these shares being conditionally redeemable under circumstances that are not within the control of the Company, these shares were accounted for outside of permanent equity and liabilities consistent with the applicable literature on conditionally redeemable preferred stock. The shares will be re-classed to permanent equity upon conversion to commons stock or to liabilities if redemption becomes certain to occur.  As of March 31, 2012, 12,000 shares convertible at $0.10 and valued at $60,000 were outstanding.

10

Accounting for Asset Retirement Obligations

The Company accounts for conditional asset retirement obligations in accordance with FASB ASC 410-20.  Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. The Company estimates a fair value of the obligation on each well in which it owns an interest by identifying costs associated with the future dismantlement and removal of production equipment and facilities and the restoration and reclamation of a production operation’s surface to a condition similar to that existing before oil and natural gas extraction began.

In general, the amount of an Asset Retirement Obligation (“ARO”) and the costs capitalized will be equal to the estimated future cost to satisfy the abandonment obligation using current prices that are escalated by an assumed inflation factor up to the estimated settlement date which is then discounted back to the date that the abandonment obligation was incurred using an assumed cost of funds for the Company. After recording these amounts, the ARO is accreted to its future estimated value using the same assumed cost of funds and the liability is increased each period as the retirement obligation approaches.  See Note 11 for a discussion of our estimated Asset Retirement Obligation.

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

In December 2010, the FASB issued authoritative guidance that modified Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts.  For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists.  In determining whether it is more likely than not  that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist such as if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.  This new authoritative guidance became effective on January 1, 2012 and did not have a significant impact on the Company’s financial statements.

In May 2011, the FASB amended the accounting guidance related to fair value measurement and disclosure, the result of which being common fair value measurement and disclosure requirements in U.S. GAAP and IFRS’s.  The FASB does not intend for the amendment to result in a change in the application of the requirements in Topic 820.  Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements.  Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  The amendments became effective January 1, 2012 and had no significant impact on the Company’s financial statements.

In June 2011, the FASB amended the accounting guidance for presentation of other comprehensive income.  The new guidance requires that all nonowner changes in stockholders equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The new guidance is effective for the fiscal year ending December 31, 2012 and is not expected to have a significant impact on the Company’s financial statements.  In addition, this guidance requires the entity to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented.  In December 2011, the FASB issued an amendment to the guidance released in June 2011 to defer the changes related to the presentation of reclassification adjustments to give the FASB more time to reassess and evaluate alternative presentation formats.  Thus, the requirements for the presentation of reclassifications out of accumulated other comprehensive income that were in place before the issuance of the June 2011 guidance were reinstated until their deliberation is complete.

In September 2011, the FASB amended guidance pertaining to goodwill impairment testing.  The amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.  An entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.  The guidance became effective January 1, 2012 with no significant impact on the Company’s financial statements.

11

In December 2011, the FASB issued guidance which relates to deconsolidation events. Under this amendment, when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of the default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance in Subtopic 360-20, Property, Plant and Equipment - Real Estate Sales, to determine whether it should derecognize the in substance real estate.  This guidance is effective for the fiscal year ending December 31, 2013 and is not expected to have a significant impact on the Company’s financial statements.

In December 2011, The FASB issued authoritative guidance to provide enhanced disclosures in the financial statements about offsetting and netting arrangements.  The new guidance requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting agreement.  This guidance was issued to facilitate comparison between financial statements prepared on a U.S. GAAP and IFRS reporting. The new guidance will be effective January 1, 2013 and is not expected to have a significant impact on the Company’s financial statements.

NOTE 4 – GOING CONCERN

The accompanying consolidated financial statements have been prepared assuming that Treaty will continue as a going concern. As shown in these consolidated financial statements, we have had continuing negative cash flows from operations and a working capital deficit as of March 31, 2012.  These conditions raise substantial doubt as to our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.  Management intends to finance these deficits by making additional shareholder notes and seeking additional outside financing through either debt or sales of its common stock.

NOTE 5 – OIL AND GAS PROPERTIES

There were no acquisitions during the three months ended March 31, 2012.

Our geographical proved and unproved properties are as follows:

	03/31/12			12/31/11
Oilfield Support Equipment	$	1,141,701		$	1,141,701
Less: accumulated depreciation		(148,017	)		(107,353	)
Total		993,684			1,034,348
Proved developed producing:
Texas	$	105,494		$	105,494
Less: accumulated depletion		(25,475	)		(18,806	)
Total		80,019			87,408
Unproved:
Belize		48,075			48,075
Total	$	48,075		$	48,075

12

Production of Oil from all fields

We recorded depletion expense of $7,389 for the three  months ended March 31, 2012 based on total production of approximately 1,076 barrels.

For the three months ended March 31, 2012, we shipped 665.14 barrels, and reflect a $16,400  net  receivable (after  royalty and production tax reductions) for shipments made prior to March 31, 2012.

Carved Out Production Payment

As noted in the 10-K filed for the year ended December 31, 2011, we entered into an agreement with an investor to sell a 5% permanent royalty and a 15% temporary royalty to be paid until production reaches 200 barrels per day for $600,000.  The interests for both the permanent and temporary royalties relate to all current and future Texas leases.  Once total Texas production exceeds 200 barrels per day, the temporary 15% royalties will revert to Treaty Energy Corporation.

In recording the temporary portion of the royalties sold, an advance on a production payment liability was established.  Since the amount of proceeds to be paid out in the future is not readily determinable and the Company is not responsible for any shortfall in payment related to future production, the temporary 15% is treated as a “Carved-Out Production Payment Payable in Product” consistent with the guidance in ASC 932-10.  Moreover, since the payout amounts are uncertain, no allocation of the proceeds between the permanent 5% and the temporary 15% Overriding Royalty was made, and therefore, no gain or loss was recorded on the transaction.

Consistent with the aforementioned guidance, the cash received related to the 15% carved-out production interest is treated as deferred revenue and amortized with production and payment to the holder.  The proportional amount of carrying value of oil and gas assets will be amortized with production to match the costs to the production periods.

Amortization was based on the independent reserve report and is subject to future changes in estimates.

For the three months ended March 31, 2012 and  March 31, 2011, the amortization of the Carved Out Production payment was $1,496 and $ -0-,  respectively.

For the three months ended March 31, 2012 and March 31, 2011, the amortization of the Deferred Revenue was $24,668 and $ -0-,  respectively

13

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT

Other property, plant and equipment consist principally of drilling rigs, and office furniture and equipment.  Historical cost and accumulated depreciation are as follows:

	03/31/12			12/31/11
Drilling rigs and related equipment	$	530,247		$	467,656
Office equipment		5,165			3,958
Furniture and fixtures		1,000			1,000
Vehicles		114,020			42,520
Equipment		24,598			32,474
Total property, plant and equipment - at cost		675,030			547,608
Less: accumulated depreciation		(81,329	)		(53,135	)
Net property, plant and equipment - other	$	593,701		$	494,473

Assets other than drilling equipment and vehicles generally have estimated useful lives of three years.  Estimated useful lives of drilling equipment and vehicles is five years .

NOTE 7 – NOTES PAYABLE

As of March 31, 2012 and December 31, 2011, we had notes and accrued interest payable totaling  $823,583 and $829,095, respectively.

This consisted of the following:

Notes and Interest Payable to Previous Officers and Directors (Principal of $156,545 and Accrued Interest of $18,814 and $17,644 as of March 31, 2012 and December 31, 2011, respectively)

These liabilities arose principally between January, 2007 and December, 2008 as cash contributions and accrued compensation to officers and directors of Treaty Petroleum, Inc. with whom Treaty Energy Corporation merged in December of 2008.  Some additional compensation was accrued during 2009 until the Crockett County, Texas leases were lost.

This note is subject to following legal actions:

On January 29, 2010, a lawsuit (Highground et al. versus Ronald L. Blackburn et al.) was filed in the 22nd Judicial District Court, Parish of St. Tammany, Louisiana naming Treaty Energy Corporation, among others, as a defendant.  The lawsuit alleges certain wrongdoings by the defendants (other than Treaty) which have no bearing on our operations since inception.  The lawsuit also alleges certain monies owed to some of the plaintiffs by the Company.

On March 11, 2010, we filed a Notice of Removal of the state action to the United States District Court, Eastern District of Louisiana, based upon the diversity of all the parties.  The case has been moved to the United States District Court.

14

On April 11, 2010, the defendants filed a countersuit against the plaintiffs seeking damages against Highground, et al based on misrepresentation of the Crockett County, Texas leases.

In April , 2010, some of the plaintiffs in this lawsuit filed for protection under federal bankruptcy laws.  This caused the action to be moved to the federal bankruptcy courts where it remains as of the filing of this report.

The notes bear interest at 3%.  Management believes that the interest rate stated in these notes does not adequately represent the Company’s incremental cost of capital.  Therefore, we have imputed interest at an additional 5% by charging interest expense and increasing Additional Paid in Capital.  For the three months ended March 31, 2012, we have charged interest expense and increased interest payable in the amount of $1,170 for the amount of the 3% nominal interest on the notes.  We have also charged interest expense (and increased Additional Paid in Capital) with $1,953 for the additional imputed interest at 5%.

Subsequent to March 31, 2012, the lawsuit was ruled upon and the Company was determined to bear no liability.  The effects of this favorable judgment will be reflected in future filings.

Promissory Note Issued for the Acquisition of the Great 8 lease (principal of $297,476 and $354,219  as of March 31, 2012 and  December 31, 2011, respectively, and accrued interest of $ 1,590 and $146 as of March 31, 2012 and December 31, 2011, respectively)

On May 31, 2011, we issued a promissory note in the amount of $692,539 for the Great 8 leases in Texas, the payment terms of which are: monthly payments including interest and principal with the final payment due on June 1, 2012. This note accrues interest at 5%.  At March 31, 2012, the Company was behind one installment on its payment obligations with this note.

Promissory Note Issued for Cash Deposit (principal of $ 150,000 and $150,000  as of March 31, 2012 and December 31, 2011, respectively, and accrued interest of $ 6,658 and $2,170 as of March 31, 2012 and December 31, 2011, respectively)

On November 14, 2011, we issued a promissory note in the amount of $150,000 in return for a cash advance. Stated interest on the loan is at 12% with quarterly payments starting March 31, 2012.  As of March 31, 2012, payment for the first installment had not been made.

Promissory Note Issued for the Acquisition of the Wooldridge lease (principal of $30,000 and $120,000  as of March 31, 2012 and  December 31, 2011.

On November 25, 2011, we issued a promissory note in the amount of $120,000 for the Wooldridge leases in Texas, the payment terms called for four equal monthly payments beginning December 25, 2011 .  The note was discounted to reflect the inherent interest within the agreement based on an interest rate of 8% which resulted in a discount value of $3,983, all of which was amortized during the three months ended March 31, 2012.  The net balance of this note as of March 31, 2012, was $30,000.

Promissory Note Issued for Cash Deposit (principal of $ 50,000 and $-0- as of March 31, 2012 and  December 31, 2011, respectively, and accrued interest of $ 2,500 and $-0- as of March 31, 2012 and December 31, 2011, respectively)

On January 13, 2012, we issued a promissory note in the amount of $50,000 in return for a cash advance.  Payments are interest only at 5% per month for one year at which time the principal amount is due and payable.

Promissory Note Issued for Cash Deposit (principal of $ 100,000 and $-0-  as of March 31, 2012 and  December 31, 2011, respectively, and accrued interest of $ 10,000 and $-0- as of March 31, 2012 and December 31, 2011, respectively)

On January 30, 2012, we issued a promissory note in the amount of $100,000 in return for a cash advance.  Payments are interest only at 5% per month for one year at which time the principal amount is due and payable.  This note is collateralized with 10,000,000 common shares of the Company. In the event the Company defaults on the note these shares would be owed to the lender. The agreement requires that the Company provide additional collateral if the fair value of the shares decreases below $200,000 while the note is outstanding. As of March 31, 2012 the value of the collateral exceeded $200,000.

All related party balances related to salary and consulting agreements have been recorded within accrued liabilities. The Company re-paid or had debts forgiven for all related party debt related to financing during the three months ended March 31, 2012, see note 8 below related to debts forgiven. During the three months ended March 31, 2012 interest totaling$1,953, was imputed for the balances outstanding during the period based on the Company’s incremental borrowing rate.

15

NOTE 8 – SHAREHOLDERS’ EQUITY

We are authorized to issue 750 million shares of our common stock.  At December 31, 2011, we had 746,449,069 shares issued and 737,449,069 outstanding.  During the three months ended March 31, 2012, we did not issue any shares.

Stock Payable

●   On May 20, 2011 the Company entered into a note agreement for $100,000 that required payment of 1,000,000 shares as an inducement to the lender. Due to the short term nature of the note the full value of the shares of $39,000 was expensed and recorded to stock payable with the agreement. These shares remained unissued as of March 31, 2012, and are recorded within stock payable as of March 31, 2012.

●   On May 20, 2011, the Company agreed to issue 1,500,000 shares for $20,000 of cash proceeds received. These shares remained unissued as of March 31, 2012, and are recorded within stock payable as of March 31, 2012.

●   On July 1, 2011 we contracted with a broker to purchase and sell shares of our common stock. As of March 31, 2012, $26,875 had been received for 1,343,750 shares subscribed to but not yet issued by the Company.

Treasury Stock

On July 1, 2011, we purchased  20,000,000 shares of our stock from to a related company also controlled by our Chairman and Chief Executive Officer, Andrew Reid.  The shares were valued at $790,000, the amount the Company agreed to re-pay with an outstanding liability. This amount was equal to the fair value of the shares acquired on the acquisition date.

Also, on July 1, 2011, we issued 11,000,000 of those shares and reduced the Treasury Stock balance by $434,500.   Losses on the sale of Treasury Stock are not reflected on the Income Statement, therefore the difference between cost and the proceeds  received was charged to Additional Paid in Capital. As of March 31, 2012, $355,500 and 9,000,000 shares remain in treasury stock.

Imputed Interest

Pursuant to our notes payable to our former corporate secretary and the former operator of the Crockett County leases, the aggregate unpaid principal amount of which is $156,545, and which forms a portion of the lawsuit discussed in Note 5 to our annual report filed on Form 10-K as of December 31, 2011, we accrue simple interest at 3% per year.  This resulted in an interest charge collectively of $ 1,170 for three months ended March 31, 2012.

Management believes that the stated interest on these notes is not equivalent to the Company’s realistic cost of capital.  We therefore imputed an additional 5% interest and charged interest expense with an additional $1,953 for the three months ended March 31, 2012.

16

NOTE 9 – PENDING LITIGATION

On January 29, 2010, a lawsuit (Highground et al. versus Ronald L. Blackburn et al.) was filed in the 22nd Judicial District Court, Parish of St. Tammany, Louisiana naming Treaty Energy Corporation, among others, as a defendant.

The lawsuit alleges certain wrongdoings by the defendants (other than Treaty) which have no bearing on our operations since inception.  The lawsuit also alleges certain monies owed to the some of the plaintiffs by the Company.

On March 11, 2010, we filed a Notice of Removal of the state action to the United States District Court, Eastern District of Louisiana, based upon the diversity of all the parties.  The Complainants may challenge the removal, but as of the date of this report have not responded.

On April 11, 2010, the defendants filed a countersuit against the plaintiffs seeking damages against Highground, et al based on misrepresentation of the Crockett County, Texas leases.

Several of the defendants in the lawsuit filed for bankruptcy protection.  On April 30, 2010, the case was moved to the US Bankruptcy Court for the Eastern District of Louisiana, Section B.

Subsequent to March 31, 2012,  a determination by the court was made in which the Company was absolved of any financial liability.

NOTE 10 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities at March 31, 2012 and December 31, 2011 consist of the following:

	03/31/12		12/31/11
Trade accounts payable	$	401,741	$	425,903
Royalties payable		9,753		-
Production taxes payable		756		-
Liabilities associated with our reverse merger in December, 2008		200,380		200,380
Bank overdraft		-		1,982
All-Secure payable		79,884		89,347
Total	$	692,514	$	717,612

During the three months ended March 31, 2012, the Company owed three related parties a combined liability of $90,100 for cash advances and for accrued consulting fees.  At March 31, 2012, the three parties each agreed to waive their liability and contribute the total amount due to Additional Paid in Capital.  At March 31, 2012, the Company had -0- remaining liability to these related parties.

As of March 31, 2012 the Company had a cash call liability for $74,200. This liability represents cash calls the Company made for their Belize property for the continuation of development, drilling and exploration.  Whenever the funds are utilized and the related costs are incurred the liability will be relieved against the development costs as the Company will no longer be obligated after the agreed upon work is performed.

17

NOTE 11 – ASSET RETIREMENT OBLIGATION

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

	03/31/12		12/31/11
Beginning Balance	$	130,397	$	128,367
Accretion to balance sheet date		1,176		2,030
Asset retirement obligation at balance sheet date	$	131,573	$	130,397

The Company recorded an accretion expense of $1,176 and $ -0- for the three months ended March 31, 2012 and March 31, 2011, respectively.

NOTE 12 – RELATED PARTY TRANSACTIONS

During the three months ended March 31, 2012, we had the following transactions with related parties:.

●   We accrued $90,100 in compensation costs to our Chairman and CEO and two other related consultants.  At March 31, 2012, they each donated their accrued amounts to Additional Paid in Capital.

●   We borrowed a net amount of  $741,404 from an entity owned by our Chairman and CEO, Andrew Reid.  The related party elected to contribute the amount owed to Additional Paid in Capital   As of March 31, 2012, the company had -0- liability to this related party.

●   An entity owned by our Chairman and CEO, Andrew Reid, paid 4,000,000 shares they held in our common stock to an acquisition target as a deposit for a potential acquisition. The shares were valued on the date they were issued at $140,000 and recorded as an addition to other assets and additional paid in capital as the entity contributed the shares and is not seeking repayment. The acquisition had not closed as of March 31, 2012 and relates to a Belize target with undrilled and unproved oil and gas leases. If the acquisition is closed the Company will be obligated to pay $4,500 monthly for 3 years.

NOTE 13 – SUBSEQUENT EVENTS

Subsequent to March 31, 2012, we

●   Paid an additional $89,286 on our promissory note on the Great Eight Texas leases

●   Paid the remaining $30,000on our promissory note on the Wooldridge, Texas leases

●   Paid an additional $21,875 on our promissory note on an equipment purchase

We have evaluated subsequent events through the date of issuance of the financial statements.

18

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with management’s discussion and analysis contained in our 2011 Annual Report on Form 10-K, as well as the financial statements and notes hereto included in this quarterly report on Form 10-Q. The following discussion contains forward-looking statements that involve risks, uncertainties, and assumptions, such as statements of our plans, objectives, expectations, and intentions. Our actual results may differ materially from those discussed in these forward-looking statements because of the risks and uncertainties inherent in future events.

Results of Operations

Three Months Ended March 31, 2012, compared with Three Months Ended March 31, 2011

We had $57,016 in revenues for the three months ended March 31, 2012 from our recent Texas acquisitions versus $  -0- for the same period in 2011..

Our lease operating expenses were $77,491 in 2012 versus $106,715 in 2011 due to increased management oversight of expenses resulting from our Texas and Belize acquisitions.

General and administrative expenses have increased from $142,548 for the three months ended March 31, 2011 to $551,816 in 2012, mostly resulting from additional personnel, office space and related expenses required to manage the growth in operations.

Our depreciation, depletion and amortization expenses for the three months ended March 31, 2012 were $78,265 as compared to $2,346 for the same period in 2011, owing to the start of depreciation on our equipment  that we use in Belize, from our unit of production depletion in Texas, and reclassification to depreciable equipment following the January 1, 2012 reserve report.

Interest expense is higher during the three months ended March 31, 2012 versus the same period in 2011, due to higher debt levels during the first three months of the year.

Liquidity and Capital Resources

Our financial statements have been prepared on a going concern basis that contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.

Currently, we are able to maintain our existing operations through funding agreements with related party companies.  The existing cash balances and internally generated cash flows are from sales of oil production.  We have determined that our existing capital structure is adequate to fund our planned growth.

We intend to finance our drilling, work over and acquisition program by related party loans and private debt offerings.  There can be no assurance that we will be successful in procuring the financing we are seeking.  Future cash flows are subject to a number of variables, including the level of production, oil and gas prices and successful drilling efforts.  There can be no assurance that operations and other capital recourses will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures.

Plan of Operation

Over the next twelve months we intend to develop the following initiatives:

19

Revenue Generation

In Texas,  we have been reworking the wells purchased during 2011, allowing additional sources of production.  This process will continue through 2012 and into 2013, gradually increasing our daily oil output.  We have received funding commitments for the rework program and expect to increase  production from our current levels in the future.

Drilling

Treaty currently has hundreds of proven, undeveloped acreage in which we can drill on.  Depth of the new wells will range from a shallow 550 feet to 2600 feet.  Some wells will reach deeper than 4500 feet.

On November 14, 2011 Treaty acquired the Mark H. & Eula E. Wooldridge Leases, totaling 260 acres.    This Lease has one well currently producing 5 barrels of oil per day.  Treaty has secured funding in the amount of $700,000 in order to infield drill twelve new wells to 550 feet.  Drilling commenced and these wells are expected to produce 14 to 22 barrels of oil per day each.  This will allow us to reach our goal of 200 barrels of oil per day by July, 2012

Treaty has three additional wells to drill on the Shotwell and Kennard Leases.  We are seeking funding for these wells, which we expect to produce at the depth 2,500 feet.  We estimate them producing anywhere from 30 to 150 barrels of oil per day initially.

Financing

We have made arrangement for private lending on many of the projects currently in progress.  As we progress we expect to require additional funds for the purchase of additional equipment, leases, and operations.

There is no guarantee that we can raise the required capital to make acquisitions, drill new wells, or repair equipment on any acquired properties, or that undertaking such repairs, acquisitions and drilling program will make us profitable or self-sustaining.

ITEM 3 - QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A smaller reporting company is not required to provide the information required by this item.

ITEM 4 - CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our Chief Executive Officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer, as appropriate to allow timely decisions regarding required disclosure.

20

Our management, including our principal executive officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. To address the material weaknesses, we performed additional analysis and other post-closing procedures in an effort to ensure our consolidated financial statements included in this annual report have been prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

Our annual report on Form 10-K as of December 31, 2011 reported the following material weaknesses:

1.

As of December 31, 2011, we did not maintain effective controls over the control environment.  Specifically we have not developed and effectively communicated to our employees its accounting policies and procedures.  This has resulted in inconsistent practices.  Further, the Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-B.  Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute e a material weakness.

2.

As of December 31, 2011, we did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements.   Accordingly, management has determined that this control deficiency constitutes a material weakness.

Management has been addressing these weaknesses during the three months ended March 31, 2012, however, believe that the material weakness assessment is unchanged.

Change In Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

21

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

On January 29, 2010, a lawsuit (Highground et al. versus Ronald L. Blackburn et al.)was filed in the 22nd Judicial District Court, Parish of St. Tammany, Louisiana naming Treaty Energy Corporation, among others, as a defendant.

The lawsuit alleges certain wrongdoings by the defendants (other than Treaty) which have no bearing on our operations since inception.  The lawsuit also alleges certain monies owed to the some of the plaintiffs by the Company.

On March 11, 2010, we filed a Notice of Removal of the state action to the United States District Court, Eastern District of Louisiana, based upon the diversity of all the parties.  The Complainants may challenge the removal, but as of the date of this report have not responded.

On April 11, 2010, the defendants filed a countersuit against the plaintiffs seeking damages against Highground, et al based on misrepresentation of the Crockett County, Texas leases.

Several of the defendants in the lawsuit filed for bankruptcy protection.  On April 30, 2010, the case was moved to the US Bankruptcy Court for the Eastern District of Louisiana, Section B.

Subsequent to March 31, 2012, a judgment was issued that effectively absolved the Company of any financial responsibility.

We may be involved from time to time in ordinary litigation, negotiation and settlement matters that will not have a material effect on our operations or finances. We are not aware of any pending or threatened litigation against us or our officers and directors in their capacity as such that could have a material impact on our operations or finances, except as disclosed in this report.

ITEM 1A – RISK FACTORS

Our business has many risks. Factors that could materially adversely affect our business, financial condition, operating results or liquidity and the trading price of our common stock are described under “Risk Factors in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, filed April 15, 2011.

This information should be considered carefully, together with other information in this report and other reports and materials we file with the Securities and Exchange Commission.

22

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES

See Note 9 for a listing of shares issued during the three months ended March 31, 2012.

Options and Warrants

During the three months ended March 31, 2012, no options or warrants have been granted, expired or exercised.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5 - OTHER INFORMATION

None.

23

ITEM 6 – EXHIBITS

Exhibit No.	Description of Exhibit
3.1	Articles of Incorporation, as filed August 1, 1997 (included as Exhibit 3.1 to the Form 10-SB12G filed November 10, 1999, and incorporated herein by reference).
3.2	Bylaws (included as Exhibit 3.2 to the Form 10-SB12G filed November 10, 1999, and incorporated herein by reference).
3.3	Articles of Amendment to the Articles of Incorporation, as filed August 23, 1997 (included as Exhibit 3.3 to the Form 10-SB12G filed November 10, 1999, and incorporated herein by reference).
3.4	Articles of Amendment to the Articles of Incorporation, as filed November 20, 1998 (included as Exhibit 3.4 to the Form 10-SB12G filed November 10, 1999, and incorporated herein by reference).
3.5	Articles of Amendment to the Articles of Incorporation, as filed May 16, 2003 (included as Exhibit 3.5 to the Form 10-SB12G filed November 10, 1999, and incorporated herein by reference).
4.1	2003 Stock Benefit Plan, dated July, 1, 2003 (included as Exhibit 4.1 to the Form S-8 filed July 23, 2003, and incorporated herein by  reference).
4.2	Form of Class A Warrant (included as Exhibit 4 to the Form 8-K filed March 15, 2005, and incorporated herein by reference).
4.3	Form of Class B Warrant (included as Exhibit 4 to the Form 8-K filed March 15, 2005, and incorporated herein by reference).
4.4	Form of Class C Warrant (included as Exhibit 4 to the Form 8-K filed March 15, 2005, and incorporated herein by reference).
4.5	Subscription Agreement between the Company and various subscribers  (included as Exhibit 10.1 to the Form SB-2/A filed September 14, 2005, and incorporated herein by reference).
4.6	Subscription Agreement between the Company and various subscribers (included as Exhibit 4 to the Form 8-K filed March 15, 2005, and incorporated herein by reference).
14.1	Corporate Code of Ethics (included as Exhibit 14 to From 10-KSB filed March 16, 2004, and incorporated herein by reference).
2.1	Subsidiaries of the registrant (filed herewith).
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1	Certification of Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

24

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: June 25, 2012	Treaty Energy Corporation
	By:	/s/ Andrew V. Reid
		Andrew V. Reid
		Chief Executive Officer

25

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Andrew Reid, Chief Executive Officer of TREATY ENERGY CORPORATION (the “Registrant”) certify that:

1. I have reviewed the report being filed on Form 10-Q.

2. Based on my knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report;

3. Based on my knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of TREATY ENERGY CORPORATION as of, and for, the periods presented in the report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-a5(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-a5(f)) for the Registrant and have;

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure the material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation.

(d) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal three months (the Registrant's fourth fiscal three months in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and;

5. I have disclosed, based on our most recent evaluation, to the TREATY ENERGY CORPORATION auditors and the audit committee of the board of directors (or persons fulfilling the equivalent function):

i.        All significant deficiencies in the design or operation of internal controls which could adversely affect TREATY ENERGY CORPORATION’S ability to record, process, summarize and report financial data and have identified TREATY ENERGY CORPORATION's auditors any material weaknesses in internal controls; and

ii.       Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal controls; and

6. I have indicated in the report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: June 25 , 2012	/s/ Andrew V. Reid
	Andrew V. Reid Chief Executive Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of TREATY ENERGY CORPORATION (the "Company") on Form 10-Q as filed with the Securities and Exchange Commission on the date hereof (the "Report'), I, Andrew V. Reid, Chief Executive Officer of the Company, certify, pursuant to 18 USC section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: June 25 , 2012	/s/ Andrew V. Reid
	Andrew V. Reid, Chief Executive Officer

XML

GOING CONCERN

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

GOING CONCERN

NOTE 4 – GOING CONCERN

The accompanying consolidated financial statements have been prepared assuming that Treaty will continue as a going concern. As shown in these consolidated financial statements, we have had continuing negative cash flows from operations and a working capital deficit as of March 31, 2012. These conditions raise substantial doubt as to our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. Management intends to finance these deficits by making additional shareholder notes and seeking additional outside financing through either debt or sales of its common stock.

XML

RECENT ACCOUNTING PRONOUNCEMENTS

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

RECENT ACCOUNTING PRONOUNCEMENTS

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

In December 2010, the FASB issued authoritative guidance that modified Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist such as if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This new authoritative guidance became effective on January 1, 2012 and did not have a significant impact on the Company’s financial statements.

In May 2011, the FASB amended the accounting guidance related to fair value measurement and disclosure, the result of which being common fair value measurement and disclosure requirements in U.S. GAAP and IFRS’s. The FASB does not intend for the amendment to result in a change in the application of the requirements in Topic 820. Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments became effective January 1, 2012 and had no significant impact on the Company’s financial statements.

In June 2011, the FASB amended the accounting guidance for presentation of other comprehensive income. The new guidance requires that all nonowner changes in stockholders equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new guidance is effective for the fiscal year ending December 31, 2012 and is not expected to have a significant impact on the Company’s financial statements. In addition, this guidance requires the entity to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. In December 2011, the FASB issued an amendment to the guidance released in June 2011 to defer the changes related to the presentation of reclassification adjustments to give the FASB more time to reassess and evaluate alternative presentation formats. Thus, the requirements for the presentation of reclassifications out of accumulated other comprehensive income that were in place before the issuance of the June 2011 guidance were reinstated until their deliberation is complete.

In September 2011, the FASB amended guidance pertaining to goodwill impairment testing. The amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. An entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The guidance became effective January 1, 2012 with no significant impact on the Company’s financial statements.

In December 2011, the FASB issued guidance which relates to deconsolidation events. Under this amendment, when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of the default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance in Subtopic 360-20, Property, Plant and Equipment - Real Estate Sales, to determine whether it should derecognize the in substance real estate. This guidance is effective for the fiscal year ending December 31, 2013 and is not expected to have a significant impact on the Company’s financial statements.

In December 2011, The FASB issued authoritative guidance to provide enhanced disclosures in the financial statements about offsetting and netting arrangements. The new guidance requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting agreement. This guidance was issued to facilitate comparison between financial statements prepared on a U.S. GAAP and IFRS reporting. The new guidance will be effective January 1, 2013 and is not expected to have a significant impact on the Company’s financial statements.

XML

Consolidated Balance Sheets (Unaudited) (USD $)	Mar. 31, 2012	Dec. 31, 2011
ASSETS
Cash and equivalents	$ 25,941	$ 14,716
Accounts receivable	16,400	23,438
Total current assets	42,341	38,154
Oil and gas properties (successful efforts)
Proved producing, net	105,494	105,494
Unproved	48,075	48,075
Oilfield support equipment	1,141,701	1,141,701
Less: accumulated depreciation, depletion and amortization	(173,492)	(125,439)
Net oil and gas properties and support equipment	1,121,778	1,169,831
Property, plant and equipment, net	593,701	494,473
Other Assets	205,363	65,363
Carved out interest, net	74,509	76,005
TOTAL ASSETS	2,037,692	1,843,826
LIABILITIES
Accounts payable and accrued liabilities	692,514	717,612
Notes and accrued interest payable	823,583	829,095
Cash Call Liability	74,200	0
Purchase Option Liability	25,000	25,000
Total current liabilities	1,615,297	1,571,707
Deferred revenue	520,839	545,507
Asset retirement obligation	131,573	130,397
TOTAL LIABILITIES	2,267,709	2,247,611
Convertible Redeemable Class A Preferred Stock (12,000 issued and outstanding at March 31, 2012 and December 31, 2011, respectively, $5 redemption value )	60,000	60,000
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock - par value $0.001, 50 million shares authorized, none issued or outstanding at March 31, 2012 and December 31, 2011	0	0
Common stock – par value $0.001, 750 million shares authorized, 746,449,069 issued at March 31, 2012 and December 31, 2011, and 737,449,069 shares outstanding at March 31, 2012 and December 31, 2011, respectively	746,449	746,449
Treasury Stock	(355,500)	(355,500)
Additional paid in capital	9,704,088	8,730,631
Common stock payable	85,875	85,875
Accumulated loss - pre exploration stage	(644,829)	(644,829)
Accumulated loss	(9,733,131)	(8,963,829)
Accumulated other comprehensive income	390	390
Total stockholders' equity (deficit)	(196,658)	(400,813)
Non-Controlling Interest	(93,359)	(62,972)
Total Controlled Stockholder's equity (deficit)	(290,017)	(463,785)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)	$ 2,037,692	$ 1,843,826

XML

ORGANIZATION AND NATURE OF BUSINESS

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

ORGANIZATION AND NATURE OF BUSINESS

NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

Information Regarding Forward-Looking Statements

This report contains forward-looking statements that involve risks and uncertainties. We generally use words such as "believe," "may," "could," "will," "intend," "expect," "anticipate," "plan," and similar expressions to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks described below and elsewhere in this report. Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made, and our future results, levels of activity, performance or achievements may not meet these expectations. We do not intend to update any of the forward-looking statements after the date of this document to conform these statements to actual results or to changes in our expectations, except as required by law.

History

Treaty Energy Corporation, formerly known as Alternate Energy Corp., (“Treaty”, “the Company”, “we”, or “us”) was incorporated as COI Solutions, Inc. in the State of Nevada in August, 1997.

We incorporated as COI Solutions, Inc. on August 1, 1997 as a Nevada corporation. On May 22, 2003, we acquired all the assets of AEC I Inc., formerly known as Alternate Energy Corporation, and changed our name to Alternate Energy Corp. We commenced active business operations on June 1, 2003 and were a development stage company under Codification Topic No. 915 developing alternate renewable energy sources.

The Company merged with Treaty Petroleum, Inc., a Texas Corporation under a transaction commonly referred to as a reverse merger. With the change in ownership in December 2008, we embarked on a new business plan, focusing on oil and gas production.

XML

BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Treaty Energy Drilling, C&C Petroleum Management, LLC,, and Treaty Belize Energy, Ltd., in which the Company holds a 76% interest. All significant intercompany transactions have been eliminated.

The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of financial information for the interim periods presented. These adjustments are of a normal recurring nature and include appropriate estimated provisions.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates underlying these consolidated financial statements include the estimated quantities of proved oil reserves used to compute depletion of oil and natural gas properties and the estimated fair value of asset retirement obligations.

All of the Company’s accounting policies are not included in this Form 10-Q. A more comprehensive set of accounting policies adopted by the Company are included on our Form 10-K as of December 31, 2011 and are herein incorporated by reference.

Revenue Recognition

The Company recognizes oil, gas and natural gas condensate revenue in the period of delivery. Settlement on sales occurs anywhere from two weeks to two months after the delivery date. The Company recognizes revenue when an arrangement exists, the product has been delivered, the sales price is fixed or determinable, and collectability is reasonably assured.

The Company recognizes drilling revenue in the period services are rendered. The Company recognizes revenue when a drilling engagement exists, the service has been rendered, the contract fee is fixed or determinable, and collectability is reasonably assured.

Stock-Based Compensation

In December of 2004, the Financial Accounting Standards Board (FASB) issued guidance now codified as Topic 718 (“Topic 18”) which applies to transactions in which an entity exchanges its equity instruments for goods or services and also applies to liabilities an entity may incur for goods or services that are based on the fair value of those equity instruments. For any unvested portion of previously issued and outstanding awards, compensation expense is required to be recorded based on the previously disclosed Topic 18 methodology and amounts. Prior periods presented are not required to be restated. The Company adopted Topic 18 at its inception and applied the standard using the modified prospective method.

Class A Convertible Preferred shares

During the quarter ended June 30, 2011 the Company issued 36,000 shares of Class A Convertible Preferred shares. These shares have a stated value of $5 per share. The preferred shares are convertible into common stock at varying rates for each third (12,000 shares) of the preferred stock issued. The first tranche is convertible according to the stated value of the preferred shares divided by $0.03, the second tranche at $0.05, and the final tranche at $0.10. These preferred shares are also to be repaid to the holder in the event that the Company’s share price does not exceed the conversion value during the 24 months from the issuance date. The preferred shares are redeemable at their stated value of $5 per share on April 8, 2013 if this event occurs.

Based on these shares being conditionally redeemable under circumstances that are not within the control of the Company, these shares were accounted for outside of permanent equity and liabilities consistent with the applicable literature on conditionally redeemable preferred stock. The shares will be re-classed to permanent equity upon conversion to commons stock or to liabilities if redemption becomes certain to occur. As of March 31, 2012, 12,000 shares convertible at $0.10 and valued at $60,000 were outstanding.

Accounting for Asset Retirement Obligations

The Company accounts for conditional asset retirement obligations in accordance with FASB ASC 410-20. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. The Company estimates a fair value of the obligation on each well in which it owns an interest by identifying costs associated with the future dismantlement and removal of production equipment and facilities and the restoration and reclamation of a production operation’s surface to a condition similar to that existing before oil and natural gas extraction began.

In general, the amount of an Asset Retirement Obligation (“ARO”) and the costs capitalized will be equal to the estimated future cost to satisfy the abandonment obligation using current prices that are escalated by an assumed inflation factor up to the estimated settlement date which is then discounted back to the date that the abandonment obligation was incurred using an assumed cost of funds for the Company. After recording these amounts, the ARO is accreted to its future estimated value using the same assumed cost of funds and the liability is increased each period as the retirement obligation approaches. See Note 11 for a discussion of our estimated Asset Retirement Obligation.

XML

Consolidated Balance Sheets (Parenthetical) (USD $)	Mar. 31, 2012	Dec. 31, 2011
Liabilities
Convertible Redeemable Class A Preferred Stock shares issued	12,000	12,000
Convertible Redeemable Class A Preferred Stock shares outstanding	$ 12,000	$ 12,000
Convertible Redeemable Class A Preferred Stock shares outstanding	5	5
Stockholders Equity
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, authorized shares	50,000,000	50,000,000
Preferred stock, issued shares	0	0
Preferred stock, outstanding shares	0	0
Common stock, par value	$ 0.001	$ 0.001
Common stock, authorized shares	750,000,000	750,000,000
Common stock, issued shares	746,449,069	737,449,069
Common stock, outstanding shares	746,449,069	737,449,069

XML

RELATED PARTY TRANSACTIONS

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

RELATED PARTY TRANSACTIONS

NOTE 12 – RELATED PARTY TRANSACTIONS

During the three months ended March 31, 2012, we had the following transactions with related parties:.

• We accrued $90,100 in compensation costs to our Chairman and CEO and two other related consultants. At March 31, 2012, they each donated their accrued amounts to Additional Paid in Capital.
• We borrowed a net amount of $741,404 from an entity owned by our Chairman and CEO, Andrew Reid. The related party elected to contribute the amount owed to Additional Paid in Capital As of March 31, 2012, the company had -0- liability to this related party.
• An entity owned by our Chairman and CEO, Andrew Reid, paid 4,000,000 shares they held in our common stock to an acquisition target as a deposit for a potential acquisition. The shares were valued on the date they were issued at $140,000 and recorded as an addition to other assets and additional paid in capital as the entity contributed the shares and is not seeking repayment. The acquisition had not closed as of March 31, 2012 and relates to a Belize target with undrilled and unproved oil and gas leases. If the acquisition is closed the Company will be obligated to pay $4,500 monthly for 3 years.

XML

Document and Entity Information	3 Months Ended
	Mar. 31, 2012	Jun. 20, 2012
Document And Entity Information
Entity Registrant Name	Treaty Energy Corp
Entity Central Index Key	0001075773
Document Type	10-Q
Document Period End Date	Mar. 31, 2012
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		737,449,069
Document Fiscal Period Focus	Q1
Document Fiscal Year Focus	2012

XML

SUBSEQUENT EVENTS

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

SUBSEQUENT EVENTS

NOTE 13 – SUBSEQUENT EVENTS

Subsequent to March 31, 2012, we

· Paid an additional $89,286 on our promissory note on the Great Eight Texas leases

· Paid the remaining $30,000on our promissory note on the Wooldridge, Texas leases

· Paid an additional $21,875 on our promissory note on an equipment purchase

We have evaluated subsequent events through the date of issuance of the financial statements.

XML

Consolidated Statements of Operations (Unaudited) (USD $)	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
REVENUES
Oil and gas revenues	$ 57,016	$ 0
Total revenues	57,016	0
EXPENSES
Lease operating expenses	77,491	106,715
Direct drilling costs	73,672	0
Land lease costs	20,000	0
Production taxes	3,741	0
General and administrative	551,816	142,548
Depreciation, depletion and amortization	78,265	2,346
Accretion of asset retirement obligation	1,176	0
Interest expense	43,190	11,403
Total expenses	849,351	263,012
Operating loss	(792,335)	(263,012)
OTHER INCOME AND EXPENSE ITEMS
Gains (Loss) on retirement of debt	0	17,287
Gains (Loss) on sale of assets	(7,354)	0
NET LOSS	(799,689)	(245,725)
Less: loss attributable to non-controlling interests	30,387	0
Net loss attributable to Company	$ (769,302)	$ (245,725)
Net loss per common shares - basic and diluted	$ 0	$ 0
Weighted average common shares outstanding - basic and diluted	737,449,069	515,356,400

XML

NOTES PAYABLE

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

NOTES PAYABLE

NOTE 7 – NOTES PAYABLE

As of March 31, 2012 and December 31, 2011, we had notes and accrued interest payable totaling $823,583 and $829,095, respectively.

This consisted of the following:

Notes and Interest Payable to Previous Officers and Directors (Principal of $156,545 and Accrued Interest of $18,814 and $17,644 as of March 31, 2012 and December 31, 2011, respectively)

These liabilities arose principally between January, 2007 and December, 2008 as cash contributions and accrued compensation to officers and directors of Treaty Petroleum, Inc. with whom Treaty Energy Corporation merged in December of 2008. Some additional compensation was accrued during 2009 until the Crockett County, Texas leases were lost.

This note is subject to following legal actions:

On January 29, 2010, a lawsuit (Highground et al. versus Ronald L. Blackburn et al.) was filed in the 22nd Judicial District Court, Parish of St. Tammany, Louisiana naming Treaty Energy Corporation, among others, as a defendant. The lawsuit alleges certain wrongdoings by the defendants (other than Treaty) which have no bearing on our operations since inception. The lawsuit also alleges certain monies owed to some of the plaintiffs by the Company.

On March 11, 2010, we filed a Notice of Removal of the state action to the United States District Court, Eastern District of Louisiana, based upon the diversity of all the parties. The case has been moved to the United States District Court.

On April 11, 2010, the defendants filed a countersuit against the plaintiffs seeking damages against Highground, et al based on misrepresentation of the Crockett County, Texas leases.

In April , 2010, some of the plaintiffs in this lawsuit filed for protection under federal bankruptcy laws. This caused the action to be moved to the federal bankruptcy courts where it remains as of the filing of this report.

The notes bear interest at 3%. Management believes that the interest rate stated in these notes does not adequately represent the Company’s incremental cost of capital. Therefore, we have imputed interest at an additional 5% by charging interest expense and increasing Additional Paid in Capital. For the three months ended March 31, 2012, we have charged interest expense and increased interest payable in the amount of $1,170 for the amount of the 3% nominal interest on the notes. We have also charged interest expense (and increased Additional Paid in Capital) with $1,953 for the additional imputed interest at 5%.

Subsequent to March 31, 2012, the lawsuit was ruled upon and the Company was determined to bear no liability. The effects of this favorable judgment will be reflected in future filings.

Promissory Note Issued for the Acquisition of the Great 8 lease (principal of $297,476 and $354,219 as of March 31, 2012 and December 31, 2011, respectively, and accrued interest of $ 1,590 and $146 as of March 31, 2012 and December 31, 2011, respectively)

On May 31, 2011, we issued a promissory note in the amount of $692,539 for the Great 8 leases in Texas, the payment terms of which are: monthly payments including interest and principal with the final payment due on June 1, 2012. This note accrues interest at 5%. At March 31, 2012, the Company was behind one installment on its payment obligations with this note.

Promissory Note Issued for Cash Deposit (principal of $ 150,000 and $150,000 as of March 31, 2012 and December 31, 2011, respectively, and accrued interest of $ 6,658 and $2,170 as of March 31, 2012 and December 31, 2011, respectively)

On November 14, 2011, we issued a promissory note in the amount of $150,000 in return for a cash advance. Stated interest on the loan is at 12% with quarterly payments starting March 31, 2012. As of March 31, 2012, payment for the first installment had not been made.

Promissory Note Issued for the Acquisition of the Wooldridge lease (principal of $30,000 and $120,000 as of March 31, 2012 and December 31, 2011.

On November 25, 2011, we issued a promissory note in the amount of $120,000 for the Wooldridge leases in Texas, the payment terms called for four equal monthly payments beginning December 25, 2011 . The note was discounted to reflect the inherent interest within the agreement based on an interest rate of 8% which resulted in a discount value of $3,983, all of which was amortized during the three months ended March 31, 2012. The net balance of this note as of March 31, 2012, was $30,000.

Promissory Note Issued for Cash Deposit (principal of $ 50,000 and $-0- as of March 31, 2012 and December 31, 2011, respectively, and accrued interest of $ 2,500 and $-0- as of March 31, 2012 and December 31, 2011, respectively)

On January 13, 2012, we issued a promissory note in the amount of $50,000 in return for a cash advance. Payments are interest only at 5% per month for one year at which time the principal amount is due and payable.

Promissory Note Issued for Cash Deposit (principal of $ 100,000 and $-0- as of March 31, 2012 and December 31, 2011, respectively, and accrued interest of $ 10,000 and $-0- as of March 31, 2012 and December 31, 2011, respectively)

On January 30, 2012, we issued a promissory note in the amount of $100,000 in return for a cash advance. Payments are interest only at 5% per month for one year at which time the principal amount is due and payable. This note is collateralized with 10,000,000 common shares of the Company. In the event the Company defaults on the note these shares would be owed to the lender. The agreement requires that the Company provide additional collateral if the fair value of the shares decreases below $200,000 while the note is outstanding. As of March 31, 2012 the value of the collateral exceeded $200,000.

All related party balances related to salary and consulting agreements have been recorded within accrued liabilities. The Company re-paid or had debts forgiven for all related party debt related to financing during the three months ended March 31, 2012, see note 8 below related to debts forgiven. During the three months ended March 31, 2012 interest totaling$1,953, was imputed for the balances outstanding during the period based on the Company’s incremental borrowing rate.

XML

PROPERTY, PLANT AND EQUIPMENT

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

PROPERTY, PLANT AND EQUIPMENT

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT

Other property, plant and equipment consist principally of drilling rigs, and office furniture and equipment. Historical cost and accumulated depreciation are as follows:

		03/31/12		12/31/11
Drilling rigs and related equipment	$	530,247	$	467,656
Office equipment		5,165		3,958
Furniture and fixtures		1,000		1,000
Vehicles		114,020		42,520
Equipment		24,598		32,474
Total property, plant and equipment - at cost		675,030		547,608
Less: accumulated depreciation		(81,329)		(53,135)
Net property, plant and equipment - other	$	593,701	$	494,473

Assets other than drilling equipment and vehicles generally have estimated useful lives of three years. Estimated useful lives of drilling equipment and vehicles is five years.

XML

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

NOTE 10 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities at March 31, 2012 and December 31, 2011 consist of the following:

		03/31/12		12/31/11
Trade accounts payable	$	401,741	$	425,903
Royalties payable Production taxes payable		9,753 756		- -
Liabilities associated with our reverse merger in December, 2008 Bank overdraft All-Secure payable		200,380 - 79,884		200,380 1,982 89,347
Total	$	692,514	$	717,612

During the three months ended March 31, 2012, the Company owed three related parties a combined liability of $90,100 for cash advances and for accrued consulting fees. At March 31, 2012, the three parties each agreed to waive their liability and contribute the total amount due to Additional Paid in Capital. At March 31, 2012, the Company had -0- remaining liability to these related parties.

As of March 31, 2012 the Company had a cash call liability for $74,200. This liability represents cash calls the Company made for their Belize property for the continuation of development, drilling and exploration. Whenever the funds are utilized and the related costs are incurred the liability will be relieved against the development costs as the Company will no longer be obligated after the agreed upon work is performed.

XML

SHAREHOLDERS’ EQUITY

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

SHAREHOLDERS’ EQUITY

NOTE 8 – SHAREHOLDERS’ EQUITY

We are authorized to issue 750 million shares of our common stock. At December 31, 2011, we had 746,449,069 shares issued and 737,449,069 outstanding. During the three months ended March 31, 2012, we did not issue any shares.

Stock Payable

• On May 20, 2011 the Company entered into a note agreement for $100,000 that required payment of 1,000,000 shares as an inducement to the lender. Due to the short term nature of the note the full value of the shares of $39,000 was expensed and recorded to stock payable with the agreement. These shares remained unissued as of March 31, 2012, and are recorded within stock payable as of March 31, 2012.
• On May 20, 2011, the Company agreed to issue 1,500,000 shares for $20,000 of cash proceeds received. These shares remained unissued as of March 31, 2012, and are recorded within stock payable as of March 31, 2012.
• On July 1, 2011 we contracted with a broker to purchase and sell shares of our common stock. As of March 31, 2012, $26,875 had been received for 1,343,750 shares subscribed to but not yet issued by the Company.

Treasury Stock

On July 1, 2011, we purchased 20,000,000 shares of our stock from to a related company also controlled by our Chairman and Chief Executive Officer, Andrew Reid. The shares were valued at $790,000, the amount the Company agreed to re-pay with an outstanding liability. This amount was equal to the fair value of the shares acquired on the acquisition date.

Also, on July 1, 2011, we issued 11,000,000 of those shares and reduced the Treasury Stock balance by $434,500. Losses on the sale of Treasury Stock are not reflected on the Income Statement, therefore the difference between cost and the proceeds received was charged to Additional Paid in Capital. As of March 31, 2012, $355,500 and 9,000,000 shares remain in treasury stock.

Imputed Interest

Pursuant to our notes payable to our former corporate secretary and the former operator of the Crockett County leases, the aggregate unpaid principal amount of which is $156,545, and which forms a portion of the lawsuit discussed in Note 5 to our annual report filed on Form 10-K as of December 31, 2011, we accrue simple interest at 3% per year. This resulted in an interest charge collectively of $ 1,170 for three months ended March 31, 2012.

Management believes that the stated interest on these notes is not equivalent to the Company’s realistic cost of capital. We therefore imputed an additional 5% interest and charged interest expense with an additional $1,953 for the three months ended March 31, 2012.

XML

PENDING LITIGATION

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

PENDING LITIGATION

NOTE 9 – PENDING LITIGATION

On January 29, 2010, a lawsuit (Highground et al. versus Ronald L. Blackburn et al.) was filed in the 22nd Judicial District Court, Parish of St. Tammany, Louisiana naming Treaty Energy Corporation, among others, as a defendant.

The lawsuit alleges certain wrongdoings by the defendants (other than Treaty) which have no bearing on our operations since inception. The lawsuit also alleges certain monies owed to the some of the plaintiffs by the Company.

On March 11, 2010, we filed a Notice of Removal of the state action to the United States District Court, Eastern District of Louisiana, based upon the diversity of all the parties. The Complainants may challenge the removal, but as of the date of this report have not responded.

On April 11, 2010, the defendants filed a countersuit against the plaintiffs seeking damages against Highground, et al based on misrepresentation of the Crockett County, Texas leases.

Several of the defendants in the lawsuit filed for bankruptcy protection. On April 30, 2010, the case was moved to the US Bankruptcy Court for the Eastern District of Louisiana, Section B.

Subsequent to March 31, 2012, a determination by the court was made in which the Company was absolved of any financial liability.

XML

ASSET RETIREMENT OBLIGATION

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

ASSET RETIREMENT OBLIGATION

NOTE 11 – ASSET RETIREMENT OBLIGATION

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

		03/31/12		12/31/11
Beginning Balance	$	130,397	$	128,367
Accretion to balance sheet date		1,176		2,030
Asset retirement obligation at balance sheet date	$	131,573	$	130,397

The Company recorded an accretion expense of $1,176 and $ -0- for the three months ended March 31, 2012 and March 31, 2011, respectively.

XML

Consolidated Statements of Cash Flows (Unaudited) (USD $)	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$ (799,689)	$ (245,725)
Adjustments to reconcile net loss to net cash provided by / (used in) operating activities:
Depreciation, depletion and amortization	78,265	2,346
Loss on sale of assets	7,354	0
(Gain)/loss on retirement of debt	0	(17,287)
Amortization of discount on notes payable	3,983	5,313
Accretion of asset retirement obligation	1,176	0
Stock based compensation (shares issued and owed)	0	42,200
Interest imputed on related-party notes	1,953	1,953
Amortization of deferred revenue	(24,668)	0
Changes in operating assets and liabilities:
Accounts receivable	7,038	0
Prepaid expenses & other assets	0	(50,000)
Accounts payable and accrued expenses	(6,515)	(26,737)
Officer and director liabilities	3,000	30,000
Cash call liability	74,200	0
Net cash used in operating activities	(653,903)	(257,937)
CASH FLOWS FROM INVESTING ACTIVITIES
Deposit on equipment lease purchase	(8,000)	0
Purchases of fixed assets	(127,298)	(34,718)
Net cash used in investing activities	(135,298)	(34,718)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from related parties, net	831,505	231,757
Proceeds from notes payable	150,000	0
Principal payments on notes payable	(179,097)	0
Common stock issued for cash	0	60,750
Bank overdraft	(1,982)	0
Net cash provided by financing activities	800,426	292,507
Net increase / (decrease) in cash and cash equivalents	11,225	(148)
Cash and cash equivalents, beginning of period	14,716	148
Cash and cash equivalents, end of period	25,941	0
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest	17,508	6,000
Cash paid for income taxes	0	0
Shares issued for retirement of debt	0	622,732
Acquisition of oil and gas properties with debt	0	19,500
Acquisition of other assets with stock	0	72,250
Related Party notes payable forgiven	971,505	0
Shares issued by related party on behalf of company for potential acquisition	$ 140,000	$ 0

XML

OIL AND GAS PROPERTIES

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

OIL AND GAS PROPERTIES

NOTE 5 – OIL AND GAS PROPERTIES

There were no acquisitions during the three months ended March 31, 2012.

Our geographical proved and unproved properties are as follows:

		03/31/12		12/31/11
Oilfield Support Equipment		$1,141,701		$1,141,701
Less: accumulated depreciation		(148,017)		(107,353)
Total		993,684		1,034,348
Proved developed producing:
Texas	$	105,494	$	105,494
Less: accumulated depletion		(25,475)		(18,806)
Total		80,019		87,408
Unproved:
Belize		48,075		48,075
Total	$	48,075	$	48,075

Production of Oil from all fields

We recorded depletion expense of $7,389 for the three months ended March 31, 2012 based on total production of approximately 1,076 barrels.

For the three months ended March 31, 2012, we shipped 665.14 barrels, and reflect a $16,400 net receivable (after royalty and production tax reductions) for shipments made prior to March 31, 2012.

Carved Out Production Payment

As noted in the 10-K filed for the year ended December 31, 2011, we entered into an agreement with an investor to sell a 5% permanent royalty and a 15% temporary royalty to be paid until production reaches 200 barrels per day for $600,000. The interests for both the permanent and temporary royalties relate to all current and future Texas leases. Once total Texas production exceeds 200 barrels per day, the temporary 15% royalties will revert to Treaty Energy Corporation.

In recording the temporary portion of the royalties sold, an advance on a production payment liability was established. Since the amount of proceeds to be paid out in the future is not readily determinable and the Company is not responsible for any shortfall in payment related to future production, the temporary 15% is treated as a “Carved-Out Production Payment Payable in Product” consistent with the guidance in ASC 932-10. Moreover, since the payout amounts are uncertain, no allocation of the proceeds between the permanent 5% and the temporary 15% Overriding Royalty was made, and therefore, no gain or loss was recorded on the transaction.

Consistent with the aforementioned guidance, the cash received related to the 15% carved-out production interest is treated as deferred revenue and amortized with production and payment to the holder. The proportional amount of carrying value of oil and gas assets will be amortized with production to match the costs to the production periods.

Amortization was based on the independent reserve report and is subject to future changes in estimates.

For the three months ended March 31, 2012 and March 31, 2011, the amortization of the Carved Out Production payment was $1,496 and $ -0-, respectively.

For the three months ended March 31, 2012 and March 31, 2011, the amortization of the Deferred Revenue was $24,668 and $ -0-, respectively.