GROOVE BOTANICALS INC. - FORM 10-Q

Attached files

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EX-31 - GROOVE BOTANICALS INC.	ex31.htm
EX-32 - GROOVE BOTANICALS INC.	ex32.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2010

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

For the transition period from ___________ to ___________

Commission File Number: 1-12850

AVALON OIL & GAS, INC.

(Exact Name of Small Business Issuer as specified in its charter)

Nevada	84-1168832
(State or other jurisdiction of incorporation or organization)	(I.R.S. employer identification no.)

7808 Creekridge Circle, Suite 105

Minneapolis, MN 55439

(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code:

(952) 746-9652

Indicate by check mark whether the Issuer:

(1) Has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports): Yes x No o

(2) Has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an 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 x

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

468,564,125 shares of the registrant's Common Stock, $0.001 per share, were outstanding as of February 1, 2011.

Table of Contents

PART I FINANCIAL INFORMATION		Page

Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of December 31, 2010 (Unaudited) and March 31, 2010	3
	Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2010 and 2009 (Unaudited)	4
	Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2010 and 2009 (Unaudited)	5
	Notes to Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition or Plan of Operation	28
Item 3.	Qualitative and Quantitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35

PART II OTHER INFORMATION

Item 1.	Legal Proceedings	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults upon Senior Securities	36
Item 4.	Submission of Matters to a Vote of Security Holders	36
Item 5.	Other Information	36
Item 6.	Exhibits and Reports on Form 8-K	37

Signatures		38

Table of Contents

ITEM 1. FINANCIAL STATEMENTS

AVALON OIL & GAS, INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31,			March 31,
	2010			2010
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	183,235		$	46,522
Accounts receivable, net		5,889			11,340
Note receivable		8,571			-
Deposits and prepaid expenses		7,467			4,150
Total current assets		205,162			62,012

Note receivable		30,714			-
Property and equipment, net		10,264			17,689
Unproven oil and gas properties		1,866,095			1,866,095
Producing oil and gas properties, net		190,473			263,268
Intellectual property rights, net		234,220			266,158
Total Assets	$	2,536,928		$	2,475,222
Liabilities and stockholders' equity
Current liabilities
Accounts payable and accrued interest	$	730,523		$	786,234
Accounts payable and accrued liabilities- related parties		205,568			150,168
Due to related party – dividends payable		61,200			31,700
Accrued liabilities to joint interests		24,665			26,281
Notes payable – related party		6,000			17,000
Notes payable, net of discount		409,319			444,500
Total current liabilities		1,437,275			1,455,883

Accrued asset retirement obligations liability		78,005			73,659
Total liabilities		1,515,280			1,529,542

Commitments and contingencies		-			-

Stockholders' equity
Preferred stock, Series A, $0.10 par value, 1,000,000 shares
authorized; 100 shares issued and outstanding - stated at redemption value		500,000			500,000
Common stock, $0.001 par value; 1,000,000,000 shares authorized;
487,483,044 and 164,704,193 shares issued and outstanding
at December 31, 2010 and March 31, 2010, respectively		487,483			164,704
Additional paid-in capital - common stock		28,250,223			27,379,920
Common stock subscribed		244,939			71,167
Subscription receivable		(40,000	)		-
Accumulated deficit		(28,420,997	)		(27,170,111	)
Total stockholders' equity		1,021,648			945,680

Total liabilities and stockholders’ equity	$	2,536,928		$	2,475,222

See notes to consolidated financial statements.

Table of Contents

AVALON OIL & GAS, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

	For the Three			For the Three			For the Nine			For the Nine
	Months Ended			Months Ended			Months Ended			Months Ended
	December 31,			December 31,			December 31,			December 31,
	2010			2009			2010			2009

Oil and gas sales	$	56,935		$	68,545		$	134,916		$	193,557

Operating expenses:
Lease operating expense, severance taxes
and asset retirement obligations accretion		53,903			19,896			111,175			101,580
Selling, general and administrative expenses		214,139			92,400			781,256			431,558
Stock based compensation		3,500			(7,867	)		274,633			18,083
Depreciation, depletion, and amortization		27,558			106,627			89,602			581,800
Impairment expense		-			564,711			-			564,711
Total operating expenses		299,100			775,767			1,256,666			1,697,732

Operating loss		(242,165	)		(707,222	)		(1,121,750	)		(1,504,175	)

Other (income) expense:
Gain on sale of well interest		-			-			(22,478	)		-
Loss on extinguishment of debt		-			242,570			110,880			309,696
Gain on settlement of accounts payable		-			-			(19,925	)		-
Loss on conversion of notes payable		2,694						2,694
Interest expense, net		26,308			236,637			57,965			492,615
Total other (income) expense		29,002			479,207			129,136			802,311

Loss before taxes		(271,167	)		(1,186,429	)		(1,250,886	)		(2,306,486	)

Provision for taxes		-			-			-			-

Net loss		(271,167	)		(1,186,429	)		(1,250,886	)		(2,306,486	)

Preferred stock dividend		(10,000	)		(10,000	)		(30,000	)		(30,000	)

Net loss attributable to common stock after preferred stock dividends	$	(281,167	)	$	(1,196,429	)	$	(1,280,886	)	$	(2,336,486	)

Net loss per share - basic and diluted	$	(0.00	)	$	(0.01	)	$	(0.00	)	$	(0.02	)

Weighted average shares outstanding - basic and diluted		475,839,373			124,263,976			341,104,308			110,669,895

See notes to consolidated financial statements.

Table of Contents

AVALON OIL & GAS, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

	For the Nine			For the Nine
	Months Ended			Months Ended
	December 31,			December 31,
	2010			2009
Cash flows from operating activities:
Net loss	$	(1,250,886	)	$	(2,306,486	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on extinguishment of debt		110,880			309,696
Gain on sale of Well interest		(22,478	)		-
Gain on settlement of debt		(19,925	)		-
Loss on conversion of notes payable		2,694			-
Non-cash compensation		274,633			18,083
Common stock issued for financing fees		74,260			-
Depreciation		7,425			7,841
Depletion		50,244			452,904
Depreciation of asset retirement obligations liability		2,172			2,172
Impairment of intangible asset		-			564,711
Amortization of discount on notes payable		24,319			461,518
Amortization of intangible assets		31,938			121,057
Net change in operating assets and liabilities:
Accounts receivable		5,451			1,902
Joint interest receivable		(1,616	)		(3,897	)
Prepaid expenses		1,350			43,340
Accounts payable and other accrued expenses		179,335			196,373
Dividend payable to related party		29,500			22,200
Due to related party		55,400			90,350
Asset retirement obligation		4,346			4,346
Net cash used in operating activities		(440,958	)		(13,890	)

Cash flows from investing activities:
Payments received on notes receivable		3,571			-
Purchase of interests in Grace wells		-			(350	)
Net cash provided by (used in) investing activities		3,571			(350	)

Cash flows from financing activities:
Proceeds from notes payable – related party		13,000			-
Payments on notes payable –related party		(24,000	)		-
Proceeds from notes payable		47,500			6,000
Payments on notes payable		(5,000	)		-
Common stock issued for cash		542,600			-
Net cash provided by financing activities		574,100			6,000

Net increase (decrease) in cash and cash equivalents		136,713			(8,240	)

Cash and cash equivalents at beginning of period		46,522			26,406

Cash and cash equivalents at end of period	$	183,235		$	18,166

Table of Contents

AVALON OIL & GAS, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

Supplemental disclosures of cash flow information:

Cash paid during the period for:
Interest	$	-		$	-

Taxes	$	-		$	-

Common stock issued in exchange for consulting services	$	185,383		$	18,083

Common stock issued for conversion of note payable and accrued interest, and assumption of debt	$	406,694		$	585,000

Gain on sale of well interests	$	(22,478	)	$	-

Common stock issued in error	$	10,000		$	-

Loss on extinguishment of debt	$	110,880		$	-

Gain from settlement of debt	$	(19,925	)	$	-

Common stock issued for financing fees	$	74,260		$	-

Common stock issued for directors services	$	89,250		$	-

See notes to consolidated financial statements.

Table of Contents

AVALON OIL & GAS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

NOTE 1: DESCRIPTION OF BUSINESS

Avalon Oil & Gas, Inc. (the "Company") was originally incorporated in Colorado in April 1991 under the name Snow Runner (USA), Inc. The Company was the general partner of Snow Runner (USA) Ltd.; a Colorado limited partnership which was formed to sell proprietary snow skates under the name "Sled Dogs" and which was dissolved in August 1992. In late 1993, the Company relocated its operations to Minnesota and in January 1994 we changed our name to Snow Runner, Inc. In November 1994 we changed our name to the Sled Dogs Company. On November 5, 1997, we filed for protection under Chapter 11 of the U.S. Bankruptcy Code. In September 1998, we emerged from protection of Chapter 11 of the U.S. Bankruptcy Code. In May 1999, we changed our state of domicile to Nevada and our name to XDOGS.COM, Inc. On July 22, 2005, the Board of Directors and a majority of the Company's shareholders approved an amendment to our Articles of Incorporation to change the Company's name to Avalon Oil & Gas, Inc., and to increase the authorized number of shares of our common stock from 200,000,000 shares to 1,000,000,000 shares, par value $0.001, and engage in the acquisition of producing oil and gas properties.

The Company is currently in the process of raising funds to acquire oil and gas properties and related oilfield technologies, which the Company plans to develop into commercial applications.

On July 17, 2006, the Company purchased all the outstanding shares of Ultrasonic Mitigation Technologies, Inc. (UMTI) from Innovaro Corporation for 16,250,000 shares of the Company's common stock valued at $695,500. The shares were valued at the average sales price received in private placements of sales of our restricted common stock for cash. UMTI became a wholly owned subsidiary of the Company as of the date of acquisition. UMTI holds the technology license of a patented process for paraffin wax mitigation from crude oil using ultrasonic waves developed by the University of Wyoming.

On November 9, 2006, the Company purchased all the outstanding shares of Intelli-Well Technologies, Inc. (IWTI) from Innovaro Corporation for 20,000,000 shares of the Company's common stock valued at $594,000. The shares were valued at the average sales price received in private placements of sales of our restricted common stock for cash. ITWI became a wholly owned subsidiary of the Company as of the date of acquisition. IWTI holds a non-exclusive license in the United States for a borehole casing technology developed by the Regents of the University of California (the "Regents") through its researchers at Lawrence Livermore National Laboratory.

On March 28, 2007, the Company purchased all the outstanding shares of Leak Location Technologies, Inc. (LLTI) from Innovaro Corporation for 36,710,526 shares of the Company's common stock valued at $1,090,303. The shares were valued at the average sales price received in private placements for sales of restricted common stock for cash. LLTI became a wholly owned subsidiary of the Company as of the date of acquisition. LLTI holds a non-exclusive license in the United States for a leak detection and location technology developed by the Rensselaer Polytechnic Institute ("Rensselaer") through its researcher Michael Savic.

On September 22, 2007 the Company entered into an agreement with respect to its purchase of a 75.6% interest in Oiltek, Inc. (Oiltek) for $50,000 and the right of Oiltek to market Avalon's intellectual property. Oiltek is consolidated in these financial statements with a minority interest shown.

In June 2008, the Company entered into an agreement with Bedford Energy to acquire a 2.5% working interest in Grace Well #2 in East Chandler Field, Oklahoma, which had been producing 350 thousand cubic feet of gas per day. In August 2008, the Company entered into an additional agreement with Bedford Energy (the “Expanded Bedford Agreement”) to increase its working interest in the Grace #2 from 2.5% to 7.5%; and to increase its net revenue interest in the Grace #2 to 11.95%. In addition, the Company acquired a 10% working interest and a 13.825% net revenue interest in the Grace #1, Grace #3, Grace #5A and Grace #6 wells (such interest, collectively “Bedford Assets”). The Company also acquired the right to operate the Grace Wells, and as set forth in the Acquisition Strategy section of Item 2: Management’s Discussion and Analysis, intends to increase its ownership in these wells.

In September 2008, the Company sold 15% of its recently acquired interest in the Bedford Assets for cash in the amount of $262,500.

In September 2008, the Company also acquired an undivided fifty (50%) percent interest in a salt water disposal well and offset and development acreage in the two quarter sections of the East Chandler Field. In addition, the Company acquired a fifty (50%) percent interest in 540 acres adjoining the 320 acre East Chandler Field.

Table of Contents

AVALON OIL & GAS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

During the three months ended June 30, 2009, the Company amended the agreement with Bedford Energy, whereby the Company transferred a 2.25% carried interest in the Grace Wells #1, #2, #3, #5A and #6 in consideration for the cancellation of the note payable and accrued interest to Bedford in the amounts of $390,000 and $18,627, respectively.

During the three months ended December 31, 2009, the Company reduced the amount recorded for the assumption of accounts payable pursuant to the Bedford Energy transaction in the amount of $26,785.

During the three months ended June 30, 2010, the Company sold working interests in wells located in Blackmon- Hall Unit, New Diana Field, Upshur County, Texas (the “New Diana Wells”), of which it had previously acquired a ten percent (10%) working interest in April, 2008, for a note receivable in the amount of $42,857. These properties had a net book value at the time of the sale of $20,379. This resulted in a gain from the sale of the working interest in the wells in the amount of $22,478.

Interim Financial Information

The accompanying unaudited interim consolidated financial statements have been prepared by the Company, in accordance with generally accepted accounting principles pursuant to Regulation S-X of the Securities and Exchange Commission. Accordingly, these interim financial statements should be read in conjunction with the Company’s financial statements and related notes as contained in Form 10-K for the year ended March 31, 2010. In the opinion of management, the interim consolidated financial statements reflect all adjustments, including normal recurring adjustments, necessary for fair presentation of the interim periods presented. The results of the operations for the three and nine months ended December 31, 2010 are not necessarily indicative of the results of operations to be expected for the full year.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Preparation of Financial Statements

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and related notes. The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto for the year ended March 31, 2010.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which include only normal recurring adjustments) necessary to present fairly the balance sheets of the Company and subsidiaries as of December 31, 2010 and the results of their operations for the three and nine months ended December 31, 2010 and 2009, and cash flows for the nine months ended December 31, 2010 and 2009. The results of operations for the three and nine months ended December 31, 2010 and 2009 are not necessarily indicative of the results to be expected for the entire year.

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Ultrasonic Mitigation Technologies, Inc.; Intelli-Well Technologies, Inc. and Leak Location Technologies, Inc. along with 75.6 % owned Oiltek, Inc. All significant inter-company items have been eliminated in consolidation.

Going Concern

The December 31, 2010, consolidated financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has incurred a loss of $28,420,997 from inception through December 31, 2010, and has a working capital deficiency of $1,232,113 at December 31, 2010. The Company currently has minimal revenue generating operations and expects to incur substantial operating expenses in order to expand its business. As a result, the Company expects to incur operating losses for the foreseeable future.

Table of Contents

AVALON OIL & GAS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

We intend to attempt to raise additional equity and/or debt financing to provide funds to acquire oil and gas producing properties, as we have done this past quarter.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates and assumptions.

Basis of Accounting

The Company's financial statements are prepared using the accrual method of accounting.

Cash Equivalents

Cash and cash equivalents consist primarily of cash on deposit, certificates of deposit, money market accounts, and investment grade commercial paper that are readily convertible into cash and purchased with original maturities of three months or less. The Company maintains its cash balances at several financial institutions. Accounts at the institutions are insured by the Federal Deposit Insurance Corporation up to $250,000.

Fair Value of Financial Instruments

The Company's financial instruments are cash and cash equivalents, accounts receivable, accounts payable, notes payable, and long-term debt. The recorded values of cash and cash equivalents, accounts receivable, and accounts payable approximate their fair values based on their short-term nature. The recorded values of notes payable and long-term debt approximate their fair values, as interest approximates market rates.

Accounts Receivable

Management periodically assesses the collectability of the Company's accounts receivable. Accounts determined to be uncollectible are charged to operations when that determination is made. The Company had an allowance for doubtful accounts receivable of $56,219 and $19,696 at December 31, 2010 and March 31, 2010.

Oil and Natural Gas Properties

The Company follows the full cost method of accounting for natural gas and oil properties prescribed by the Securities and Exchange Commission ("SEC"). Under the full cost method, all acquisition, exploration, and development costs are capitalized. The Company capitalizes all internal costs, including: salaries and related fringe benefits of employees directly engaged in the acquisition, exploration and development of natural gas and oil properties, as well as other identifiable general and administrative costs associated with such activities. During the three and nine months ended December 31, 2010 and year ended March 31, 2010, no acquisition costs were capitalized as such costs were immaterial.

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AVALON OIL & GAS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

Other Property and Equipment

Other property and equipment is reviewed on an annual basis for impairment and as of March 31, 2010, the Company had not identified any such impairment. Repairs and maintenance are charged to operations when incurred and improvements and renewals are capitalized.

Other property and equipment are stated at cost. Depreciation is calculated using the straight-line method for financial reporting purposes and accelerated methods for tax purposes.

Their estimated useful lives are as follows:

Office Equipment

5-7 Years

Asset Retirement Obligations

In accordance with the provisions of Financial Accounting Standards Board “FASB” Accounting Standard Codification “ASC” 410-20-15, the Company records the fair value of its liability for asset retirement obligations in the period in which it is incurred and a corresponding increase in the carrying amount of the related long live assets. Over time, the liability is accreted to its present value at the end of each reporting period, and the capitalized cost is depreciated over the useful life of the related assets. Upon settlement of the liability, the Company will either settle the obligation for its recorded amount or incur a gain or loss upon settlement. The Company's asset retirement obligations relate to the plugging and abandonment of its oil properties.

Intangible Assets

The cost of licensed technologies acquired is capitalized and will be amortized over the shorter of the term of the licensing agreement or the remaining life of the underlying patents.

The Company evaluates recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that intangible assets carrying amount may not be recoverable. Such circumstances include, but are not limited to: (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of cost significantly in excess of the amount originally expected for the acquisition of an asset. The Company measures the carrying amount of the assets against the estimated undiscounted future cash flows associated with it. During the three months ended December 31, 2010, there were no such events or changes in circumstances which indicated assets may not be recoverable.

Should the sum of the expected cash flows be less than the carrying amount of assets being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying amount of the assets, exceed fair value. Estimated amortization of intangible assets over the next five years is as follows:

December 31,
2011	$	42,585
2012		42,585
2013		42,585
2014		42,585
2015		42,585
	$	212,925

The carrying value of the assets does not exceed fair value at December 31, 2010, and no impairment charge has been recorded during the three and nine months ended December 31, 2010.

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AVALON OIL & GAS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

Stock Based Compensation

In December 2004, ASC 718-10, Share Based Payment, ASC 718-10 eliminates accounting for share-based compensation transaction using the intrinsic value method and requires instead that such transactions be accounted for using a fair-value-based method. The Company has elected to adopt the provisions of ASC 718-10 effective January 1, 2006, under the modified prospective transition method, in which compensation cost was recognized beginning with the effective date (a) based on the requirements of ASC 718-10 for all share-based payments granted after the effective date and (b) based on the requirements of ASC 718-10 for all awards granted to employees prior to the effective date of ASC 718-10 that remain unvested on the effective date.

Warrants

The value of warrants issued is recorded at their fair values as determined by use of a Black Scholes Model at such time or over such periods as the warrants vest.

Loss per Common Share

ASC 260-10-45 requires presentation of "basic" and "diluted" earnings per share on the face of the statements of operations for all entities with complex capital structures. Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted during the period. Dilutive securities having an antidilutive effect on diluted earnings per share are excluded from the calculation.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

ASC 740-10-25 is intended to clarify the accounting for uncertainty in income taxes recognized in a company's financial statements and prescribes the recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740-10-25 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Under ASC 740-10-25, evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met.

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AVALON OIL & GAS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

Reclassifications

Certain reclassifications have been made to the prior years' financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.

Revenue Recognition

In accordance with the requirements of SEC Staff Accounting Bulletin Topic 13A "Revenue Recognition", revenues are recognized at such time as (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller's price to the buyer is fixed or determinable and (4) collectability is reasonably assured. Specifically, oil and gas sales are recognized as income at such time as the oil and gas are delivered to a viable third party purchaser at an agreed price. Interest income is recognized as it is earned.

During the three months ended December 31, 2010, the Company entered into a contractual dispute with a well operator (the “Operator”) which currently operates three of the Company’s producing leaseholds. As a result of this dispute, the Operator is withholding from the Company cash payments related to revenue from these leaseholds.

The Company has estimated this amount to be $33,500 based upon the historical production of these wells, and we have recognized revenue and accounts receivable in this amount during the three months ended December 31, 2010.

Long-Lived Assets

Equipment is stated at acquired cost less accumulated depreciation. Office equipment is depreciated on the straight-line basis over the estimated useful lives (five to seven years).

Impairment of long-lived assets is recognized when events or changes in circumstances indicate that the carrying amount of the asset or related group of assets may not be recoverable. If the expected future undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recognized at that time. Measurement of impairment may be based upon appraisal, market value of similar assets or discounted cash flows. During the three and nine months ended December 31, 2010, the Company recognized no such expense during the period.

New Accounting Pronouncements

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

NOTE 3: NOTE RECEIVABLE

During the nine months ended December 31, 2010, the Company entered into an agreement to sell its working interest in the New Diana Wells to KROG, the well operator, for a non- interest bearing note receivable in the amount of $42,857. This note is payable in monthly principal installments of $714 for sixty (60) months, with payments beginning on August 20, 2010. The note matures on July 20, 2015. In the event that the payor defaults on the note receivable, the note will accrue interest at a rate of ten percent (10%) per annum. If the payor prepays the note receivable, the principal balance of the note will be discounted by one hundred twenty percent (120%) of the amount of the prepayment.

During the three and nine months ended December 31, 2010, the Company received payments in the amount of $3,571. As of December 31, 2010, the outstanding balance of the note was $39,286, $8,571 has been recorded as a current note receivable and the long-term portion has been recorded in the amount of $30,714.

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AVALON OIL & GAS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

NOTE 4: RECEIVABLE FROM JOINT INTERESTS

The Company is the operator of certain wells acquired in the Expanded Bedford Agreement. Pursuant to a joint interest operating agreement (the “Joint Interest Agreement”), the Company charges the other owners of the Grace Wells for their pro-rata share of operating and work-over expenses. These receivables are carried on the Company’s balance sheet as Receivable from Joint Interests at December 31, 2010 and March 31, 2010, the amount of these receivables is $0. During the year ended March 31, 2010, the Company deemed the collectability of the receivable from joint interests in the amount of $168,502 unlikely. As a result, the Company charged $168,502 to operations during the year ended March 31, 2010 as bad debt expense.

NOTE 5: PROPERTY AND EQUIPMENT

A summary of property and equipment at December 31, 2010 and March 31, 2010, is as follows:

	December 31, 2010			March 31, 2010
Office Equipment	$	41,778		$	41,778
Leasehold improvements		7,989			7,989
		49,767			49,767
Less: Accumulated depreciation		(39,503	)		(32,078	)
Total	$	10,264		$	17,689

Depreciation expense for the three months ended December 31, 2010 and 2009 was $2,475 and $2,752, respectively. Depreciation expense for the nine months ended December 31, 2010 and 2009 was $7,425 and $7,841, respectively.

NOTE 6: INTELLECTUAL PROPERTY RIGHTS

A summary of the intellectual property rights at December 31, 2010 and March 31, 2010, are as follows:

	December 31, 2010			March 31, 2010
Ultrasonic Mitigation Technology	$	425,850		$	425,850
Intelli-Well Technologies		391,500			391,500
Leak Location Technology		980,305			980,305
BIO-CAT Well and pipeline		30,000			30,000
		1,827,655			1,827,655
Less: accumulated amortization		(1,593,435	)		(1,561,497	)
Total	$	234,220		$	266,158

Amortization expense for the three months ended December 31, 2010 and 2009 was $10,646. Amortization expense for the nine months ended December 31, 2010 and 2009 was $31,938 and $121,057, respectively. During the year ended March 31, 2010, the Company determined that the Leak Location Technology license and the BIO-CAT Technology license value was impaired, which resulted in the impairment expense of $564,711 for the year ended March 31, 2010.

Estimated amortization of intangible assets over the next five years is as follows:

December 31,
2011	$	42,585
2012		42,585
2013		42,585
2014		42,585
2015		42,585
	$	212,925

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AVALON OIL & GAS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

NOTE 7: OIL AND GAS PROPERTY ACTIVITY

The Company purchased a five percent (5%) working interest in 1,280 acres in Lipscomb County, Texas in December, 2007. The Waters #3-328 well was drilled and completed in April, 2008 and put into production in September, 2008.

The Company acquired a ten percent (10%) working interest in the Blackmon – Hall Unit, New Diana Field, Upshur County, Texas in April, 2008. The work-over on the Annie Blackmon well and the R. L. Hall were completed in June, 2008 and put into production August, 2008. The company sold this working interest in June 2010.

In April 2008, the Company increased its working interest in the Janssen #1A well to 7.5% for $37,500.

In June 2008, the Company entered into an agreement with Bedford Energy to acquire a 2.5% working interest in Grace Well #2 in East Chandler Field, Oklahoma, which had been producing 350 thousand cubic feet of gas per day, for $40,000. In August 2008, the Company entered into an additional agreement with Bedford Energy (the “Expanded Bedford Agreement”) to increase its working interest in the Grace #2 well from 2.5% to 7.5%; and to increase its net revenue interest in the Grace #2 well to 11.95%. In addition, the Company acquired a 10% working interest and a 13.825% net revenue interest in the Grace #1, Grace #3, Grace #5A and Grace #6 wells (such interest, collectively, the “Bedford Assets”).

In September 2008, the Company sold a 15% of its recently acquired interest in the Bedford Assets, for cash in the amount of $262,500, resulting in a loss of $37,500.

In December 2008, the Company and Bedford Energy, Inc. agreed to amend the Original Bedford Agreement, and on December 8, 2008, the Company entered into an amended agreement with Bedford Energy (the “Amended Bedford Agreement”). Pursuant to the terms of the Amended Bedford Agreement, The Company would pay a total of $900,000 in cash (reduced from $1,000,000 in the Original Bedford Agreement), and provide a note in the amount of $400,000 (reduced from $750,000 in the Original Bedford Agreement, which note was subsequently cancelled when the Company agreed to assume accounts payable in the amount of $222,273 (increased from $0 in the original agreement) and issue a total of 3,500,000 shares of its common stock (increased from 2,500,000 in the original agreement) to Bedford Energy, Inc. The Company closed this transaction on December 22, 2008.

In September 2008, The Company also acquired an undivided fifty (50%) percent interest in a salt water disposal well and offset and development acreage in the two quarter sections of the East Chandler Field. In addition, the Company acquired a fifty (50%) percent interest in 540 acres adjoining the 320 acre East Chandler Field.

As part of the Expanded Bedford Agreement, the Company also acquired the right to operate Grace Wells #1, #2, #3, #5A, and #6 (the “Grace Wells”). The Company hired a third party to operate the Grace Wells and to upgrade the operation of the Grace Wells (“Workover”). In February and March 2009, the Company made formal buyout offers (the “Grace Wells Buyout Offer”) to the approximately 93 additional working interest holders in the Grace Wells (the “Additional Grace Wells Owners”). The Grace Wells Buyout Offer provided three options to the Additional Grace Wells Owners: (1) The Additional Grace Wells Owners would continue to participate in the operation of the Grace Wells, and would remit to the Company funds representing their pro rata portion of the Workover costs; (2) The Additional Grace Wells Owners would sell their interests in the Grace Wells to the Company for cash and stock in the Company; (3) The Additional Grace Wells Owners could do nothing. If this option was chosen, the Additional Grace Well Owner would retain their interest in the Grace Wells, but their pro-rata portion of the costs would be subject to a 500% penalty; in addition, their pro-rata portion of the revenue generated by the Grace Wells would be applied to their portion of the costs, including the 500% penalty, before they would receive any payment. At March 31, 2009, the approximately 93 Grace Wells investors had selected the following options: Approximately 22 selected option 1, continued participation; 29 selected option 2, the Company buyout; 17 were in Option 3, non-consent; and 25 were still pending and had not made a selection.

In April 2009, the Company and Bedford Energy, Inc. agreed to amend the Amended Bedford Agreement, whereby the Company transferred to Bedford Energy a 2.25% carried interest in the Grace Wells #1, #2, #3 #5A, and #6 in consideration for the cancellation of the promissory note in the amount of $400,000 plus accrued interest in that amount of $18,627.

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AVALON OIL & GAS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

During the year ended March 31, 2010, pursuant to the terms of the Grace Well Buyout Offer, an additional 6 investors selected option 2, the Company buyout, and 2 additional investor selected option 1, continued participation.

The table below shows the Company’s working interests in the Grace Wells as of December 31, 2010:

Well	December 31, 2010 Working Interest
Grace #1		46	%
Grace #2		27	%
Grace #3		41	%
Grace #5A		36	%
Grace #6		33	%

The Company has reached an agreement to purchase a 13.50% working interest in the Grace # 1, a 22.50% working interest in the Grace # 2, an 11.50% working interest in the Grace # 3 and Grace # 5A, and a 21.50% working interest in the Grace #6, for $40,687.50, from 15 working interest owners. We closed this transaction in January, 2011.

During the three months ended June 30, 2010, the Company sold working interests in the New Diana Wells for a note receivable in the amount of $42,857. These properties has a net book value as of June 30, 2010 of $20,379, this resulted in a gain from the sale of the working interest in the wells in the amount of $22,478.

Producing oil and gas properties consist of the following:

	December 31, 2010			March 31, 2010
Lincoln County, Oklahoma	$	67,565		$	67,565
Other properties, net		1,005,676			1,038,233
Asset retirement obligation		49,984			48,298
Property impairments		(481,072	)		(481,072	)
		642,153			673,024
Less: Depletion		(451,680	)		(409,756	)
Net	$	190,473		$	263,268

Unproven Oil and Gas Properties

The balance of unproven oil and gas properties as of December 31, 2010 and March 31, 2010 was $1,866,095.

The costs of unproven properties are excluded from amortization until the properties are evaluated. We review all of our unevaluated properties annually to determine whether or not and to what extent proved reserves have been assigned to the properties and otherwise if impairment has occurred. Unevaluated properties are grouped by major prospect area where individual property costs are not significant and are assessed individually when individual costs are significant. The Company reviews oil and gas properties annually, so no impairment was taken for the period ended December 31, 2010.

NOTE 8: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consisted of the following:

	December 31, 2010		March 31, 2010
Accounts payable	$	650,460	$	733,233
Accrued interest		80,063		53,001
Total	$	730,523	$	786,234

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AVALON OIL & GAS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

NOTE 9: NOTES PAYABLE

		December 31, 2010				March 31, 2010
On May 8, 2005, the Company entered into a convertible note payable agreement with a shareholder in the amount of $100,000. The note carries an interest rate of 10% per annum and a maturity date of November 8, 2006. The note holder has the right to convert the note and accrued interest at a rate of $0.01 per share. The value of this conversion feature was treated as a loan discount for the full $100,000 of the loan and was amortized to interest expense over the life of the loan. On May 8, 2007 the note was extended for one year. The conversion feature of the note was valued at $25,852 and was treated as a prepaid loan costs. The prepaid loan costs have been amortized over the life of the new note. On October 19, 2007, the note holder converted $30,000 of principal plus accrued interest of $16,152 for 1,350,000 shares of common stock. On November 30, 2007, the note holder converted $10,000 of principal for 950,000 shares of common stock. On January 31, 2008, the note holder converted $10,000 of principal and accrued interest of $600 for 1,250,000 shares of common stock. On February 29, 2008, the note holder converted $8,000 of principal for 1,250,000 shares of common stock. On March 31, 2008, the note holder converted $5,000 of principal for 1,250,000 shares of common stock. On March 31, 2008, the note holder converted $5,000 of principal for 1,250,000 shares of common stock. On June 6, 2008, the note holder converted $7,000 of principal and $1,372 of accrued interest for 1,550,000 shares of common stock. On June 23, 2008, the note holder converted $10,000 of principal and $395 of accrued interest for 1,500,000 shares of common stock. On October 15, 2008, the note holder converted $5,000 of principal and $10,000 of interest for 3,300,000 shares of common stock. On December 3, 2008, the note holder converted $3,000 of principal and $201 of interest for 2,000,000 shares of common stock. On February 24, 2009, the note holder converted $2,000 of principal and $167 of accrued interest into 4,000,000 shares of common stock During the three months ended September 30, 2009, the Company issued 33,000,000 shares for the conversion of $2,000 of principal and $367 of accrued interest on this note, and for other consideration. During the three months ended December 31, 2009, the Company issued 30,000,000 shares of common stock for the conversion of $1,000 principal and $361 of accrued interest on this note and for other considerations. During the three months ended June 30, 2010, the Company issued 32,000,000 shares of common stock for the conversion of $1,000 principal and $380 of accrued interest on this note and for other considerations (see note 12). During the three months ended September 30, 2010, the Company issued 60,000,000 shares of common stock for the conversion of $1,000 principal and $166 of accrued interest on this note and for other considerations (see note 12). Interest in the amount of $126 and $176 was accrued on this note during the three months ended December 31, 2010 and 2009, respectively. Interest in the amount of $413 and $903 was accrued on this note during the nine months ended December 31, 2010 and 2009, respectively. As of September 30, 2009, the 6,000,000 shares for the conversion on February 24, 2009 have not been issued, these shares are shown as common stock subscribed on the Company’s balance sheet as of December 31, 2009. During the year ended March 31, 2010, the Company extended the maturity date of this note until April 1, 2010. During the three months ended June 30, 2010, the Company extended the maturity date of this note until April 1, 2011		$	5,000			$	7,000

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AVALON OIL & GAS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

	December 31, 2010		March 31, 2010
On November 11, 2008, the Company issued a convertible promissory note to an investor in the amount of $50,000. The note carries an interest rate of 10% per annum and a maturity date of October 1, 2009. The note holder has the right to convert the note and accrued interest into shares of the Company’s common stock at a rate of $0.10 per share. In addition to the note, the investor received three-year warrants to purchase 500,000 shares of the Company’s common stock at a price of $0.10 per share. The Company valued these warrants using the Black-Sholes valuation model, and charged the fair value of the warrants in the amount of $11,310 as a discount on notes payable. The discount is being amortized to interest expense over the life of the note via the effective interest method. Interest in the amount of $756 and $1,260 was accrued on this note during the three months ended December 31, 2010 and 2009, respectively. Interest in the amount of $2,304 and $3,729 was accrued on this note during the nine months ended December 31, 2010 and 2009, respectively. During the three months ended December 31, 2010 and 2009 the Company amortized $0 and $3,982 of the discount on the note payable to interest expense, respectively. During the nine months ended December 31, 2010 and 2009 the Company amortized $0 and $10,819 of the discount on the note payable to interest expense, respectively. During the three months ended December 31, 2009, the Company issued 30,000,000 shares in consideration for the assumption by a third party of $10,000 this note and interest of $1,068, and for other consideration. During the three months ended June 30, 2010, the Company issued 32,000,000 shares of common stock for the conversion of $1,000 principal and $380 of accrued interest on another note and for other considerations (see note 12). During the three months ended June 30, 2010, the Company extended the maturity date of this note until April 1, 2011.		30,000		40,000

On December 22, 2008, the Company issued a promissory note to an investor in the amount of $150,000. This note carries an interest rate of 10% per annum and matured on December 15, 2009. In addition to the note payable, the Company issued 7,500,000 shares of common stock to the note holder. The shares are considered a discount to the note payable. At the time of the issuance of the shares to the note holder, the market price of the shares exceeded the fair value of the note payable; as a result the value of the discount was capped at the face value of the note, $150,000. The discount will be amortized to interest expense over the life of the note, 1 year, via the effective interest method. Interest in the amount of $3,781 was accrued on this note during the three months ended December 31, 2010 and 2009. Interest in the amount of $11,301 was accrued on this note during the nine months ended December 31, 2010 and 2009. During the three months ended December 31, 2010 and 2009 the Company amortized $0 and $103,711 of the discount on the note payable to interest expense, respectively. During the nine months ended December 31, 2010 and 2009 the Company amortized $0 and $146,745 of the discount on the note payable to interest expense, respectively. During the three months ended June 30, 2010, the Company extended the maturity date of this note until April 1, 2011.		150,000		150,000

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AVALON OIL & GAS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

		December 31, 2010				March 31, 2010
On December 31, 2008, the Company received a cash advance from an investor in the amount of $100,000. On January 1, 2009, the Company received an additional $50,000 and the Company entered into a note payable agreement in the amount of $150,000. The note bears interest at a rate of 10% per annum and matured on December 15, 2009. In additional to the note payable, the Company issued 7,500,000 shares of common stock to the note holder. The shares are considered a discount to the note payable. At the time of issuance of the shares to the note holders, the market price of the shares exceeded the fair value of the note payable; as a result the value of the discount was capped at the face value of the note, $150,000. The discount will be amortized over the life of the note via the effective interest method. Interest in the amount of $3,781 was accrued on this note during the three months ended December 31, 2010 and 2009. Interest in the amount of $11,301 was accrued on this note during the nine months ended December 31, 2010 and 2009. During the three months ended December 31, 2010 and 2009 the Company amortized $0 and $108,493 of the discount on the note payable to interest expense, respectively. During the nine months ended December 31, 2010 and 2009 the Company amortized $0 and $148,029 of the discount on the note payable to interest expense, respectively. During the three months ended June 30, 2010, the Company extended the maturity date of this note until April 1, 2011.			150,000				150,000

On January 27, 2009, the Company issued a promissory note to an investor in the amount of $50,000. The note carries an interest rate of 10% per annum and matured on December 15, 2009. In addition to the note payable, the Company issued 1,000,000 shares of common stock to the note holder. The shares are considered a discount to the note payable. The shares are valued using the closing market price on the date the note was signed and have a value of $25,000. The discount will be amortized over the life of the note via the effective interest method. Interest in the amount of $1,260 was accrued on this note during the three months ended December 31, 2010 and 2009. Interest in the amount of $3,767 was accrued on this note during the nine months ended December 31, 2010 and 2009. During the three months ended December 31, 2010 and 2009 the Company amortized $0 and $18,102 of the discount on the note payable to interest expense, respectively. During the nine months ended December 31, 2010 and 2009 the Company amortized $0 and $24,672 of the discount on the note payable to interest expense, respectively. During the three months ended June 30, 2010, the Company extended the maturity date of this note until April 1, 2011.	50,000	50,000

On July 15, 2009, the Company issued a promissory note to a related party in the amount of $6,000. The note carries an interest rate of 10% per annum and matured on December 15, 2009. Interest in the amount of $151 was recorded for the three months ended December 31, 2010 and 2009, respectively. Interest in the amount of $452 and $278 was recorded for the nine months ended December 31, 2010 and 2009, respectively. During the three months ended June 30, 2010, the Company extended the maturity date of this note until April 1, 2011.	6,000	6,000

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AVALON OIL & GAS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

	December 31, 2010		March 31, 2010
On January 22, 2010, the Company issued a promissory note to a related party in the amount of $2,000. The note carries an interest rate of 10% per annum and matures on January 22, 2011. Interest in the amount of $0 was recorded for the three months ended December 31, 2010 and 2009, respectively. Interest in the amount of $85 and $0 was recorded for the nine months ended December 31, 2010 and 2009, respectively. During the three months ended September 30, 2010 the Company repaid the $2,000 principal portion of this note.		-		2,000

On February 18, 2010, the Company issued a promissory note to a related party in the amount of $9,000. The note carries an interest rate of 15% per annum and matures on December 15, 2010. Interest in the amount of $0 was recorded for the three months ended December 31, 2010 and 2009, respectively. Interest in the amount of $387 and $0 was recorded for the nine months ended December 31, 2010 and 2009, respectively. During the three months ended September 30, 2010 the Company repaid the $9,000 principal portion of this note.		-		9,000

On March 24, 2010, the Company issued a convertible note payable in the amount of $50,000. The note carries an interest rate of 8% per annum and matures on December 26, 2010. The note holder has the right to convert the note at a rate of $0.005 per share. The beneficial conversion feature created a discount on the note in the amount of $15,000 and is being amortized using the effective interest method over the term of the note. Interest in the amount of $473 and $0 was recorded for the three months ended December 31, 2010 and 2009, respectively. Interest in the amount of $2,478 and $0 was recorded for the nine months ended December 31, 2010 and 2009, respectively. During the three months ended December 31, 2010 and 2009 the Company amortized $11,897 and $0 of the discount on the note payable to interest expense, respectively. During the nine months ended December 31, 2010 and 2009 the Company amortized $15,000 and $0 of the discount on the note payable to interest expense, respectively. During the three months ended December 31, 2010, the Company negotiated new conversation rates with the lender, and the lender converted $9,000 of principal into 1,363,636 shares of common stock at an effective rate of $0.0066 per share; $10,000 of principal into 1,818,182 shares of common stock at an effective rate of $0.0055 per share; $10,000 of principal into 1,694,915 shares of common stock at an effective rate of $0.059 per share; $10,000 of principal into 2,083,333 shares of common stock at an effective rate of $0.0048 per share; and $5,000 of principal into 1,111,111 shares of common stock at an effective rate of $0.0045 per share.

6,000

50,000

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AVALON OIL & GAS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

		December 31, 2010				March 31, 2010
On April 30, 2010, the Company issued a convertible note payable in the amount of $25,000. This note carries an interest rate of 8% per annum and matures on January 28, 2011. The note holder has the right to convert the note at a rate of $0.005 per share. The beneficial conversion feature created a discount on the note in the amount of $10,500 and is being amortized using the effective interest method over the term of the note. Interest in the amount of $401 and $0 was recorded for the three months December 31, 2010 and 2009, respectively. Interest in the amount of $1,239 and $0 was recorded for the nine months December 31, 2010 and 2009, respectively. During the three months ended December 31, 2010 and 2009 the Company amortized $8,665 and $0 of the discount on the note payable to interest expense, respectively. During the nine months ended December 31, 2010 and 2009 the Company amortized $9,318 and $0 of the discount on the note payable to interest expense, respectively. During the three months ended December 31, 2010, the Company negotiated a new conversation rate with the lender, and the lender converted $10,000 of principal into 2,564,103 shares of common stock at an effective rate of $0.0039 per share; and $12,000 of principal into 3,428,571 shares of common stock at an effective rate of $0.0035 per share.			3,000				-

On December 9, 2010, the Company issued a convertible note in the amount of $22,500. This note carried an interest rate of 8% per annum and matures on September 9, 2011. The note holder has the right to convert the note at a rate of $0.005 per share. The beneficial conversion feature created a discount on the note in the amount of $13,500 and is being amortized using the effective interest method over the term of the note. Interest in the amount of $108 and $0 was recorded for the three months ended December 31, 2010 and 2009, respectively. Interest in the amount of $108 and $0 was recorded for the nine months ended December 31, 2010 and 2009, respectively. During the three months ended December 31, 2010 and 2009 the Company amortized $0 and $0 of the discount on the note payable to interest expense, respectively. During the nine months ended December 31, 2010 and 2009 the Company amortized $0 and $0 of the discount on the note payable to interest expense, respectively.	22,500	-

On November 28, 2006, Oiltek, of which the Company has a majority interest in, issued a convertible note payable in the amount of $2,500. This note bears interest at a rate of 8% per annum and matured on October 1, 2007. The principal amount of the note and accrued interest are convertible into shares of the Company’s common stock at a price of $0.01 per share. A beneficial conversion feature in the amount of $2,500 was recorded as a discount to the note and was amortized to interest expense during the period ended December 31, 2006. Interest in the amount of $50 was accrued on this note during the three months ended December 31, 2010 and 2009. Interest in the amount of $150 was accrued on this note during the nine months ended December 31, 2010 and 2009. In December 2008, the maturity date of this note was extended until December 31, 2010. The Company plans to extend the maturity date of these notes until December 31, 2011, this has not been completed as of December 31, 2010.	2,500	2,500

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AVALON OIL & GAS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

	December 31, 2010		March 31, 2010
On November 28, 2006, Oiltek, of which the Company has a majority interest in, issued a convertible note payable in the amount of $5,000. This note bears interest at a rate of 8% per annum and matured on October 1, 2007. The principal amount of the note and accrued interest are convertible into shares of the Company’s common stock at a price of $0.01 per share. A beneficial conversion feature in the amount of $5,000 was recorded as a discount to the note and was amortized to interest expense during the period ended December 31, 2006. Interest in the amount of $101 was accrued on this note during the three months ended December 31, 2010 and 2009. Interest in the amount of $301 was accrued on this note during the nine months ended December 31, 2010 and 2009. In December 2008, the maturity date of this note was extended until December 31, 2010. The Company plans to extend the maturity date of these notes until December 31, 2011, this has not been completed as of December 31, 2010.		5,000		5,000

On December 10, 2006, Oiltek, of which the Company has a majority interest in, issued a convertible note payable in the amount of $5,000. This note bears interest at a rate of 8% per annum and matured on October 1, 2007. The principal amount of the note and accrued interest are convertible into shares of the Company’s common stock at a price of $0.01 per share. A beneficial conversion feature in the amount of $5,000 was recorded as a discount to the note and was amortized to interest expense during the period ended December 31, 2006. Interest in the amount of $102 was accrued on this note during the three months ended December 31, 2010 and 2009. Interest in the amount of $202 was accrued on this note during the nine months ended December 31, 2010 and 2009. In December 2008, the maturity date of the note was extended until December 31, 2010. During the three months ended September 30, 2010, the Company repaid $5,000 in principal and $1,538 in accrued interest on this note.		-		5,000

Total outstanding	$	430,000	$	476,500

	Note		Unamortized			Net of
December 31, 2010:	Amount		Discounts			Discount
Notes payable -- current portion	$	424,000	$	(14,681	)	$	409,319
Notes payable – current portion – related party		6,000		-			6,000
Total	$	430,000	$	(14,681	)	$	415,319

	Note		Unamortized			Net of
March 31, 2010:	Amount		Discounts			Discount
Notes payable - current portion	$	459,500	$	(15,000	)	$	444,500
Notes payable – current portion – related party		17,000		-			17,000
Total	$	476,500	$	(15,000	)	$	461,500

	Three months ended December 31,
	2010		2009
Discount on Notes Payable amortized to interest expense	$	20,561	$	234,286

	Nine months ended December 31,
	2010		2009
Discount on Notes Payable amortized to interest expense	$	24,319	$	461,518

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AVALON OIL & GAS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

NOTE 10: RELATED PARTY TRANSACTIONS

Preferred Stock

The 100 shares of Series A Preferred Stock, issued to an officer/director as payment for $500,000 in promissory notes, are convertible into the number of shares of common stock sufficient to represent forty percent (40%) of the fully diluted shares outstanding after their issuance. The Series A Preferred Stock pays an eight percent (8%) dividend. The dividends are cumulative and payable quarterly. The Series A Preferred Stock carries liquidating preference, over all other classes of stock, equal to the amount paid for the stock plus any unpaid dividends. The Series A Preferred Stock provides for voting rights on an "as converted to common stock" basis.

During the three and nine months ended December 31, 2010 and 2009, the Company incurred $10,000 and $30,000 in preferred stock dividends, in each period, respectively.

The holders of the Series A Preferred Stock have the right to convert each share of preferred stock into a sufficient number of shares of common stock to equal 40% of the then fully-diluted shares outstanding. Fully diluted shares outstanding is computed as the sum of the number of shares of common stock outstanding plus the number of shares of common stock issuable upon exercise conversion or exchange of outstanding options, warrants, or convertible securities.

Common Stock

The Company issued an aggregate 22,500,000 shares of common stock to three directors of the Company for services. The fair value of these shares in the amount of $89,250 was charged to operations during the three months ended September 30, 2010.

Notes Payable

On July 15, 2009, the Company borrowed $6,000 from an officer of the corporation. The note carried a 10% interest rate and matured on December 15, 2009. Interest in the amount of $151 was recorded for the three months ended December 31, 2010. Interest in the amount of $452 was recorded for the nine months ended December 31, 2010. The Company extended the maturity date of this note until April 1, 2011.

On January 22, 2010, the Company borrowed $2,000 from an officer of the corporation. The note carries an interest rate of 10% per annum and matures on January 22, 2011. Interest in the amount of $0 was recorded for the three months ended December 31, 2010. Interest in the amount of $84 was recorded for the nine months ended December 31, 2010. During the three months ended September 30, 2010, the Company repaid the principal portion of this note in the amount of $2,000.

On February 18, 2010, the Company borrowed $9,000 from an officer of the corporation. The note carries an interest rate of 10% per annum and matures on December 15, 2010. Interest in the amount of $0 was recorded for the three months ended December 31, 2010. Interest in the amount of $387 was recorded for the nine months ended December 31, 2010. During the three months ended September 30, 2010, the Company repaid the principal portion of this note in the amount of $9,000.

On July 1, 2010, the Company borrowed $3,000 from an officer of the corporation. The note carries an interest rate of 10% per annum and matures on July 1, 2011. Interest in the amount of $0 was recorded for the three months ended December 31, 2010. Interest in the amount of $85 was recorded for the nine months ended December 31, 2010. During the three months ended September 30, 2010, the Company repaid the principal portion of this note in the amount of $3,000.

On July 2, 2010, the Company borrowed $5,000 from an officer of the corporation. The note carries an interest rate of 10% per annum and matures on July 2, 2011. Interest in the amount of $0 was recorded for the three months ended December 31, 2010. Interest in the amount of $146 was recorded for the nine months ended December 31, 2010. During the three months ended September 30, 2010, the Company repaid the principal portion of this note in the amount of $5,000.

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AVALON OIL & GAS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

On July 12, 2010, the Company borrowed $5,000 from an officer of the corporation. The note carries an interest rate of 10% per annum and matures on July 12, 2011. Interest in the amount of $0 was recorded for the three months ended December 31, 2010. Interest in the amount of $158 was recorded for the nine months ended December 31, 2010. During the three months ended September 30, 2010, the Company repaid the principal portion of this note in the amount of $5,000.

Employment Agreements

KENT RODRIGUEZ

In 2009, Mr. Rodriguez, our President, was under an employment agreement dated April 1, 2008 that expires on March 31, 2013, pursuant to which he was compensated at an annual rate of $120,000. During the three and nine months ended December 31, 2010, the Company charged to operations the amount of $30,000 and $90,000 in quarterly salary for Mr. Rodriguez, respectively. During the nine months ended December 31, 2010, the Company paid $29,400 and the amount of $60,600 was accrued. A balance of $173,400 remains for salary payable to Mr. Rodriguez as of December 31, 2010 and is shown on the balance sheet as part of accounts payable and accrued liabilities to related parties.

JILL ALLISON

In 2009, Ms. Allison, our Vice President, was under an employment agreement dated April 1, 2008 that expires on March 31, 2011, pursuant to which she was compensated at a rate of $5,000 per month, for an annual rate of $60,000. During the quarter ended June 30, 2010, the Company increased the compensation rate for Ms. Allison, from $5,000 per month to $6,000 per month, for an annual rate of $72,000. During the three and nine months ended December 31, 2010, the Company charged to operations the amount of $18,000 and $54,000, respectively, in quarterly salary for Ms. Allison, of which $59,200 was paid to her during the nine months. A balance of $20,168 remains for salary payable to Ms. Allison as of December 31, 2010 and is shown on the balance sheet as part of accounts payable and accrued liabilities to related parties.

NOTE 11: INCOME TAXES

The adoption of ASC 740-10-25 at January 1, 2007 did not have a material effect on the Company's financial position.

The Company is delinquent filing tax returns with the Internal Revenue Service and state taxing authorities. The Company is currently in the process of filing these delinquent returns. We expect to file these delinquent returns on or before March 31, 2011. The filing of these returns should result in a net operating loss (NOL) carry forward which would create a deferred tax asset that would be fully reserved due to uncertainties about realization of the benefits of the carry forward.

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AVALON OIL & GAS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

NOTE 12: SHAREHOLDERS' EQUITY

Preferred Stock

The Company is authorized to issue 1,000,000 shares of preferred stock, par value $0.10 per share. As of December 31, 2010, the Company has 100 shares of preferred stock issued and outstanding.

The 100 shares of Series A Preferred Stock, issued to an officer/director as payment for $500,000 in promissory notes, are convertible into the number of shares of common stock sufficient to represent 40 percent (40%) of the fully diluted shares outstanding after their issuance. The Series A Preferred Stock pays an eight percent (8%) dividend. The dividends are cumulative and payable quarterly. The Series A Preferred Stock carries liquidating preference, over all other classes of stock, equal to the amount paid for the stock plus any unpaid dividends. The Series A Preferred Stock provides for voting rights on an "as converted to common stock" basis.

During the three and nine months ended December 31, 2010 and 2009, the Company incurred $10,000 and $30,000 in preferred stock dividends, respectively. As of December 31, 2010, dividends in the amount of $61,200 have not been paid, and are carried on the Company’s balance sheet as Dividends Payable to Related Party.

The holders of the Series A Preferred Stock have the right to convert the preferred stock into shares of common stock such that if converted simultaneously, they shall represent 40 percent (40%) of the fully diluted shares outstanding after their issuance. Fully diluted shares outstanding is computed as the sum of the number of shares of common stock outstanding plus the number of shares of common stock issuable upon exercise, conversion or exchange of outstanding options, warrants, or convertible securities.

Common Stock

The Company has authorized 1,000,000,000 shares of common stock with a par value of $0.001 per share. As of December 31, 2010, the Company has 487,483,044 shares of common stock issued and outstanding.

During the three months ended December 31, 2010:

The Company issued 1,363,636 shares of common stock for the conversion of $9,000 of principal of a note payable with an effective rate of $0.0066 per share; 1,818,182 shares of common stock for the conversion of $10,000 of principal of a note payable with an effective rate of $0.0055 per share; 1,694,915 shares of common stock for the conversion of $10,000 of principal of a note payable with an effective rate of $0.0059 per share; 2,083,333 shares of common stock for the conversion of $10,000 of principal of a note payable with an effective rate of $0.0048 per share; 1,111,111 shares of common stock for the conversion of $5,000 of principal on a note payable with an effective rate of $0.0045 per share; 2,564,103 shares of common stock for the conversion of principal of a note payable with an effective rate of $0.0039 per share; and 3,428,571 shares of common stock for the conversion of $12,000 of principal of a note payable with an effective conversion rate of $0.0035 per share. The Company renegotiated the conversion rate, which was originally $0.005 per share with the lender; this resulted in a loss on the conversion of notes payable in the net amount of $2,694, which was charged to operations during the three months ended December 31, 2010.

The Company issued 5,000,000 shares of common stock for the third party assumption of accounts payable in the amount of $228,759 and the conversion of a note payable in the amount of $1,000 and accrued interest in the amount of $166, during the nine months ended December 31, 2010. These shares were subscribed during the six months ended September 30, 2010, and issued during the three months ended December 31, 2010.

Options

There are no stock options outstanding.

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AVALON OIL & GAS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

Warrants

During the year ended March 31, 2009, the Company issued 500,000 warrants to purchase additional shares of common stock. The value of these warrants in the amount of $11,310 was charged to discount on notes payable during the three months ended December 31, 2008. The warrants are convertible into shares of common stock at a price of $0.10 per share, and have a 3 year term.

The following table summarizes the warrants outstanding and the related prices for the shares of the Company’s common stock issued to non-employees of the Company at December 31, 2010:

Warrants Outstanding						Warrants Exercisable
				Weighted Average						Weighted Average
Exercise		Number		Remaining Contractual		Weighted Average		Number		Remaining Contractual
Prices		Outstanding		Life (years)		Exercise Price		Exercisable		Life (years)
$	0.10		500,000		0.86	$	0.10		500,000	0.86
	0.20		125,000		1.94		0.20		125,000	1.94
	0.60		150,000		2.21		0.60		150,000	2.21
			775,000		1.30				775,000	1.30

Transactions involving warrants are summarized as follows:

	Number of Shares		Weighted Average Price Per Share
Outstanding at March 31, 2010		775,000	$	0.21
Granted		-		-
Exercised		-		-
Cancelled or expired		-		-
Outstanding at December 31, 2010		775,000	$	0.21

NOTE 13: TECHNOLOGY LICENSE AGREEMENTS

On July 12, 2006 UMTI entered into a technology license of a patented process for paraffin wax mitigation from crude oil using ultrasonic waves from the University of Wyoming. This license calls for an earned royalty of five percent on net sales of licensed technologies and services; twenty-five percent of all sublicense fees and revenues with an escalating minimum annual royalty which will be credited toward the total royalties due.

On March 27, 2007 LLTI entered into non-exclusive license in the United States for a leak detection and location technology developed by the Rensselaer Polytechnic Institute ("Rensselaer") through its researcher Michael Savic. The agreement calls for a milestone license fee of $10,000 sixteen months following the effective date of the agreement or the first production introduction, whichever is sooner. A royalty fee of four and one-half percent (4.5%) of gross sales of licensed products is also required with the annual minimum royalty payments. As of March 31, 2010, the Company has accrued the $10,000 milestone license fee. During the year ended March 31, 2010, the Company determined that the Leak Location Technology license value was impaired, which resulted in the impairment expense of $534,711. As of March 31, 2010, the Company has valued this technology at $0.

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AVALON OIL & GAS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

On February 11, 2008 the Company entered into a technology license of a patented process for enzyme based technology for the improvement and increase of the extraction of hydrocarbons from underground. The original terms of the agreement called for a payment of $75,000, however the agreement was modified for a payment of $10,000 in cash and 200,000 shares of common stock which were valued at $20,000. Terms of the agreement call for an annual renewal fee of $100,000 on the anniversary date of the agreement. The license calls for royalties of six percent of the net sales of licensed products or services. All royalties earned during the first 365 days of the agreement shall be forgiven until such amount equals $100,000. As of March 31, 2010, the Company has accrued the annual license renewal fee of $100,000. During the year ended March 31, 2010, the Company determined that the BIO-CAT Technology license value was impaired, which resulted in the impairment expense of $30,000. As of March 31, 2010, the Company has valued this technology at $0. During the year ended March 31, 2010, the Company terminated its license agreement with BIO-CAT technologies. Pursuant to the terms of the termination agreement, the Company license fees in the amount of $200,000 were forgiven. As a result the Company recorded a gain on the cancellation of a license agreement in the amount of $200,000, during the year ended March 31, 2010.

NOTE 14: EARNINGS (LOSS) PER SHARE

In accordance with ASC 260-10-45, "Earnings Per Share," the basic income (loss) per common share is computed by dividing net income (loss) available to common stockholders less preferred dividends by the weighted average number of common shares outstanding. Diluted loss per common share is computed similarly to basic loss per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were not anti-dilutive.

The following securities were not included in the calculation of diluted earnings per share because their effect was anti-dilutive.

Anti-dilutive shares at December 31, 2010:

The following warrants were not included in basic or fully-diluted earnings per share because the effect would have been anti-dilutive: 125,000 warrants at an exercise price of $0.20 per share; 150,000 warrants at an exercise price of $0.60 per share; and 500,000 warrants at an exercise price of $0.10 per share.

Diluted shares does not include shares issuable to the preferred shareholder pursuant to his right to convert preferred stock into sufficient common shares sufficient to equal 40% of the post conversion outstanding shares as the effect would be anti-dilutive.

Anti-dilutive shares at December 31, 2009:

The following warrants were not included in fully-diluted earnings per share because the exercise prices of the warrants were greater than the average market price of the Company’s common stock: 125,000 warrants at an exercise price of $0.20 per share; 150,000 warrants at an exercise price of $0.60 per share; and 500,000 warrants at an exercise price of $0.10 per share.

Diluted shares does not include shares issuable to the preferred shareholders pursuant to their right to convert preferred stock into sufficient common shares sufficient to equal 40% of the post conversion outstanding shares as the effect would be anti-dilutive.

NOTE 15: REVENUE RECOGNITION

During the three months ended December 31, 2010, a well operator (the “Operator”) which currently operates three of the Company’s producing leaseholds has not distributed funds from the sale of oil and gas for the months of September, October and November 2010. The Company has estimated this amount to be $33,500 based upon the historical production of these wells, and we have recognized revenue and accounts receivable in this amount during the three months ended December 31, 2010.

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AVALON OIL & GAS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009

(Unaudited)

NOTE 16: CONTINGENCIES

In July, 2010 the Company issued 5,000,000 shares with a fair value of $17,500 and committed to issue an additional 55,000,000 shares with a fair value of $192,500 to a third party for assumption of accounts payable in the amount of $228,759 and conversion of an note payable in the amount of $1,000 and accrued interest in the amount of $166. The aggregate number of shares issued or committed to be issued pursuant to this transaction was 60,000,000. The Company recorded a gain on settlement of accounts payable in the amount of $19,925. The Company may be liable for payment of these accounts payable should the third party default on its obligation to settle these liabilities on behalf of the Company. During the three months ended December 31, 2010, the Company issued an additional 5,000,000 shares for the assumption of accounts payable and conversion of note payable.

The Company has estimated a portion of the revenue for the period ended December 31, 2010, as the operator of certain production leaseholds have not, as of December 31, 2010, remitted to the Company the operating statements for these wells. The Company has used historical production and revenue statistics as a basis of these estimates.

NOTE 17: SUBSEQUENT EVENTS

The Company has evaluated events subsequent to December 31, 2010 through the filing date of this Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2010, and has disclosed such items in Note 16 “Subsequent Events” herein.

The Company borrowed $450,000 from two shareholders in January, 2011. The notes mature on January 15, 2014, have an interest rate of 8%, and can be converted into the Company’s common stock at $0.005 per share.

The Company issued 1,081,081 shares of common stock for a conversion of a note payable.

The Company also received 20,000,000 shares which were issued to a consultant in September, 2010. These shares were returned to the Company and were cancelled.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our financial statements and the notes related thereto. The discussion of results, causes and trends should not be construed to infer conclusions that such results, causes or trends necessarily will continue in the future.

Business Development

We were originally incorporated in Colorado in April 1991 under the name Snow Runner (USA), Inc. We were the general partner of Snow Runner (USA) Ltd., a Colorado limited partnership which was formed to sell proprietary snow skates under the name "Sled Dogs" and which was dissolved in August 1992. In late 1993, we relocated our operations to Minnesota and in January 1994 changed our name to Snow Runner, Inc. In November 1994 we changed our name to the Sled Dogs Company. On November 5, 1997, we filed for protection under Chapter 11 of the U.S. Bankruptcy Code.

In September 1998, we emerged from protection of Chapter 11 of the U.S. Bankruptcy Code. In May 1999, we changed our state of domicile to Nevada and our name to XDOGS.COM, Inc. In August 2000, following our bankruptcy, we made a decision to re-focus to a traditional wholesale to retail distributor, and obtained the exclusive North American rights to distribute high-end European outdoor apparel and equipment. We first intended to exploit these rights over the Internet under the name XDOGS.COM, Inc. However, due to the general economic conditions and the ensuing general downturn in e-commerce and internet-based businesses, we decided that to best preserve our core assets we would need to adopt a more traditional strategy. Thus, we abandoned this approach and to better reflect our new focus, we changed our name to XDOGS, Inc. On July 22, 2005, the Board of Directors and a majority of the Company's shareholders approved an amendment to our Articles of Incorporation to change the Company's name to Avalon Oil & Gas, Inc. ("Avalon"), and to increase the authorized number of shares of our common stock from 200,000,000 shares to 1,000,000,000 shares, par value $0.001, and engage in the acquisition of producing oil and gas properties.

Acquisition Strategy

Our strategy is to acquire oil and gas producing properties that have proven reserves and established in-field drilling locations with a combination of cash, debt, and equity. We believe that acquisition of such properties minimizes our risk, allows us to generate immediate cash flow, and provides in-field drilling locations to expand production within the proven oil and gas fields. We will aggressively develop these low cost/low risk properties in order to enhance shareholder value. In addition, Avalon's technology group acquires oil production enhancing technologies. Through its strategic partnership with Innovaro Corporation, (ASE: INV) a transfer technology company, Avalon is building an asset portfolio of innovative technologies in the oil and gas industry to maximize enhancement opportunities at its various oil and gas properties.

In furtherance of the foregoing strategy, we have engaged in the following transactions during the last three years:

On May 22, 2007, we acquired a seven and one-half percent (7.5%) working interest in the Janssen #1A prospect in Karnes County, Texas. The Janssen Prospect will be re-completed in the existing vertical wellbore by a sidetrack drilling procedure at a depth of approximately 10,500 feet, and test the Wilcox sand.

On May 31, 2007 we announced the purchase of a 15% stake in the oil wells in the Janssen Prospect, Karnes County, Texas (the "Janssen Well").

On October 17, 2007, we signed a non-binding letter of intent with Gran Tierra Energy Colombia, Ltd. ("Gran Tierra"), a Colombian Energy company, expressing our intent to acquire Gran Tierra's interest in the Mecaya Block and the Talora Block. Pursuant to the non-binding letter of intent, we are required to pay $1,500,000 in cash for Gran Tierra's interest in the Mecaya Block. However, at this time our management does not believe that the terms of the non-binding letter of intent will be complied with, or that we will enter into a definitive agreement.

On October 31, 2007, we announced in a press release that we closed upon the acquisition of non-operated production in the Lake Washington Field in Plaquemines Parish, Louisiana. Since its discovery in the 1930, the Lake Washington Field has produced approximately 350 million barrels of oil. We hold approximately a 0.70% working interest in a 3 well unit that is producing over 1000 barrels of oil per day.

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On April 7, 2008 we announced in a press release our acquisition in December 2007 of a 5% working interest in the 1,280 acre Waters prospect. The first well is being drilled between two gas wells that have produced over 500 million cubic feet of natural gas in the two years they have been in production.

In June 2008, the Company entered into an agreement with Bedford Energy to acquire a 2.5% working interest in Grace Well #2 in East Chandler Field, Oklahoma, which had been producing 350 thousand cubic feet of gas per day. In August 2008, the Company entered into an additional agreement with Bedford Energy (the “Expanded Bedford Agreement”) to increase its working interest in the Grace #2 well from 2.5% to 7.5%; and to increase its net revenue interest in the Grace #2 well to 11.95%. In addition, the Company acquired a 10% working interest and a 13.825% net revenue interest in the Grace #1, Grace #3, Grace #5A and Grace #6 wells. In March, 2009 Avalon additionally increased its working interest in the Grace wells as follows: in the Grace #1 to 42.125%; in the Grace # 2 to 30.5%; in the Grace #3 to 39.0%, in the Grace #5A to 40.0%, and in the Grace #6 to 34.0%.

In September 2008, the Company sold 15% of its recently acquired interest in the Bedford assets, for cash in the amount of $262,500.

The Company also acquired an undivided fifty (50%) percent interest in a salt water disposal well and offset and development acreage in the two quarter sections of the East Chandler Field. In addition, the Company acquired a fifty (50%) percent interest in 540 acres adjoining the 320 acre East Chandler Field.

As part of the Expanded Bedford Agreement, the Company also acquired the right to operate Grace Wells #1, #2, #3, #5A, and #6 (the “Grace Wells”). The Company hired a third party to operate the Grace Wells and to upgrade the operation of the Grace Wells (“Workover”). In February and March 2009, the Company made formal buyout offers (the “Grace Wells Buyout Offer”) to the approximately 93 additional working interest holders in the Grace Wells (the “Additional Grace Wells Owners”). The Grace Wells Buyout Offer provided three options to the Additional Grace Wells Owners: (1) The Additional Grace Wells Owners would continue to participate in the operation of the Grace Wells, and would remit to the Company funds representing their pro rata portion of the Workover costs; (2) The Additional Grace Wells Owners would sell their interests in the Grace Wells to the Company for cash and stock in the Company; (3) The Additional Grace Wells Owners could do nothing. If this third option was chosen, the Additional Grace Well Owner would retain their interest in the Grace Wells, but their pro-rata portion of the costs would be subject to a 500% penalty; in addition, their pro-rata portion of the revenue generated by the Grace Wells would be applied to their portion of the costs, including the 500% penalty, before they would receive any payment. As of June 30, 2010, the approximately 93 Grace Wells investors had selected the following options: Approximately 22 selected option 1, continued participation; 29 selected option 2, the Company buyout; 17 were in Option 3, non-consent; and 25 were still pending and had not made a selection.

During the three months ended December 31, 2009, the Company reduced the amount recorded for the assumption of accounts payable pursuant to the Bedford Energy transaction in the amount of $26,785. Also during the three months ended December 31, 2009, the Company determined that the Leak Location Technology license and the BIO-CAT Technology license value were impaired, which resulted in a write-down of $564,711.

During the three months ended June 30, 2010, the Company sold working interests in the wells located in Blackmon- Hall Unit, New Diana Field, Upshur County, Texas (the “New Diana Wells”), of which it had previously acquired a ten percent (10%) working interest in April, 2008, for a note receivable in the amount of $42,857. These properties has a net book value as of June 30, 2010 of $20,379, this resulted in a gain from the sale of the working interest in the wells in the amount of $22,478.

We plan to raise additional capital during the coming fiscal year, but currently have not identified additional funding sources. Our ability to continue operations is highly dependent upon our ability to obtain additional financing, or generate revenues from our acquired oil and gas leasehold interests, none of which can be guaranteed.

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Ultimately, our success is dependent upon our ability to generate revenues from our acquired oil and gas leasehold interests, and to achieve profitability, which is dependent upon a number of factors, including general economic conditions and the sustained profitability resulting from the operation of the acquired oil and gas leaseholds. There is no assurance that even with adequate financing or combined operations, we will generate revenues and be profitable.

PATENTS, TRADEMARKS, AND PROPRIETARY RIGHTS

On May 17, 2006, The Company signed a strategic alliance agreement with Innovaro Corporation, a technology transfer company to develop a portfolio of new technologies for the oil and gas industry.

On July 17, 2006, we acquired Ultrasonic Mitigation Technologies, Inc. ("UMTI"). UMTI holds the exclusive worldwide license for the mitigation of paraffin wax deposition from crude oil using ultrasonic waves. This technology was developed at the University of Wyoming by Dr. Brian Towler.

On November 9, 2006, we acquired Intelli-Well Technologies, Inc., ("IWT"). IWT holds a license for borehole casing technology developed by researchers at Lawrence Livermore National Laboratory.

On March 29, 2007, we acquired Leak Location Technologies, Inc., ("LLT"). LLT owns an exclusive license to a system for determining the presence and location of leaks in underground pipes.

On May 17, 2007, The Company renewed its strategic alliance agreement with Innovaro Corporation, a technology transfer company, to develop a portfolio of new technologies for the oil and gas industry.

On August 13, 2007, The Company received notice that the U.S. Patent and Trademark Offices approved the patent application for Avalon's paraffin wax mitigation system, being marketed as Ultrasonic Mitigation Solutions(TM) (the "Patent"). Currently available solutions to paraffin wax deposits and build-up in oil production rely upon chemical solvents, which not only require repeated mechanical pigging operation and costly workovers to maintain production capacity, but can also result in environmental liabilities. In contrast, the Patent utilizes ultrasonic waves to fragment current paraffin deposits in the production's tubing and prevent future wax formation in an environmentally safe process.

On August 16, 2007, Kent Rodriguez, the Company's President and CEO, presented a proposal to the Board of Directors to spin-off Oiltek Inc. ("Oiltek"), which specializes in oil and gas recovery technology to Avalon's shareholders. The oil and gas technology include, but are not limited, to the Patent; a system to detect hazardous gas leaks including small leaks in natural gas pipelines; and a system for intelligent drilling and completion sensors to provide real-time oil reservoir monitoring of subsurface information.

On September 22, 2007 the Company entered into an agreement with respect to its purchase of a 75.6% interest in Oiltek for $50,000 and the right of Oiltek to market Avalon's intellectual property.

Going Concern

The December 31, 2010, financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has incurred a loss of $28,420,997 from inception through December 31, 2010, and has a working capital deficiency of $1,232,113 at December 31, 2010. The Company currently has minimal revenue generating operations and expects to incur substantial operating expenses in order to expand its business. As a result, the Company expects to incur operating losses for the foreseeable future.

We will continue to raise additional equity and/or debt financing to provide funds to acquire oil and gas producing properties, as we have done this past quarter.

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Financing Activities

We have been funding our obligations through the issuance of our Common Stock for services rendered for notes payable owed or for cash in private placements. The Company may seek additional funds in the private or public equity or debt markets in order to execute its plan of operation and business strategy. There can be no assurance that we will be able to attract capital or obtain such financing when needed or on acceptable terms in which case the Company's ability to execute its business strategy will be impaired.

Results of Operations

Three months ended December 31, 2010 compared to the three months ended December 31, 2009:

Revenues

Revenues for the three months ended December 31, 2010 were $56,935, a decrease of approximately 17% compared to revenues of $68,545 for the three months ended December 31, 2009. Revenues from the sale of oil and gas decreased as a result of the lower market price for oil and natural gas, and the Company’s decision to shut-in the wells in the Grace Field due to the weakness in the market price of natural gas.

Lease Operating Expenses

During the three months ending December 31, 2010, our lease operating expenses were $53,903, an increase of $34,007 or approximately 171% compared to $19,896 for the three months ended December 31, 2009. This increase was due to the work over costs incurred in Plaquemines Parish, Louisiana, and Camp County and Karnes County, Texas.

Selling, General, and Administrative Expenses

Selling, general and administrative expenses for the three months ended December 31, 2010 were $214,139 an increase of $121,739 or approximately 132% compared to selling, general and administrative expenses of $92,400 during the three months ended December 31, 2009, this increase was due to the expenses associated with the equity fundraising efforts by the Company. Selling, general and administrative expenses for the three months ended December 31, 2010 consisted primarily of legal and accounting fees in the amount of $51,764; payroll and related costs of $48,424; office expenses of $15,372; facilities costs in the amount of $14,537; financing fees of $13,260; travel and entertainment expenses of $12,733;dividend expense of $10,000; consulting fees of $3,927; insurance of expense of $4,274; and investor relations costs of $1,292.

Non-Cash Compensation

Non-cash compensation for the three months ended December 31, 2010 was $3,500, an increase of $11,367 or approximately 144% compared to non-cash compensation of ($7,867) for the three months ended December 31, 2009. This increase was the result of common stock issuances to consultants and directors as payment for services.

Loss on Conversion of Notes Payable

During the three months ended December 31, 2010, the Company issued 1,363,636 shares of common stock for the conversion of $9,000 of principal of a note payable with an effective rate of $0.0066 per share; 1,818,182 shares of common stock for the conversion of $10,000 of principal of a note payable with an effective rate of $0.0055 per share; 1,694,915 shares of common stock for the conversion of $10,000 of principal of a note payable with an effective rate of $0.0059 per share; 2,083,333 shares of common stock for the conversion of $10,000 of principal of a note payable with an effective rate of $0.0048 per share; 1,111,111 shares of common stock for the conversion of $5,000 of principal on a note payable with an effective rate of $0.0045 per share; 2,564,103 shares of common stock for the conversion of principal of a note payable with an effective rate of $0.0039 per share; and 3,428,571 shares of common stock for the conversion of $12,000 of principal of a note payable with an effective conversion rate of $0.0035 per share. The Company renegotiated the conversion rate, which was originally $0.005 per share with the lender, this resulted in a loss on the conversion of notes payable in the amount of $2,694, which was charged to operations during the three months ended December 31, 2010.

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Loss on Extinguishment of Debt

During the three months ended December 31, 2009, the Company agreed to issued 30,000,000 shares of common stock for the conversion of debt in the amount of $1,361 and the assumption of notes payable and accrued interest in the amount of $11,068. This resulted in a loss on extinguishment of debt in the amount of $242,570. There is no comparable expense during the period ended December 31, 2010.

Impairment Expense

During the three months ended December 31, 2009, the Company determined that the value of the Leak Location Technology license and the BIO-CAT license were no longer of value, as a result the Company expensed the remaining value of $564,711 to operations during the period. There is no comparable expense during the period ended December 31, 2010.

Depreciation, Depletion, and Amortization

Depreciation, Depletion, and Amortization were $27,558 for the three months ended December 31, 2010, a decrease of $79,069 or approximately 74% compared to $106,627 for the three months ended December 31, 2009. The reason for the decrease is the reduction in the amortization of the technologies that were acquired from Innovaro Corporation.

Interest Expense, net of Interest Income

Interest expense, net of interest income, amounted to $26,308 for the three months ended December 31, 2010, a decrease of $210,329, or approximately 89% compared to interest expense, net of interest income, of $236,637 for the three months ending December 31, 2009. This decrease is due to the conversion and assumption of notes payable by investors.

Net Loss

For the reasons stated above, our net loss for the three months ended December 31, 2010, amounted to $271,167, a decrease of $915,262 or approximately 77% compared to a net loss of $1,186,429 during the prior period.

Nine months ended December 31, 2010 compared to the nine months ended December 31, 2009:

Revenues

Revenues for the nine months ended December 31, 2010 were $134,916, a decrease of approximately 30% compared to revenues of $193,557 for the nine months ended December 31, 2009. Revenues from the sale of oil and gas decreased as a result of the lower market price for oil and natural gas, and the Company’s decision to shut-in wells in the Grace Field due to the weakness in the market price of natural gas.

Lease Operating Expenses

During the nine months ending December 31, 2010, our lease operating expenses were $111,175, an increase of $9,595 or approximately 9% compared to $101,580 for the nine months ended December 31, 2009. This increase was due to the work over costs incurred in Plaquemines Parish, Louisiana, and Camp County and Karnes County, Texas.

Selling, General, and Administrative Expenses

Selling, general and administrative expenses for the nine months ended December 31, 2010 were $781,256 an increase of $349,698 or approximately 81% compared to selling, general and administrative expenses of $431,558 during the nine months ended December 31, 2009, this increase was due to the expenses associated with the equity fundraising efforts by the Company. Selling, general and administrative expenses for the nine months ended December 31, 2010 consisted primarily of legal and accounting fees in the amount of $199,159; payroll and related costs of $147,504; financing fees of $129,820; travel and entertainment expenses of $72,630; office expenses of $54,141; consulting fees of $42,942; facilities costs in the amount of $32,708;dividend expense of $30,000; investor relations costs of $18,185; and insurance of expense of $11,797.

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Impairment Expense

During the nine months ended December 31, 2009, the Company determined that the value of the Leak Location Technology license and the BIO-CAT license were no longer of value, as a result the Company expensed the remaining value of $564,711 to operations during the period. There is no comparable expense during the period ended December 31, 2010.

Non-Cash Compensation

Non-cash compensation for the nine months ended December 31, 2010 was $274,633, an increase of $256,550 or approximately 1,419% compared to non-cash compensation of $18,083 for the nine months ended December 31, 2009. This increase was the result of common stock issuances to consultants and directors as payment for services.

Depreciation, Depletion, and Amortization

Depreciation, Depletion, and Amortization were $89,602 for the nine months ended December 31, 2010, a decrease of $492,198 or approximately 85% compared to $581,800 for the nine months ended December 31, 2009. The reason for the decrease is the reduction in the amortization of the technologies that were acquired from Innovaro Corporation.

Gain from Sale of Property

During the nine months ended December 31, 2010, the Company sold oil and gas properties for a gain of $22,478; there were no such gains during the nine months ended December 31, 2009.

Gain of Settlement of Accounts Payable

During the nine months ended December 31, 2010, the Company agreed to issue 60,000,000 shares of common stock for the assumption of $228,759 of accounts payable and the conversion of notes payable and accrued interest in the amount of $1,166. This resulted in a gain on settlement of accounts payable in the amount of $19,925.

Loss of Extinguishment of Debt

During the nine months ended December 31, 2010, the Company agreed to issue 32,000,000 shares of common stock for the conversion of $1,380 of debt and the assumption of notes payable and accrued interest in the amount of $15,740. This resulted in a loss on extinguishment of debt in the amount of $110,880.

During the nine months ended December 31, 2009, the Company agreed to issued 63,000,000 shares of common stock for the conversion of debt in the amount of $3,728 and the assumption of notes payable and accrued interest in the amount of $271,525. This and a similar transaction resulted in a loss on extinguishment of debt in the amount of $309,696.

Loss on Conversion of Notes Payable

During the nine months ended December 31, 2010, the Company issued 1,363,636 shares of common stock for the conversion of $9,000 of principal of a note payable with an effective rate of $0.0066 per share; 1,818,182 shares of common stock for the conversion of $10,000 of principal of a note payable with an effective rate of $0.0055 per share; 1,694,915 shares of common stock for the conversion of $10,000 of principal of a note payable with an effective rate of $0.0059 per share; 2,083,333 shares of common stock for the conversion of $10,000 of principal of a note payable with an effective rate of $0.0048 per share; 1,111,111 shares of common stock for the conversion of $5,000 of principal on a note payable with an effective rate of $0.0045 per share; 2,564,103 shares of common stock for the conversion of principal of a note payable with an effective rate of $0.0039 per share; and 3,428,571 shares of common stock for the conversion of $12,000 of principal of a note payable with an effective conversion rate of $0.0035 per share. The Company renegotiated the conversion rate, which was originally $0.005 per share with the lender, this resulted in a loss on the conversion of notes payable in the amount of $2,694, which was charged to operations during the three months ended December 31, 2010.

Interest Expense, net of Interest Income

Interest expense, net of interest income, amounted to $57,965 for the nine months ended December 31, 2010, a decrease of $434,650 or approximately 88% compared to interest expense, net of interest income, of $492,615 for the nine months ending December 31, 2009. This decrease is due to the conversion and assumption of notes payable by investors.

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Net Loss

For the reasons stated above, our net loss for the nine months ended December 31, 2010, amounted to $1,250,886, a decrease of $1,055,600 or approximately 46% compared to a net loss of $2,306,486 during the nine months ended December 31, 2009.

LIQUIDITY AND CAPITAL RESOURCES

The December 31, 2010, financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has incurred a loss of $28,420,997 from inception through December 31, 2010, and has a working capital deficiency of $1,232,113 and shareholder’s equity of $1,021,648, as of December 31, 2010. The Company currently has minimal revenue generating operations and expects to incur substantial operating expenses in order to expand its business. As a result, the Company expects to incur operating losses for the foreseeable future. The accompanying consolidated financial statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern.

Our cash and cash equivalents were $183,235 on December 31, 2010, compared to $46,522 on March 31, 2010. We met our liquidity needs through the issuance of our common stock and notes payable for cash as well as revenue derived from our oil and gas operations.

We need to raise additional capital during the fiscal year, in order to maintain our operations. Our ability to continue operations as a going concern and to achieve profitability is highly dependent upon our ability to obtain immediate additional financing, or generate revenues from our acquired oil and gas leasehold interest, none of which can be guaranteed. Unless additional funding is located, it is highly unlikely that we can continue to operate. There is no assurance that even with adequate financing or combined operations, we will generate revenues and be profitable.

Ultimately, our success is dependent upon our ability to generate revenues from our acquired oil and gas leasehold interests.

Operating activities

Net cash used by operating activities for the nine months ended December 31, 2010 was $440,958 compared to $13,890 used in operating activities in the nine months ended December 31, 2009.

The Company had a net loss of $1,250,886 for the nine months ended December 31, 2010 compared to a net loss of $2,306,486 for the nine months ended December 31, 2009. The Company had the following non-cash items during the period: non-cash costs of $7,425 for amortization and depreciation; $274,633 for non-cash compensation; $74,260 in non-cash expense for the issuance of shares for equity fundraising; a loss on extinguishment of debt in the amount of $110,800; a gain from the sale of a working interest in a property of $22,478; a gain from the settlement of account payable in the amount of $19,925; loss from the conversion of notes payable in the amount of $2,694; non-cash costs of $50,244 for depletion; non-cash costs of $2,172 for the depreciation of the asset retirement obligation; $24,319 for the amortization of the discount on notes payable; and $31,938 for the amortization of intangible assets. The Company also had a change in the components of working capital during the period, which generated a decrease of cash in the amount of $273,766. Net accounts receivable for the nine months ended December 31, 2010 was $5,889 compared to $11,340 on March 31, 2010.

Investing activities

For the nine months ended December 31, 2010 net cash provided by investing activities was $3,751 compared to net cash used in investing activities of $350 in the nine months ended December 31, 2009.

Financing activities

Our financing activities for the nine months ended December 31, 2010 provided cash of $574,100 as compared to $6,000 for the nine months ended December 31, 2009. Cash generated by financing activities consisted of $542,600 from the issuance of common stock for cash. We plan to raise additional capital during the coming fiscal year.

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Critical Accounting Policies

The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based on information available. These estimates and assumptions affect the reporting amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. A summary of the significant accounting policies is described in Note 1 to the financial statements.

Significant Estimates

The Company is involved in a dispute with the operator of certain of the Company’s leashold wells, and the operator has not supplied the Company with several production statements required for us to accurately complete our accounting for the three months ended December 31, 2010. The Company has recognized estimated revenue for these leaseholds in the amount of $33,550 during the three months ended December 31, 2010 based upon historical production.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This information has been omitted, as the Company qualifies as a smaller reporting company.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our principal executive and financial officer, after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report (the "Evaluation Date"), has concluded that as of the Evaluation Date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure, and (ii) is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms.

There has been no change in our internal control over financial reporting identified during the period covered by this report which have materially affected or is likely to materially affect our internal control over financial reporting.

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PART II

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company issued 1,363,636 shares of common stock for the conversion of $9,000 of principal of a note payable with an effective rate of $0.0066 per share; 1,818,182 shares of common stock for the conversion of $10,000 of principal of a note payable with an effective rate of $0.0055 per share; 1,694,915 shares of common stock for the conversion of $10,000 of principal of a note payable with an effective rate of $0.0059 per share; 2,083,333 shares of common stock for the conversion of $10,000 of principal of a note payable with an effective rate of $0.0048 per share; 1,111,111 shares of common stock for the conversion of $5,000 of principal on a note payable with an effective rate of $0.0045 per share; 2,564,103 shares of common stock for the conversion of principal of a note payable with an effective rate of $0.0039 per share; and 3,428,571 shares of common stock for the conversion of $12,000 of principal of a note payable with an effective conversion rate of $0.0035 per share. The Company renegotiated the conversion rate, which was originally $0.005 per share with the lender, this resulted in a loss on the conversion of notes payable in the amount of $2,694, which was charged to operations during the three months ended December 31, 2010.

The Company issued 5,000,000 shares of common stock for the third party assumption of accounts payable in the amount of $228,759 and the conversion of a note payable in the amount of $1,000 and accrued interest in the amount of $166, which was subscribed during the six months ended September 30, 2010.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Form 8-K

1. Filed on July 23, 2010, the Company announced the restatement of the previously issued financial statements for the period ended March 31, 2009.

(b) Exhibits

Exhibit Number		Description

3.1		Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Registration Statement on Form SB-2, Registration No. 33-74240C).*

3.2		Restated Bylaws (Incorporated by reference to Exhibit 3.2 to Registration Statement on Form SB-2, Registration No. 33-74240C).*

3.3		Articles of Incorporation for the State of Nevada. (Incorporated by reference to Exhibit 2.2 to Form 10-KSB filed February 2000)*

3.4		Articles of Merger for the Colorado Corporation and the Nevada Corporation (Incorporated by reference to Exhibit 3.4 to Form 10-KSB filed February 2000)*

3.5		Bylaws of the Nevada Corporation (Incorporated by reference to Exhibit 3.5 to Form 10-KSB filed February 2000)*

4.1		Specimen of Common Stock (Incorporated by reference to Exhibit 4.1 to Registration Statement on Form SB-2, Registration No. 33-74240C).*

4.2		Certificate of Designation of Series and Determination of Rights and Preferences of Series A Convertible Preferred Stock (Incorporated by reference to Exhibit 4.2 to Form 10-KSB filed July 12, 2002.)*

10.1		Incentive Compensation and Employment Agreement for Kent A. Rodriguez (Incorporated by Reference to Exhibit 10.12 of our Form 10-KSB filed July 20, 2001)*

31		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

____________

* Incorporated by reference to a previously filed exhibit or report.

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SIGNATURES

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

	Avalon Oil & Gas, Inc.

Date: February 14, 2011	By:	/s/ Kent Rodriguez
		Kent Rodriguez
		Chief Executive Officer Chief Financial and Accounting Officer

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