- Quarterly Report (10-Q)

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

For the quarterly period ended September 30, 2008

-OR-

¨	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________ to _________________

Commission file number 001-32997

PETRO RESOURCES CORPORATION

(Name of registrant as specified in its charter)

Delaware	86-0879278
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

777 Post Oak Boulevard, Suite 910, Houston, Texas 77056

(Address of principal executive offices)

(832) 369-6986

(Issuer’s telephone number)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding twelve months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Act):

Large accelerated filer o	Accelerated filer o

Non-accelerated filer o	Smaller reporting company x
(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 ¨ No x

As of September 30, 2008 there were 36,748,172 shares of the registrant’s common stock ($.01 par value) outstanding.

PETRO RESOURCES CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED SEPTEMBER 30, 2008

TABLE OF CONTENTS

	Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited):

Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007	1

Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2008 and 2007	2

Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2008	3

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007	4

Notes to Consolidated Financial Statements	5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3. Quantitative and Qualitative Disclosures About Market Risk	22

Item 4T. Controls and Procedures	23

Part II. OTHER INFORMATION

Item 6. Exhibits	24

SIGNATURES	25

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PETRO RESOURCES CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,			December 31,
	2008			2007
Current assets:
Cash and cash equivalents	$	5,015,859		$	15,399,547
Accounts receivable and accrued revenue		1,613,339			924,607
Prepaids		139,497			25,519
Deferred financing costs, net of amortization of $0 and $1,513,586		-			2,378,492
Total current assets		6,768,695			18,728,165


Property and equipment:
Oil and natural gas properties, successful efforts accounting
Unproved		30,288,892			24,676,434
Proved properties, net		23,434,119			18,936,428
Furniture and fixtures, net		113,302			118,354
Total property and equipment		53,836,313			43,731,216

Other assets:
Investment in partnership		-			3,892,944
Deposit		10,257			10,257
Deferred financing costs, net of amortization of $23,735 and $0		1,288,864			-
Market value of derivative asset		822,953			-
Total other assets		2,122,074			3,903,201

Total Assets	$	62,727,082		$	66,362,582

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	3,057,987		$	1,525,474
Accrued liabilities		102,954			244,419
Payable on sale of partnership		754,255			-
Short-term debt, net of discount of $0 and $2,956,206		-			11,344,136
Notes payable		58,384			-
Total current liabilities		3,973,580			13,114,029

Market value of derivatives		1,440,517			1,832,316
Asset retirement obligation		1,567,504			1,434,114
Revolving credit borrowings		1,500,000			-
Term loan		15,000,000			-
Total liabilities		23,481,601			16,380,459

Minority interest		2,353,079			3,025,375

Redeemable Preferred Stock
Series A Convertible Preferred stock, $3 stated value, issued 0 shares as of September 30, 2008 and 2,410,776 shares as of December 31, 2007; cummulative, dividend rate 15% per annum (2007 - 10%) with liquidation preferences		-			7,232,329

Shareholders' equity
Preferred stock, $0.01 par value; 10,000,000 shares authorized, 0 and 2,410,776 shares of Series A Preferred Stock (reported above) issued and outstanding as of September 30, 2008 and December 31, 2007		-			-

Common stock, $0.01 par value; 100,000,000 shares authorized, 36,748,172 and 36,599,372 shares issued and outstanding as of September 30, 2008 and December 31, 2007 respectively		367,482			365,994
Additional paid in capital		50,942,579			49,723,515
Accumulated deficit		(14,417,659	)		(10,365,090	)
Total shareholders' equity		36,892,402			39,724,419

Total Liabilities and Shareholders' Equity	$	62,727,082		$	66,362,582

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

PETRO RESOURCES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Revenue
Oil and gas sales	$	4,782,933		$	1,972,866		$	12,209,376		$	4,347,303
Gain on sale of assets		1,181,963			-			1,181,963			-
Other income		-			-			100,000			100,000
		5,964,896			1,972,866			13,491,339			4,447,303
Expenses
Lease operating expenses		1,492,163			890,140			4,061,269			2,352,411
Exploration		2,179,388			344,722			2,789,552			518,311
Impairment of oil & gas properties		-			-			-			15,712
Depreciation, depletion and accretion		718,513			178,483			1,855,706			488,866
General and administrative		817,811			612,321			3,005,583			2,031,635

Total expenses		5,207,875			2,025,666			11,712,110			5,406,935

Income (loss) from operations		757,021			(52,800	)		1,779,229			(959,632	)

Other income and (expense)
Interest income		40,641			17,504			179,643			91,843
Interest expense		(1,066,477	)		(182,679	)		(2,172,257	)		(479,087	)
Loss on debt extinguishment		(2,790,829	)		-			(2,790,829	)		-
Gain (loss) on derivative contracts		2,477,405			(365,731	)		(986,245	)		(1,092,432	)

Loss before minority interest		(582,239	)		(583,706	)		(3,990,459	)		(2,439,308	)

Minority interest		322,306			-			672,296			-

Net loss		(259,933	)		(583,706	)		(3,318,163	)		(2,439,308	)

Dividend on Series A Convertible Preferred		(275,605	)		(172,095	)		(734,406	)		(334,530	)

Net loss attibutable to common stockholders	$	(535,538	)	$	(755,801	)	$	(4,052,569	)	$	(2,773,838	)

Earnings per common share
Basic and diluted	$	(0.01	)	$	(0.04	)	$	(0.11	)	$	(0.13	)

Weighted average number of common shares outstanding
Basic and diluted		36,738,145			21,273,172			36,703,179			21,253,995

The accompanying notes are an integral part of these financial statements

PETRO RESOURCES CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(Unaudited)

	Common Stock									Total
	Number				Additional		Accumulated			Shareholders'
	of Shares		Total		Paid-in		Deficit			Equity

Balance, December 31, 2007		36,599,372	$	365,994	$	49,723,515	$	(10,365,090	)	$	39,724,419

Preferred stock dividend								(734,406	)		(734,406	)
Restricted stock issued to employees and consultants		148,800		1,488		300,169					301,657
Stock options issued to employees						918,895					918,895
Net loss								(3,318,163	)		(3,318,163	)

Balance, September 30, 2008		36,748,172	$	367,482	$	50,942,579	$	(14,417,659	)	$	36,892,402

The accompanying notes are an integral part of these financial statements

PETRO RESOURCES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
	2008			2007

Cash flows from operating activities
Net loss	$	(3,318,163	)	$	(2,439,308	)
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest		(672,296	)		-
Depletion, depreciation, and accretion		1,855,706			488,866
Amortization included in interest expense		1,562,989			320,432
Impairment		-			15,712
Dry hole costs		2,600,817			479,949
Issuance of common stock and stock options for services		1,220,552			876,286
Gain on sale of assets		(1,181,963	)		-
Loss on extinguishment of debt		2,790,829			-
Unrealized loss on derivative contracts		(851,577	)		900,215
Changes in operating assets and liabilities:
Accounts receivable and accrued revenue		(688,732	)		(628,366	)
Prepaid expenses		(113,978	)		(52,195	)
Accounts payable		350,482			354,091
Accrued expenses		54,218			30,669
Net cash provided by operating activities		3,608,884			346,351

Cash flows from investing activities
Capital expenditures		(12,292,702	)		(9,140,133	)
Proceeds from sale of assets		7,828,962			-
Purchase of floor		(363,175	)		-
Acquisition of Williston Basin		-			(14,397,855	)
Investment in partnership		(1,999,800	)		(1,599,840	)
Net cash used in investing activities		(6,826,715	)		(25,137,828	)

Cash flows from financing activities
Financing costs		(1,312,599	)		(2,982,154	)
Payments for debt refinancing		(144,565	)		-
Proceeds from sale of preferred stock		-			2,000,000
Cost to issue preferred stock		-			(14,705	)
Redemption of prefered stock		(7,966,735	)		-
Proceeds from revolving credit borrowings		1,500,000			-
Proceeds from term loan		15,000,000			-
Proceeds from loan		4,225,348			26,018,108
Principal payment on loan		(18,467,306	)		(1,360,985	)
Net cash provided by (used in) financing activities		(7,165,857	)		23,660,264

Net decrease in cash and cash equivalents		(10,383,688	)		(1,131,213	)
Cash and cash equivalents, beginning of period		15,399,547			4,285,204

Cash and cash equivalents, end of period	$	5,015,859		$	3,153,991

Supplemental disclosure of cash flow information
Cash paid for interest	$	1,177,075		$	1,181,501
Cash paid for federal income taxes		-			-

Non-cash transactions
Common stock issued in acquisition of Williston Basin properties	$	-		$	10,723,274
Royalty interest issued in connection with debt	$	-		$	4,118,971
Preferred stock dividend paid in preferred shares	$	-		$	334,530
Cancellation of common stock in exchange for preferred stock	$	-		$	3,250,578
Capitalized interest in oil and gas properties	$	1,149,181		$	1,227,695
Property and equipment included in accounts payable	$	986,347		$	803,135

The accompanying notes are an integral part of these financial statements

PETRO RESOURCES CORPORATION

Notes to Consolidated Financial Statements

(Unaudited)

Note 1—Basis of Presentation

The accompanying unaudited interim financial statements of Petro Resources Corporation (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in Petro Resource’s annual report on Form 10-K for the year ended December 31, 2007 filed with the SEC on March 31, 2008. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements as reported in the 2007 annual report on Form 10-K have been omitted.

Certain prior period balances have been reclassified to conform to the current period presentation.

New accounting pronouncements

In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 161, Disclosures about Derivative Instruments and Hedging Activities –an amendment of SFAS 133. SFAS 161 seeks to improve financial reporting for derivative instruments and hedging activities by requiring enhanced disclosures regarding the impact on financial position, financial performance, and cash flows. To achieve this increased transparency, SFAS 161 requires: (1) the disclosure of the fair value of derivative instruments and gains and losses in a tabular format; (2) the disclosure of derivative features that are credit risk-related; and (3) cross-referencing within the footnotes. SFAS 161 is effective for us on January 1, 2009. We are in the process of evaluating the new disclosure requirements under SFAS 161.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements, as amended in February 2008 by FASB Staff Position (“FSP”) FAS 157-2, Effective Date of FASB Statement No. 157. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FSP FAS 157-2 defers the effective date of SFAS 157 for all nonfinancial assets and liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until January 1, 2009. As such, we partially adopted the provisions of SFAS 157 effective January 1, 2008. The partial adoption of this statement did not have a material impact on our financial statements. We expect to adopt the remaining provisions of SFAS 157 beginning in 2009. We do not expect this adoption to have a material impact on our consolidated financial statements.

In February 2007, FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities–including an Amendment of FASB Statement No. 115. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in SFAS 159 are elective; however the amendment to SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale securities. The fair value option established by SFAS 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. We have adopted this statement as of January 1, 2008. The adoption created no impact to our consolidated financial statements.

PETRO RESOURCES CORPORATION

Notes to Consolidated Financial Statements

(Unaudited)

In December 2007, the FASB issued SFAS 141R, Business Combinations. SFAS 141R continues to require the purchase method of accounting to be applied to all business combinations, but it significantly changes the accounting for certain aspects of business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141R will change the accounting treatment for certain specific acquisition related items including: (1) expensing acquisition related costs as incurred; (2) valuing noncontrolling interests at fair value at the acquisition date; and (3) expensing restructuring costs associated with an acquired business. SFAS 141R also includes a substantial number of new disclosure requirements. SFAS 141R is to be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. We expect SFAS 141R will have an impact on our accounting for future business combinations once adopted but the effect is dependent upon the acquisitions that are made in the future.

In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary (minority interest) is an ownership interest in the consolidated entity that should be reported as equity in the Consolidated Financial Statement and separate from the parent company’s equity. Among other requirements, this statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the Consolidated Statement of Operations, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. This statement is effective for us on January 1, 2009. We are still in the process of evaluating the impact that SFAS 160 will have on our consolidated financial statements.

Note 2 - Fair Value of Financial Instruments

Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157, Fair Value measurements, for all financial instruments. SFAS 157 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

●	Level 1 — Quoted prices (unadjusted) for identical assets or liabilities in active markets

●	Level 2 — Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable

●	Level 3 — Significant inputs to the valuation model are unobservable

The following describes the valuation methodologies we use to measure financial instruments at fair value.

Derivative Instruments

At September 30, 2008, we had commodity derivative financial instruments in place that do not qualify for hedge accounting under SFAS 133. Therefore, the changes in fair value subsequent to the initial measurement are recorded in income. Although our derivative instruments are valued using public indexes, the instruments themselves are traded with third-party counterparties and are not openly traded on an exchange. As such, our derivative liabilities have been classified as Level 2.

The follow table provides a summary of the fair value of our derivative liabilities measured on a recurring basis under SFAS 157:

	Fair value measurements on a recurring basis September 30, 2008
	Level 1		Level 2		Level 3
Assets
Commodity derivatives	$	-	$	822,953	$	-
Liabilities
Commodity derivatives	$	-	$	1,440,517	$	-

PETRO RESOURCES CORPORATION

Notes to Consolidated Financial Statements

(Unaudited)

Note 3 —Derivative Financial Instruments

We entered into commodity derivative financial instruments intended to hedge our exposure to market fluctuations of oil prices. As of September 30, 2008, we had commodity swaps for the following oil volumes:

	Barrels per quarter		Barrels per day		Price per barrel
2008
Fourth quarter		20,600		224	$	87.70

2009
First quarter		9,725		108	$	71.76
Second quarter		8,325		91	$	72.62
Third quarter		8,400		91	$	72.55
Fourth quarter		8,400		91	$	72.55

2010
First quarter		14,825		165	$	93.50
Second quarter		15,000		165	$	105.45
Third quarter		15,000		163	$	105.45
Fourth quarter		15,000		163	$	105.45

2011
First quarter		13,500		150	$	105.45
Second quarter		13,500		148	$	105.45
Third quarter		13,500		147	$	105.45
Fourth quarter		13,500		147	$	105.45

As of September 30, 2008, the fair value of the above commodity swaps amounted to a liability of $1,325,846 .

On June 5, 2008, the Company purchased a floor at $110 per barrel for 100 bbls per day for the calendar year 2009 for a price of $363,175. As of September 30, 2008 the fair value of the floor was $708,282.

During the nine months ended September 30, 2008, we incurred a loss of $986,245 related to derivative contracts. Included in this loss was $1,837,822 of realized losses related to settled contracts, $345,107 of gains related to the floor and $506,470 of unrealized gains related to unsettled swap contracts. Unrealized gain and losses are based on the changes in the fair value of derivative instruments covering positions beyond September 30, 2008.

Note 4 —Asset Retirement Obligations

We recorded the following activity related to the ARO liability for the nine months ended September 30, 2008:

Liability for asset retirement obligation as of December 31, 2007	$	1,434,114
Liabilities settled and divested		(3,328	)
Additions-Drilling		33,072
Accretion expense		103,646
Liability for asset retirement obligation as of September 30, 2008	$	1,567,504

Note 5 – Minority Interest

In connection with the Williston Basin acquisition, we entered into equity participation agreements with the lenders pursuant to which we agreed to pay to the lenders an aggregate of 12.5% of all distributions paid to the owners of PRC Williston, which at this time is 100% owned by Petro Resources. The equity participation agreements were valued at $3,401,655 and accounted for as a minority interest in PRC Williston.

	Minority Interest
Minority interest at December 31, 2007	$	3,025,375
Loss to minority interest		(672,296	)
Minority interest at September 30, 2008	$	2,353,079

PETRO RESOURCES CORPORATION

Notes to Consolidated Financial Statements

(Unaudited)

Note 6 — Series A Preferred Stock

On September 26, 2008, the Company redeemed 2,563,712 shares of the Company's outstanding Series A Preferred Stock at an aggregate redemption price of $7,966,735. The shares were held by investment funds managed by Touradji Capital Management. Pursuant to the terms of the Preferred Stock Purchase Agreement, the Company was required to redeem all Series A Preferred Stock no later than October 2, 2008. After giving effect to the redemption, there are no shares of Series A Preferred Stock outstanding at September 30, 2008.

Note 7 —Share Based Compensation

On January 9, 2008 we granted 200,000 stock options to our President. The options have an exercise price of $2.00 per share. Fifty thousand options vested on January 9, 2008 and the remaining 150,000 options vest annually on January 10, 2009, 2010 and 2011. The stock options have a 5 year term expiring on January 10, 2013. The options were valued using the Black-Sholes model with the following assumption: $2.15 quoted stock price; $2.00 exercise price; 104.83% volatility; 3.25 year estimated life; zero dividend; 2.69% discount rate. The fair value of these options was $293,364.

Also, on January 9, 2008 we granted 10,000 stock options to our Director of Information Services. The options have an exercise price of $2.00 per share. Twenty five hundred options vested on January 10, 2008 and the remaining 7,500 options will vest annually on January 10, 2009, 2010 and 2011. The stock options have a 5 year term expiring on January 10, 2013. The options were valued using the Black-Sholes model with the following assumption: $2.15 quoted stock price; $2.00 exercise price; 104.83% volatility; 3.25 year estimated life; zero dividend; 2.69% discount rate. The fair value of these options was $14,668.

On March 1, 2008 we granted 100,000 stock options to our new Chief Operating Officer. The options have an exercise price of $1.70 per share. Twenty five thousand options vested on March 1, 2008 and the remaining 75,000 options will be issued and will vest annually on March 1, 2009, 2010 and 2011. The stock options have a 5 year term expiring on March 1, 2013. The options were valued using the Black-Sholes model with the following assumption: $1.70 quoted stock price; $1.70 exercise price; 104% volatility; 3.25 year estimated life; zero dividend; 1.87% discount rate. The fair value of these options was $112,381.

On March 1, 2008 we also granted 130,000 shares of restricted common stock to our new Chief Operating Officer. These common shares vest at 40,000 immediately and the remaining shares vest annually at 30,000 shares annually on March 1, 2009, 2010 and 2011. These shares were valued at $1.70 per share, based on the quoted market value on the date of grant, and $106,250 of expense was recognized as of September 30, 2008. The remaining $114,750 will be recognized over the remaining service term.

On January 9, 2008, we granted 100,000 shares of restricted common stock to our President. These common shares vest at 25,000 immediately and 25,000 each on January 10, 2009, 2010 and 2011. These shares were valued at $2.15 per share, based on the quoted market value on the date of grant, and $94,063 of expense was recognized as of September 30, 2008. The remaining $120,938 will be recognized over the remaining service term.

Petro Resources recognized stock compensation expense of $1,220,552 and $876,286 for the nine months ended September 30, 2008 and 2007 respectively.

PETRO RESOURCES CORPORATION

Notes to Consolidated Financial Statements

(Unaudited)

A summary of option activity for the nine months ended September 30, 2008 is presented below:

	Shares	Weighted- Average Exercise Price

Outstanding at December 31, 2007	1,125,000	$	3.68
Granted	310,000		1.90
Exercised, forfeited, or expired	-		-
Outstanding at September 30, 2008	1,435,000		3.30

Exercisable at December 31, 2007	550,000		3.74
Exercisable at September 30, 2008	902,500	$	3.56

A summary of Petro Resources non-vested options as of September 30, 2008 is presented below.

Non-vested Options	Shares
Non-vested at December 31, 2007		575,000
Granted		310,000
Vested		(352,500	)
Forfeited		-
Non-vested at September 30, 2008		532,500

Total unrecognized compensation cost related to non-vested options granted under the Plan was $850,355 and $1,566,192 as of September 30, 2008 and 2007 respectively. The cost at September 30, 2008 is expected to be recognized over a weighted-average period of 1.3 years. The aggregate intrinsic value for options was $0; and the weighted average remaining contract life was 2.93 years.

As allowed by SFAS 123(R), the Company utilizes the Black-Scholes option pricing model to measure the fair value of stock options and stock settled stock appreciation rights.

The assumptions used in the fair value method calculation for the nine months ended September 30, 2008 and 2007 are disclosed in the following table:

	Nine Months Ended September 30,
	2008 (1)		2007

Weighted average value per option granted during the period (2)	$	1.36	$	1.89
Assumptions (3) :
Stock price volatility		104-105%		108%
Risk free rate of return		1.87-2.69%		5.00%

Expected term		3.25 years		3.0 years

(1)	Our estimated future forfeiture rate is zero.
(2)	Calculated using the Black-Scholes fair value based method.
(3)	We do not pay dividends on our common stock.

PETRO RESOURCES CORPORATION

Notes to Consolidated Financial Statements

(Unaudited)

A summary of warrant activity for the nine months ended September 30, 2008 is presented below:

	Shares	Weighted- Average Exercise Price

Outstanding at December 31, 2007	6,838,962	$	2.15
Granted	-		-
Exercised, forfeited, or expired	-		-
Outstanding at September 30, 2008	6,838,962	$	2.15

Exercisable at December 31, 2007	6,838,962	$	2.15
Exercisable at September 30, 2008	6,838,962	$	2.15

The aggregate intrinsic value for warrants was $0; and the weighted average remaining contract life was 2.16 years.

Note 8 – Note Payable

On September 9, 2008, the Company entered into (1) a $50 million Credit Agreement (the "Credit Agreement") with certain lenders named in the agreement and CIT Capital USA Inc., as administrative agent for the lenders and (2) a $15 million Second Lien Term Loan Agreement (the "Second Lien Term Loan Agreement") with certain lenders named in the agreement and CIT Capital USA Inc., as administrative agent for the lenders.

The Credit Agreement provides for a $50 million first lien revolving credit facility, with an initial borrowing base availability of $17 million. The first lien facility may be used for loans and, subject to a $500,000 sublimit, letters of credit. Borrowings under the Credit Agreement may be used to provide working capital for exploration and production purposes, to refinance existing debt, and for general corporate purposes. The maturity date of the Credit Agreement is September 9, 2011.

Borrowings under the Credit Agreement bear interest, at the Company's option, at either a fluctuating base rate or a rate equal to LIBOR plus, in each case, a margin determined based on the Company's utilization of the borrowing base. If an event of default occurs and is continuing, the lenders may increase the interest rate then in effect by an additional 2% per annum. The Credit Agreement contains covenants that, among others things, restrict the ability of the Company to, with certain exceptions: (1) incur indebtedness; (2) grant liens; (3) acquire other companies or assets; (4) dispose of all or substantially all of its assets or enter into mergers, consolidations or similar transactions; (5) make restricted payments; (6) enter into transactions with affiliates; and (7) make capital expenditures. The Credit Agreement also requires the Company to satisfy certain financial covenants, including maintaining (1) a ratio of EBITDAX to Interest Expense (as each term is defined in the Credit Agreement) of not less than 2.5:1.0; (2) a ratio of Net Debt (as such term is defined in the Credit Agreement) to EBITDAX of not more than (a) 4.5:1.0 for the fiscal quarters ending December 31, 2008, March 31, 2009, June 30, 2009 and September 30, 2009, and (b) 3.5:1.0 for each fiscal quarter ending thereafter; and (3) a ratio of consolidated current assets to consolidated current liabilities of not less than 1.0:1.0. The Company is also required to enter into certain swap agreements pursuant to the terms of the Credit Agreement.

PRC Williston LLC, the Company's wholly owned subsidiary ("PRC Williston"), has guaranteed the performance of all of the Company's obligations under the Credit Agreement and related agreements pursuant to a Guaranty and Collateral Agreement dated as of September 9, 2008 (the "Guaranty and Collateral Agreement"). Subject to certain permitted liens, the Company's obligations have been secured by the grant of a first priority lien on no less than 80% of the value of the Company's and PRC Williston's existing and to-be-acquired oil and gas properties and the grant of a first priority security interest in related personal property of the Company and PRC Williston. The Company has also granted a first priority security interest in its ownership interest in PRC Williston, subject only to certain permitted liens.

The Second Lien Term Loan Agreement provides for a $15 million second lien term loan facility. All term loans available under the second lien term loan facility were advanced to the Company on September 9, 2008 and were used to refinance existing debt. The maturity date of the Second Lien Term Loan Agreement is September 9, 2012. Under certain circumstances, the Company is permitted to repay the term loans prior to the maturity date; however, any payments made on or prior to September 9, 2009 are subject to a prepayment penalty equal to 2% of the amount prepaid, and any payments made after September 9, 2009 but on or before September 9, 2010 are subject to a prepayment penalty equal to 1% of the amount prepaid.

PETRO RESOURCES CORPORATION

Notes to Consolidated Financial Statements

(Unaudited)

Borrowings under the Second Lien Term Loan Agreement bear interest, at the Company's option, at either a fluctuating base rate plus 6.50% per annum or a rate equal to LIBOR plus 7.50% per annum. If an event of default occurs and is continuing, the lenders may increase the interest rate then in effect by an additional 2% per annum. The Second Lien Term Loan Agreement contains covenants that, among others things, restrict the ability of the Company to, with certain exceptions: (1) incur indebtedness; (2) grant liens; (3) acquire other companies or assets; (4) dispose of all or substantially all of its assets or enter into mergers, consolidations or similar transactions; (5) make restricted payments; (6) enter into transactions with affiliates; and (7) make capital expenditures. The Second Lien Term Loan Agreement also requires the Company to satisfy certain financial covenants, including maintaining (1) a ratio of Total Reserve Value to Debt (as each term is defined in the Second Lien Term Loan Agreement) of not less than 1.75:1.0; and (2) a ratio of Net Debt to EBITDAX (as each term is defined in the Second Lien Term Loan Agreement) of not more than (a) 4.5:1.0 for the fiscal quarters ending December 31, 2008, March 31, 2009, June 30, 2009 and September 30, 2009, and (b) 4.0:1.0 for each fiscal quarter ending thereafter.

PRC Williston LLC has guaranteed the performance of all of the Company's obligations under the Second Lien Term Loan Agreement and related agreements pursuant to a Second Lien Guaranty and Collateral Agreement dated as of September 9, 2008 (the " Second Lien Guaranty and Collateral Agreement"). Subject to certain permitted liens (including, without limitation, the liens and security interests granted in connection with the Credit Agreement referenced above), the Company's obligations under the Second Lien Term Loan Agreement have been secured by the grant of a first priority lien on no less than 80% of the value of the Company's and PRC Williston's existing and to-be-acquired oil and gas properties and the grant of a first priority security interest in related personal property of the Company and PRC Williston. The Company has also granted a first priority security interest in its ownership interest in PRC Williston, subject only to certain permitted liens (including, without limitation, the security interest granted in connection with the Credit Agreement).

The Company incurred approximately $1.3 million of deferred financing cost on the above notes and on September 9 th , the Company borrowed $16.5 million by drawing down $15 million on its Second Lien Term Loan Agreement and $1.5 million on its Credit Agreement. The Company then paid off the Petrobridge note of $16.2 million and also incurred $2.8 million of debt extinguishment costs. The debt extinguishment costs consisted principally of the write off of the note discount and deferred financing costs related to the Petrobridge note.

Note 9 – Investment in partnership

On September 26, 2008, the Company sold its 5.33% limited partner interest in Hall-Houston Exploration II, L. P. pursuant to a Partnership Interest Purchase Agreement dated September 26, 2008, as amended on September 29, 2008. The interest was purchased by a non-affiliated partnership for a cash consideration of $8.0 million and the purchaser’s assumption of the first $1,353,000 of capital calls on the limited partnership interest sold subsequent to September 26, 2008. The Company agreed to reimburse the purchaser for up to $754,255 of capital calls on the limited partnership interest sold in excess of the first $1,353,000 of capital calls subsequent to September 26, 2008. The Company’s net gain on the sale of the asset of is subject to future upward adjustment to the extent that some or all of the $754,255 is not called. As of and for the nine months ended September 30, 2008, the Company reported a net gain on the sale of the above interest amounting to $1,098,000 and recognized the liability for the capital calls. The proceeds of the sale of the limited partnership were used to redeem the Company’s outstanding shares of Series A Preferred Stock.

Note 10 – Subsequent events

During October 2008, we purchased put options for natural gas at a price of $7.75 per mcf for 658 mcf per day of production during 2009. The cost of the natural gas put options were $200,400.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Industry terms used in this report are defined in the Glossary of Oil and Natural Gas Terms located at the end of this Item

In this report we make, and from time to time we otherwise make, written and oral statements regarding our business and prospects, such as projections of future performance, statements of management’s plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the Securities and Exchange Commission, news releases, written or oral presentations made by our officers or other representatives to analysts, stockholders, investors, news organizations and others, and discussions with management and other of our representatives. For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement speaks only as of the date on which such statement is made. Our forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications and other information from operators, government agencies and other sources that may be subject to revision. Except as required by law, we do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement.

There are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or results that are reflected from time to time in any forward-looking statement. Some of these important factors, but not necessarily all important factors, are included in our filings with the SEC, including the risk factors set forth in our annual report on Form 10-K for our 2007 fiscal year filed with the SEC on March 31, 2008 and our subsequently filed reports.

General

Petro Resources Corporation and subsidiaries (“we,” “our” or “the Company”) is an independent exploration and production company engaged in the acquisition of exploratory leases and producing properties, secondary enhanced oil recovery projects, exploratory drilling, and production of oil and natural gas in the United States.

Our business strategy is designed to create and maximize shareholder value by combining and leveraging the knowledge and expertise of our management team with that of our industry partners to grow our diversified portfolio of oil and natural gas producing projects and prospects. Since our inception in 2005, we have established a balanced portfolio which includes producing properties, secondary enhanced oil recovery projects, and exploration prospects both onshore and offshore. We believe our current portfolio has provided a solid base of production with multiple opportunities for organic growth in both production and reserves for years into the future. We target low to medium risk projects that are expected to provide meaningful reserve, production and cash flow growth. We have focused our acquisition and exploration pursuits on oil and natural gas properties principally located in North Dakota, Texas, Louisiana, and New Mexico.

In July 2005, we acquired our initial interest in drilling prospects and commenced drilling activities in November 2005. In the first quarter of 2007, we acquired oil and gas producing assets in the Williston Basin area of North Dakota. As of September 30, 2008, we held interests in approximately 200 producing wells in Texas, Louisiana and North Dakota. We also have exploratory drilling prospects located in Texas, North Dakota, Louisiana, New Mexico, and Kentucky. In December 2005, we commenced production operations from our first oil and gas prospects and received our first revenues from oil and gas production in February 2006. During 2007, we produced more than 120,000 boe and exited the year with a daily production exit rate of approximately 400 boe per day. During the first nine months of 2008 we have produced approximatel y 148,188 boe.

We recognize the value of entering into derivative and physical contracts for the sale of hydrocarbons to stabilize cash flow from production. During the second and third quarters of 2008, we entered into three separate hedging agreements. During June 2008, we purchased put options for crude oil at a price of $110 per bbl for 100 bbls per day of production during 2009. The cost of the crude oil put options was $363,175. During September 2008, we entered into swap agreements covering 207,400 barrels of crude oil at a price of $105 per bbl for varying amounts of production from October 2008 to December 2011. We incurred no cost in entering these swap agreements. During October 2008, we purchased put options for natural gas at a price of $7.75 per mcf for 658 mcf per day of production during 2009. The cost of the natural gas put options was $200,400.

As of December 31, 2007, our estimated net total proved reserves had grown to approximately 2,716,602 boe (net of production) of which approximately 2,369,600 boe were crude oil reserves and 347,002 boe were natural gas reserves. The increase in net total proved reserves is a result of our Williston Basin acquisition that closed on February 16, 2007, positive results from enhanced oil recovery operations in North Dakota, successful exploratory drilling success in the Williston Basin and in our Cinco Terry Field in Crockett County, Texas.

Our executive offices are located at 777 Post Oak Blvd., Suite 910, Houston, TX 77056, and our telephone number is (832) 369-6986. Our web site is www.petroresourcescorp.com . Additional information which may be obtained through our web site does not constitute part of this quarterly report on Form 10-Q. A copy of this quarterly report on Form 10-Q is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the SEC’s Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov .

CIT Credit Facility

On September 9, 2008, we entered into a $50 million Credit Agreement (the "Credit Agreement") with certain lenders named in the agreement and CIT Capital USA Inc., as administrative agent for the lenders, and a $15 million Second Lien Term Loan Agreement (the "Second Lien Term Loan Agreement") with certain lenders named in the agreement and CIT Capital USA Inc., as administrative agent for the lenders. All term loans available under the Second Lien Term Loan facility were advanced to us on September 9, 2008 and were used to retire our previously existing credit facility arranged by Petrobridge Investment Management, LLC.

Borrowings under the Credit Agreement bear interest, at our option, at either a fluctuating base rate or a rate equal to LIBOR plus, in each case, a margin determined based on our utilization of the borrowing base. The Credit Agreement also requires us to satisfy certain financial covenants, including maintaining (A) a ratio of EBITDAX to Interest Expense (as each term is defined in the Credit Agreement) of not less than 2.5:1.0; (B) a ratio of Net Debt (as such term is defined in the Credit Agreement) to EBITDAX of not more than (y) 4.5:1.0 for the fiscal quarters ending December 31, 2008, March 31, 2009, June 30, 2009 and September 30, 2009, and (z) 3.5:1.0 for each fiscal quarter ending thereafter; and (C) a ratio of consolidated current assets to consolidated current liabilities of not less than 1.0:1.0. We are also required to enter into certain swap agreements pursuant to the terms of the Credit Agreement.

The Second Lien Term Loan Agreement provides for a $15 million second lien term loan facility. As noted above, all term loans available under the second lien term loan facility were advanced to the us on September 9, 2008 and were used to retire our previously existing credit facility arranged by Petrobridge Investment Management, LLC. The maturity date of the Second Lien Term Loan Agreement is September 9, 2012. Under certain circumstances, we are permitted to repay the term loans prior to the maturity date; however, any payments made on or prior to September 9, 2009 are subject to a prepayment penalty equal to 2% of the amount prepaid, and any payments made after September 9, 2009 but on or before September 9, 2010 are subject to a prepayment penalty equal to 1% of the amount prepaid.

Borrowings under the Second Lien Term Loan Agreement bear interest, at our option, at either a fluctuating base rate plus 6.50% per annum or a rate equal to LIBOR plus 7.50% per annum. The Second Lien Term Loan Agreement also requires us to satisfy certain financial covenants, including maintaining (1) a ratio of Total Reserve Value to Debt (as each term is defined in the Second Lien Term Loan Agreement) of not less than 1.75:1.0; and (2) a ratio of Net Debt to EBITDAX (as each term is defined in the Second Lien Term Loan Agreement) of not more than (a) 4.5:1.0 for the fiscal quarters ending December 31, 2008, March 31, 2009, June 30, 2009 and September 30, 2009, and (b) 4.0:1.0 for each fiscal quarter ending thereafter.

If an event of default occurs and is continuing under either the Credit Agreement or the Second Lien Term Loan Agreement, the lenders may increase the interest rate then in effect by an additional 2% per annum. The Credit Agreement and the Second Lien Term Loan Agreement contain covenants that, among others things, restrict our ability to, with certain exceptions: (i) incur indebtedness; (ii) grant liens; (iii) acquire other companies or assets; (iv) dispose of all or substantially all of our assets or enter into mergers, consolidations or similar transactions; (v) make restricted payments; (vi) enter into transactions with affiliates; and (vii) make capital expenditures.

PRC Williston LLC, our wholly-owned subsidiary, has guaranteed the performance of all of our obligations under the Credit Agreement, the Second Lien Term Loan Agreement and related agreements pursuant to a Guaranty and Collateral Agreement and a Second Lien Guaranty and Collateral Agreement each dated as of September 9, 2008. Subject to certain permitted liens, our obligations have been secured by the grant of a first priority lien on no less than 80% of the value of our and PRC Williston's existing and to-be-acquired oil and gas properties and the grant of a first priority security interest in related personal property of ours and PRC Williston. We also granted a first priority security interest in our ownership interest in PRC Williston, subject only to certain permitted liens.

As of November 12, 2008, we have drawn $21.5 million, of which $15.0 million was drawn on the Second Lien Term Loan Agreement and $6.5 million was drawn on the Credit Agreement. We are permitted to use the remaining available funds under the Credit Agreement to finance our capital program and fund general corporate purposes.

Series A Preferred Stock Redemption

On September 26, 2008, we redeemed 2,563,712 shares of our outstanding Series A Preferred Stock at an aggregate redemption price of $7,946,735. The shares were held by investment funds managed by Touradji Capital Management. Pursuant to the terms of the Series A Preferred Stock, we were required to redeem all Series A Preferred Stock no later than October 2, 2008. After giving effect to the redemption, there are no shares of Series A Preferred Stock outstanding.

Sale of Hall-Houston Exploration II, L.P. Partnership Interest

On September 26, 2008, we sold our 5.33% limited partner interest in Hall-Houston Exploration II, L. P. pursuant to a Partnership Interest Purchase Agreement dated September 26, 2008, as amended on September 29, 2008. The interest was purchased by a non-affiliated partnership for a cash consideration of $8.0 million and the purchaser’s assumption of the first $1,353,000 of capital calls on the limited partnership interest sold subsequent to September 26, 2008. We have agreed to reimburse the purchaser for up to $754,255 of capital calls on the limited partnership interest sold in excess of the first $1,353,000 of capital calls subsequent to September 26, 2008. We will realize a net gain on the sale of the asset of not less than approximately $1.10 million for the quarter ending September 30, 2008, subject to future upward adjustment to the extent that some or all of the $754,255 is not called. The proceeds of the sale of the limited partnership were used to redeem the Company’s outstanding shares of Series A Preferred Stock.

Results of Operations

For the three months ended September 30, 2008 compared to the three months ended September 30, 2007

Our net production for the quarter ended September 30, 2008 included 35,012 barrels of oil, 105,239 mcf of natural gas, and 4,801 barrels of natural gas liquids for a barrel-equivalent total of 57,353 boe compared to 27,760 barrels of oil, 35,720 mcf of natural gas, and 262 barrels of natural gas liquids for a barrel-equivalent total of 33,975 boe for the quarter ended September 30, 2007.

For the quarter ended September 30, 2008, the average daily production was approximately 623 boe per day compared to average daily production of 370 boe per day for the quarter ended September 30, 2007.

We realized average prices for oil and gas during the quarter ended September 30, 2008 of $106.33 per barrel of oil, $7.34 per mcf of natural gas, and $59.82 per barrel of natural gas liquids compared to $66.75 per barrel of oil, $3.08 per mcf of natural gas, and $37.62 per barrel of natural gas liquids during the prior year period.

Revenue for the quarter ended September 30, 2008 totaled $5,964,895, compared to revenue of $1,972,866 for the prior year period. Revenue for the quarter ended September 30, 2008 consisted of $4,782,933 of oil and gas sales compared to oil and gas sales of $1,972,866 for the quarter ended September 30, 2007. The increase in revenue from oil and gas sales was due primarily to increased production as the result of our successful drilling efforts in Crockett County, Texas as well as the increase in oil and gas prices over the same period last year. In addition, during the three months ended September 30, 2008, we realized $1,181,963 of revenue from the gain on the sale of our 5.33% limited partner interest in Hall-Houston Exploration II, L. P.

Lease operating expenses for the quarter ended September 30, 2008 totaled $1,492,163 compared to lease operating expenses of $890,140 for the prior year period. The increase in lease operating expenses was due primarily to increased operational costs in the Williston Basin properties and an increase in the number of producing wells in our Cinco Terry Field in Crockett County, Texas.

Exploration costs for the quarter ended September 30, 2008 were $2,179,388 compared to $344,722 for the quarter ended September 30, 2007. Exploration costs represent our drilling costs associated with dry holes and the carrying costs of properties. The increase in exploration costs is the result of four unsuccessful exploratory wells drilled in the Williston Basin during the third quarter of 2008.

We incurred no expenses related to the impairment of oil and gas properties in the quarters ended September 30, 2008 or 2007. Impairment expenses represent the write-down of previously capitalized expenses for productive wells. We take an impairment charge for a productive well when there is an indication that we may not receive production payments equal to the net capitalized costs. No wells needed to be written down in either quarter.

Our expenses for depreciation, depletion, and accretion (“DD&A”) for the quarter ended September 30, 2008 totaled $718,513 compared to $178,483 for the same period in the prior year. DD&A expenses are a function of production and depletion rates. The increase over the same period last year is the result of our increased production in the Williston Basin and the Cinco Terry Field as well as an increase in our depletion rates.

General and administrative expenses for the quarter ended September 30, 2008 totaled $817,811 compared to general and administrative expenses of $612,321 for the prior year period. General and administrative expenses for the quarters ended September 30, 2008 and September 30, 2007 included expenses of $329,235 and $241,550, respectively, for outstanding common stock shares and common stock options granted under our Stock Incentive Plan. Without giving effect to expenses for common shares and stock options, our general and administrative expenses for the quarters ended September 30, 2008 and September 30, 2007 were $488,576 and $370,771, respectively. General and administrative expenses increased over the same period last year due primarily to an increase in the number of employees and the related expenses.

We incurred income from operations of $757,021 for the quarter ended September 30, 2008 compared to a loss from operations of $52,800 during the same period in the prior year. The increase in net income occurred due to increased production revenues and the sale of our 5.33% limited partner interest in Hall-Houston Exploration II, L. P.

During the quarter ended September 30, 2008, interest expense totaled $1,066,477 compared to $182,769 for the quarter ended September 30, 2007. This increase in interest expense was due primarily to a reduction in the interest capitalized due to the decreased development activity in North Dakota.

During this quarter, we recognized debt extinguishment losses amounting to $2,790,828 related to the payoff of our Petrobridge credit facility. The majority of this loss was related to the write off of the unamortized note discount and the write off of the deferred financing cost related to this credit facility.

Beginning in March 2007, we have entered into commodity derivative financial instruments for purposes of hedging our exposure to market fluctuations of oil and natural gas prices. During the three months ended September 30, 2008, we incurred a gain on derivative contracts of $2,477,405 compared to a loss of $365,731 for the comparable period in 2007. The gain of $2,477,405 included $625,568 of realized losses related to settled contracts, $448,682 of unrealized gains related to “floors,” which are put options we purchased to sell oil at $110 per barrel, and $2,654,291 of unrealized gains related to unsettled swap contracts. Unrealized gains and losses are based on the changes in the fair value of derivative instruments covering positions beyond September 30, 2008.

We incurred a net loss attributable to common shareholders of $535,538 ($0.01 per share) during the quarter ended September 30, 2008, compared to a net loss of $755,801 ($0.04 per share) for the same period in 2007. The decrease in net loss was primarily the result of increased revenues and the sale of our 5.33% limited partner interest in Hall-Houston Exploration II, L. during the third quarter of 2008, offset by the write off of $2,790,829 of debt extinguishment losses associated with the early repayment of the Petrobridge credit facility.

For the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007

Our net production for the nine months ended September 30, 2008 included 95,869 barrels of oil, 227,762 mcf of natural gas, and 14,358 barrels of natural gas liquids for a barrel-equivalent total of 148,188 boe compared to 65,027 barrels of oil, 107,434 mcf of natural gas, and 915 barrels of natural gas liquids for a barrel-equivalent total of 83,848 boe for the nine months ended September 30, 2007.

For the nine months ended September 30, 2008, the average daily production was approximately 543 boe per day compared to average daily production of 307 boe per day for the nine months ended September 30, 2007.

We realized average prices for oil and gas during the nine months ended September 30, 2008 of $102.23 per barrel of oil, $7.21 per mcf of natural gas, and $53.49 per barrel of natural gas liquids compared to $60.61 per barrel of oil, $3.48 per mcf of natural gas, and $34.44 per barrel of natural gas liquids for the comparable prior year period.

Revenues for the nine months ended September 30, 2008 totaled $13,491,339 compared to revenues of $4,447,303 for the nine months ended September 30, 2007. Revenue for the nine months ended September 30, 2008 consisted of $12,209,376 of oil and gas sales compared to oil and gas sales of $4,347,303 for the nine months ended September 30, 2007. The increase in revenue from oil and gas sales of $7,862,073 consisted of a $3,335,926 increase due to increased oil and gas production as a result of our successful drilling efforts in Crockett County, Texas and a $4,526,147 increase due to increased oil and gas prices over the same period last year. In addition, during the nine months ended September 30, 2008, we realized $1,181,963 of revenue from the gain on the sale of our 5.33% limited partner interest in Hall-Houston Exploration II, L. P.

Lease operating expenses for the nine months ended September 30, 2008 totaled $4,061,269 compared to lease operating expenses of $2,352,411 for the prior year period. The increase in lease operating expenses was due primarily to the increased number of producing wells in our Cinco Terry Field in Crockett County, Texas and higher costs in the Williston Basin.

Exploration costs for the nine months ended September 30, 2008 were $2,789,552 compared to $518,311 for the nine months ended September 30, 2007. Exploration costs represent our drilling costs associated with dry holes and the carrying costs of properties. The increase in exploration costs is the result of the write off of four exploratory wells in North Dakota.

We incurred no expenses related to the impairment of oil and gas properties in the nine months ended September 30, 2008, compared to $15,712 during the prior year comparable period. Impairment expenses represent the write-down of previously capitalized expenses for productive wells. We take an impairment charge for a productive well when there is an indication that we may not receive production payments equal to the net capitalized costs. The decline in expenses for impairment of oil and gas properties is the result of no wells needing to be written down to net cost.

Our expenses for depreciation, depletion, and accretion, or DD&A, for the nine months ended September 30, 2008 totaled $1,855,706, compared to $488,866 for the same period in the prior year. The increase in DD&A expenses was due to our increased production from the Cinco Terry Field and the Williston Basin as well as an increase in the depletion rates.

General and administrative expenses for the nine months ended September 30, 2008 totaled $3,005,583 compared to general and administrative expenses of $2,031,635 for the prior year period. General and administrative expenses for the nine months ended September 30, 2008 and September 30, 2007 included expenses of $1,220,552 and $876,286, respectively, for outstanding common stock shares and common stock options granted under our Stock Incentive Plan. Without giving effect to expenses for common shares and stock options, our general and administrative expenses for the nine months ended September 30, 2008 and September 30, 2007 were $1,785,031 and $1,155,349, respectively. The increase in general and administrative expenses (other than expenses for options and common shares) between reporting periods was due to increased number of employees, additional office space, professional fees, travel and other related expenses.

We incurred income from operations of $1,779,229 for the nine months ended September 30, 2008 compared to a loss from operations of $959,632 during the same period in the prior year. The increase in income is due primarily to increased revenues and the sale of our 5.33% limited partner interest in Hall-Houston Exploration II, L. P.

During the nine months ended September 30, 2008, interest expense totaled $2,172,257, compared to $479,087 for the nine months ended September 30, 2007. This increase in interest expense was due primarily to a reduction in the interest capitalized due to the decreased development activity in North Dakota.

During the nine months ended September 30, 2008, we recognized debt extinguishment losses in the amount of $2,790,828 related to the payoff of our Petrobridge credit facility. The majority of this loss was related to the write-off of the unamortized note discount and the write-off of the deferred financing cost related to the credit facility.

Beginning in March 2007, we entered into commodity derivative financial instruments intended to hedge our exposure to market fluctuations of oil prices. During the nine months ended September 30, 2008, we incurred a loss of $986,245 compared to a loss of $1,092,432 for the comparable period in 2007. The loss of $986,245 included $1,837,822 of realized losses related to settled contracts, $345,107 of gains related “floors”, which are put options we purchased to sell oil at $110 per barrel, and $506,470 of unrealized gains related to unsettled swap contracts. Unrealized gains and losses are based on the changes in the fair value of derivative instruments covering positions beyond September 30, 2008.

We incurred a net loss attributable to common stockholders of $4,052,569 ($0.11 per share) during the nine months ended September 30, 2008, compared to a net loss of $2,773,838 ($0.13 per share) for the same period in 2007. The increase in net loss was primarily the result of an increase in our cost to extinguish debt, interest expense and dividends, offset by an increase in our income from operations.

During the nine months ended September 30, 2008, cash flow provided by operations totaled $3,608,884 which represents an increase of $3,262,533 from the same period in 2007. The increase in cash flow was primarily due to increased revenues driven by increased production and higher commodity prices realized over the same period last year.

Plan of Operations

Our plan of operations for the next 12 months is to pursue further exploration and development of the oil and natural gas prospects that we currently own, along with obtaining the working capital required to fund such exploration and development and the acquisition of additional domestic oil and natural gas interests. We intend to pursue prospects in partnership with other companies with exploration, development and production expertise.

The business of oil and natural gas acquisition, exploration and development is capital intensive and the level of operations attainable by an oil and gas company is directly linked to and limited by the amount of available capital. Therefore, a principal part of our plan of operations is to raise the additional capital required to finance the exploration and development of our current oil and natural gas prospects and the acquisition of additional properties. We may seek additional working capital through our bank lines of credit, project financing or through the sale of our securities. However, as described further below, based on our present working capital, available borrowings under the credit facility and current rate of cash flow from operations, we believe we have available to us sufficient working capital to fund our operations and expected commitments for exploration and development through, at least, December 31, 2009.

We intend to use the services of independent consultants and contractors to perform various professional services, including reservoir engineering, land, legal, financial audit, environmental, and investor relations. We believe that by limiting our management and employee costs, we may be able to better control total costs and retain flexibility in terms of project management.

Financial Condition and Liquidity

We estimate our revised capital budget for the following 12 months to be approximately $17.3 million, including:

●	Up to $3.3 million of capital for secondary enhanced oil recovery operations in the Williston Basin.

●	Up to $7.4 million to be deployed in connection with our interest in prospects operated by Approach Resources, Inc. including our highly successful Cinco Terry field.

●	Up to $3.6 million for exploratory and developmental drilling in the Surprise Prospect located in Nacogdoches County, Texas.

●	Up to $2.0 million to be used for exploratory and developmental drilling in the East Chalkley Prospect located in Cameron Parish, Louisiana.

●	Up to $1.0 million for exploratory drilling in the Leblanc Prospect located in Allen Parish, Louisiana.

As of September 30, 2008, we had total assets of $ 63.0 million and working capital of $ 2.8 million. In addition, we have available to us a new $65.0 million credit facility, of which $21.5 million is outstanding as of November 12, 2008. Based on our present working capital, available borrowings under the credit facility and current rate of cash flow from operations, we believe we have available to us sufficient working capital to fund our operations and expected commitments for exploration and development through, at least, December 31, 2009. However, in the event we receive calls for capital greater than we expect or generate cash flow from operations less than we expect, we may require additional working capital to fund our operations and expected commitments for exploration and development. We will seek to obtain additional working capital through the sale of our securities and, subject to the successful deployment of our cash on hand, we will endeavor to obtain additional capital through bank lines of credit and project financing. However, other than our new $65.0 million credit facility with CIT Capital USA Inc., we have no agreements or understandings with any third parties at this time for our receipt of additional working capital. There can be no assurance we will be able to obtain continued access to capital as and when needed or, if so, that the terms of any available financing will be subject to commercially reasonable terms. If we are unable to access additional capital in significant amounts as needed, we may not be able to develop our current prospects and properties, may have to forfeit our interest in certain prospects and may not otherwise be able to develop our business. In such an event, our stock price will be materially adversely affected.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing arrangements.

Glossary of Oil and Natural Gas Terms

The following is a description of the meanings of some of the oil and natural gas industry terms used in this report.

bbl . Barrel, 42 U.S. gallons of liquid volume, used in reference to crude oil or other liquid hydrocarbons.

bcf . Billion cubic feet of natural gas.

boe. Barrels of crude oil equivalent, determined using the ratio of six mcf of natural gas to one bbl of crude oil, condensate or natural gas liquids.

boe/d . boe per day.

Btu. British thermal unit, a measurement of energy equivalent to the heat needed to raise one pound of water one degree Fahrenheit.

Completion . The process of treating a drilled well followed by the installation of permanent equipment for the production of natural gas or oil, or in the case of a dry hole, the reporting of abandonment to the appropriate agency.

Development well . A well drilled within the proved area of a natural gas or oil reservoir to the depth of a stratigraphic horizon known to be productive.

Drilling locations . Total gross locations specifically quantified by management to be included in the Company’s multi-year drilling activities on existing acreage. The Company’s actual drilling activities may change depending on the availability of capital, regulatory approvals, seasonal restrictions, oil and natural gas prices, costs, drilling results and other factors.

Dry hole . A well found to be incapable of producing either oil or gas in sufficient quantities to justify completion as an oil or gas well.

Exploratory well . A well drilled to find and produce natural gas or oil reserves not classified as proved, to find a new reservoir in a field previously found to be productive of natural gas or oil in another reservoir or to extend a known reservoir.

Field . An area consisting of either a single reservoir or multiple reservoirs, all grouped on or related to the same individual geological structural feature and/or stratigraphic condition.

Formation . An identifiable layer of rock named after its geographical location and dominant rock type.

Lease . A legal contract that specifies the terms of the business relationship between an energy company and a landowner or mineral rights holder on a particular tract of land.

Leasehold . Mineral rights leased in a certain area to form a project area.

mbbls . Thousand barrels of crude oil or other liquid hydrocarbons.

mboe. Thousand barrels of crude oil equivalent, determined using the ratio of six mcf of natural gas to one bbl of crude oil, condensate or natural gas liquids

mcf. Thousand cubic feet of natural gas.

mcfe . Thousand cubic feet equivalent, determined using the ratio of six mcf of natural gas to one bbl of crude oil, condensate or natural gas liquids.

mmbbls . Million barrels of crude oil or other liquid hydrocarbons.

mmboe. Million barrels of crude oil equivalent, determined using the ratio of six mcf of natural gas to one bbl of crude oil, condensate or natural gas liquids.

mmbtu . Million British Thermal Units.

mmcf . Million cubic feet of natural gas.

Net acres, net wells, or net reserves . The sum of the fractional working interest owned in gross acres, gross wells, or gross reserves, as the case may be.

Overriding royalty interest . Is similar to a basic royalty interest except that it is created out of the working interest. For example, an operator possesses a standard lease providing for a basic royalty to the lessor or mineral rights owner of 1/8 of 8/8. This then entitles the operator to retain 7/8 of the total oil and natural gas produced. The 7/8 in this case is the 100% working interest the operator owns. This operator may assign his working interest to another operator subject to a retained 1/8 overriding royalty of the 8/8. This would then result in a basic royalty of 1/8, an overriding royalty of 1/8 and a working interest of 3/4. Overriding royalty interest owners have no obligation or responsibility for developing and operating the property. The only expenses borne by the overriding royalty owner are a share of the production or severance taxes and sometimes costs incurred to make the oil or gas salable.

Plugging and abandonment . Refers to the sealing off of fluids in the strata penetrated by a well so that the fluids from one stratum will not escape into another or to the surface. Regulations of all states require plugging of abandoned wells.

Present value of future net revenues (PV-10 ). The present value of estimated future revenues to be generated from the production of proved reserves, before income taxes, of proved reserves calculated in accordance with Financial Accounting Standards Board guidelines, net of estimated production and future development costs, using prices and costs as of the date of estimation without future escalation, without giving effect to hedging activities, non-property related expenses such a general and administrative expenses, debt service and depreciation, depletion and amortization, and discounted using an annual discount rate of 10%.

PV-10 . Pre–tax present value of estimated future net revenues discounted at 10%.

Production . Natural resources, such as oil or gas, taken out of the ground.

Productive well . A well that is found to be capable of producing either oil or gas in sufficient quantities to justify completion as an oil or gas well.

Project . A targeted development area where it is probable that commercial oil or gas can be produced from new wells.

Prospect . A specific geographic area which, based on supporting geological, geophysical or other data and also preliminary economic analysis using reasonably anticipated prices and costs, is deemed to have potential for the discovery of commercial hydrocarbons.

Proved developed producing reserves . Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods.

Proved reserves . The estimated quantities of oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be commercially recoverable from known reservoirs under current economic and operating conditions, operating methods, and government regulations.

Proved undeveloped reserves . Proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively large expenditure is required for recompletion.

Recompletion . The process of re-entering an existing well bore that is either producing or not producing and completing new reservoirs in an attempt to establish or increase existing production.

Reserves . Oil, natural gas and gas liquids thought to be accumulated in known reservoirs.

Reservoir . A porous and permeable underground formation containing a natural accumulation of producible nature gas and/or oil that is confined by impermeable rock or water barriers and is separate from other reservoirs.

Royalty interest . A share of production or the value or proceeds of production, free of the costs of production, when and if there is production. A royalty interest is usually expressed as a fraction such as 1/8.

Secondary recovery . A recovery process that uses mechanisms other than the natural pressure of the reservoir, such as gas injection, water injection, or water flooding, to produce residual oil and natural gas remaining after the primary recovery phase.

Shut-in . A well that has been capped (having the valves locked shut) for an undetermined amount of time. This could be for additional testing, could be to wait for pipeline or processing facility, or a number of other reasons.

Standardized measure . The present value of estimated future cash inflows from proved oil and natural gas reserves, less future development, abandonment, production and income tax expenses, discounted at 10% per annum to reflect timing of future cash flows and using the same pricing assumptions as were used to calculate PV-10. Standardized measure differs from PV-10 because standardized measure includes the effect of future income taxes.

Successful . A well is determined to be successful if it is producing oil or natural gas, or awaiting hookup, but not abandoned or plugged.

Undeveloped acreage . Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether such acreage contains proved reserves.

Water flood . A method of secondary recovery in which water is injected into the reservoir formation to displace residual oil and enhance hydrocarbon recovery.

Water re-pressurization . A method of secondary recovery in which water is injected into the reservoir formation to increase reservoir pressure and enhance hydrocarbon recovery.

Working interest . The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and receive a share of production and requires the owner to pay a share of the costs of drilling and production operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .

Not applicable.

ITEM 4(T). CONTROLS AND PROCEDURES

Our chief executive officer and chief financial officer have reviewed and continue to evaluate the effectiveness of our controls and procedures over financial reporting and disclosure (as defined in the Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating our controls and procedures over financial reporting and disclosure, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

An evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2008. Based on that evaluation, our management, including our chief executive officer and chief financial officer, has concluded that our disclosure controls and procedures were effective as of September 30, 2008.

Changes in Internal Control . We made no changes to our internal control over financial reporting during the quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS

Exhibit No.	Description	Method of Filing

10.1	Credit Agreement dated as of September 9, 2008 among Petro Resources Corporation, CIT Capital USA Inc., as administrative agent, and the lenders party thereto	Filed as an exhibit to Current Report on Form 8-K dated September 9, 2008

10.2	Second Lien Term Loan Agreement dated as of September 9, 2008 among Petro Resources Corporation, CIT Capital USA Inc., as administrative agent, and the lenders party thereto	Filed as an exhibit to Current Report on Form 8-K dated September 9, 2008

10.3	Guaranty and Collateral Agreement dated as of September 9, 2008 among Petro Resources Corporation, PRC Williston LLC, and CIT Capital USA Inc., as administrative agent	Filed as an exhibit to Current Report on Form 8-K dated September 9, 2008

10.4	Second Lien Guaranty and Collateral Agreement dated as of September 9, 2008 Petro Resources Corporation, PRC Williston LLC, CIT Capital USA Inc., as administrative agent	Filed as an exhibit to Current Report on Form 8-K dated September 9, 2008

10.5	Partnership Interest Purchase Agreement dated September 26, 2008, as amended on September 29, 2008, between Petro Resources Corporation and PRC HHEP II, LP	Filed herewith

31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934	Filed herewith

31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934	Filed herewith

32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350	Filed herewith

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereto duly authorized.