8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): February 12, 2010

WOOZYFLY INC.

(Exact name of registrant as specified in its charter)

Nevada	000-51430	20-3678799
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification Number)

619 West Texas Avenue, Suite 126, Midland, Texas 79701

(Address of principal executive offices) (zip code)

432-686-7777

(Registrant's telephone number, including area code)

Copies to:

Stephen M. Fleming, Esq.

Law Offices of Stephen M. Fleming PLLC

49 Front Street, Suite 206

Rockville Centre, New York 11570

Phone: (516) 833-5034

Fax: (516) 977-1209

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

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

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

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

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

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 8-K and other reports filed by Woozyfly Inc. (“Woozyfly” or the “Company”) from time to time with the Securities and Exchange Commission (collectively the "Filings") contain or may contain forward looking statements and information that are based upon beliefs of, and information currently available to, the Company's management as well as estimates and assumptions made by the Company's management. When used in the filings the words "anticipate", "believe", "estimate", "expect", "future", "intend", "plan" or the negative of these terms and similar expressions as they relate to the Company’s or Company’s management identify forward looking statements.  Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions and other factors (including the risks contained in the section of this report entitled "Risk Factors") relating to the Company’s industry, the Company’s operations and results of operations and any businesses that may be acquired by the Company. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.

Although the Company’s management believes that the expectations reflected in the forward looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results. The following discussion should be read in conjunction with the Company's financial statements and the related notes filed with this Form 8-K.

In this Form 8-K, references to "we," "our," "us," the "Company," "Woozy" or "Woozyfly" refer to Woozyfly Inc., a Nevada corporation.

Item 1.01 Entry into a Material Definitive Agreement.

Item 2.01  Completion of Acquisition or Disposition of Assets.

Woozyfly, Inc. was organized September 11, 2003 (Date of Inception) under the laws of the State of Nevada, as GPP Diversified, Inc.  The business of the Company was to sell pet products via the Internet.  We were initially authorized to issue 25,000,000 shares of its no par value common stock.  On November 9, 2005, we amended our articles of incorporation to increase our authorized capital to 100,000,000 shares with a par value of $0.001.  Concurrently, we changed our name from GPP Diversified, Inc. to Pet Express Supplies, Inc.  On July 28, 2008, Pet Express Supply, Inc. entered into an Exchange Agreement with each of the shareholders of CJ Vision Enterprises, Inc., a Delaware corporation doing business as Woozyfly.com, pursuant to which we changed our corporate name to Woozyfly, Inc. , authorized the issuance of 10,000,000 blank check preferred shares and effectuated a 6:1 stock split.  On January 15, 2009, we ceased operations.

On May 12, 2009, Woozyfly filed a voluntary petition in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) seeking reorganization relief under the provisions of Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”). The Chapter 11 case is being administered under the caption In re Woozyfly, Inc. Case No. 09-13022 (JMP) (the “Chapter 11 Case”). Woozyfly continued to operate its business as debtor in possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.  In connection with the Chapter 11 Case, the Bankruptcy Court approved the arrangement pursuant to which MKM Opportunity Master Fund Ltd agreed to provide a DIP loan in the amount up to $100,000 (the “DIP Loan”). 

The filing of the Chapter 11 Case constituted an event of default or otherwise triggered repayment obligations under the Company's 6% Secured Convertible Notes due June 30, 2011 ("Convertible Notes"). As a result, all indebtedness outstanding under these facilities and the notes became automatically due and payable, subject to an automatic stay of any action to collect, assert, or recover a claim against the Company and the application of applicable bankruptcy law.

On January 21, 2010, we entered into an Agreement and Plan of Merger (“Merger Agreement”) with STW Acquisition, Inc. (“Acquisition Sub”), a wholly owned subsidiary of the Company, STW Resources, Inc. (“Acquiree” or “STW”) and certain shareholders of STW controlling a majority of the issued and outstanding shares of STW.  Pursuant to the Merger Agreement, STW  merged into the Acquisition Sub resulting in an exchange of all of the issued and outstanding shares of STW for shares of the Company on a one for one basis. At such time, STW will become a wholly owned subsidiary of the Company.  

On February 9, 2010, the Court entered an order confirming the Seconded Amended Plan of Reorganization (the “Plan”) pursuant to which the Plan and the Merger was approved.   It is expected that the Plan will be effective February 19, 2010 (the “Effective Date”). The

principal provisions of the Plan are as follows:

·   MKM, the DIP Lender, shall receive 400,000 shares of common stock and 2,140,000 shares of preferred stock;

·   the holders of the Convertible Notes shall receive 1,760,000 shares of common stock;

·   general unsecured claims shall received 100,000 shares of common stock; and

·   the Company’s equity interest shall be extinguished and cancelled.

- 2 -

On February 12, 2009, pursuant to the terms of the Merger Agreement, STW merged with and into Acquisition Sub, which became a wholly-owned subsidiary of the Company (the “Merger”).  In consideration for the Merger and STW becoming a wholly-owned subsidiary of the Company, the Company issued an aggregate of 26,543,075 (the “STW Acquisition Shares”) shares of common stock to the shareholders of STW at the closing of the merger and all derivative securities of STW as of the Merger became derivative securities of Woozyfly including options and warrants to acquire 12,613,002 shares of common stock at an exercise price ranging from $3.00 to $8.00 with an exercise period ranging from July 31, 2011 through November 12, 2014 and convertible debentures in the principal amount of $1,467,903 with a conversion price of $0.25 and maturity dates ranging from April 24, 2010 through November 12, 2010.

Considering that, following the merger, the shareholders of STW control the majority of our outstanding voting common stock and we effectively succeeded our otherwise minimal operations to those that are theirs, STW is considered the accounting acquirer in this reverse-merger transaction.  A reverse-merger transaction is considered, and accounted for as, a capital transaction in substance; it is equivalent to the issuance of STW securities for our net monetary assets, which are deminimus, accompanied by a recapitalization. Accordingly, we have not recognized any goodwill or other intangible assets in connection with this reverse merger transaction. STW is the surviving and continuing entities and the historical financials following the reverse merger transaction will be those of STW.  We were a "shell company" (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) immediately prior to our acquisition of STW pursuant to the terms of the Merger Agreement.  As a result of such acquisition, our operations our now focused on the provision of customized water reclamation services.  Consequently, we believe that acquisition has caused us to cease to be a shell company as we no longer have nominal operations.

STW Overview

STW, based in Houston, Texas, provides customized water reclamation services.  STW’s core expertise is an understanding of water chemistry and its application to the analysis and remediation of complex water reclamation issues. STW provides a complete solution throughout all phases of a water reclamation project including analysis, design, evaluation, implementation and operations.

STW’s expertise is applicable to several market segments including:

·   Gas shale hydro-fracturing flowback;

·   Oil and gas produced water;

·   acid mine drainage (“AMD”);

·   desalination;

·   brackish water; and

·   municipal waste water.

Understanding water chemistry is the foundation of STW’s expertise. STW will provide detailed chemical analysis of the input stream and of the process output that conforms to the various environmental and legal requirements. STW becomes an integral part of the water management process and provides a customized solution that encompasses analysis, design and operations including pretreatment and transportation.  Simultaneously, STW evaluates the economic impact of this process to the customer. These processes will use technologies that fit our customer’s need: fixed, mobile or portable; evaporation, reverse-osmosis or membrane technology, and any necessary pre-treatment, crystallization and post-treatment. STW will also supervise construction, testing, and operation of these systems. Our keystone is determining and optimizing the most appropriate technology to effectively and economically address our customers’ particular requirements.  As an independent solutions provider STW is manufacturer-agnostic and is committed to the use of the right technology demanded by the design process.

Market Opportunities

Gas shale fracturing flowback water

STW is actively pursuing opportunities in all the major shale formations in the United States. The initial focus, in this sector, is the Marcellus Shale in Pennsylvania.  Presently, we believe there are about 800 producing wells, the majority being simple vertical wells, and over sixty new wells in Pennsylvania are being drilled each month.  Most of the new wells being drilled are horizontal, requiring about 3.5 million gallons of water per well.  There are 28 producers in the Marcellus, with the four largest being Range Resources, Chesapeake Energy, Atlas Energy Resources and Seneca Resources.

Unconventional tight gas shales such as Marcellus require millions of gallons of fresh water to drill and stimulate a new well.  The water returns during the fracture flowback (“frac”) and production (“production”) with salts or TDS at levels unfit for human consumption.  This flowback or produced water is typically disposed of through various means such as controlled dilution to a river, or lost from the ecosystem by injection into disposal wells.  STW will target the frac water market in the tight gas formations first, and approach the produced water market for coal bed methane and oil and gas production subsequently.

- 3 -

Oil and gas reservoirs are usually found in porous rocks, which also contain saltwater.  Cross linked gel fracture fluids with high “proppant” loading (additives that prop open fissures in the geological formation caused by hydraulic fracturing) have been utilized to fracture these zones in order to gain permeability, allowing the oil and gas to flow to the well bore.  The unconventional shale formations have been common knowledge for decades, but the cost of gas production was always considered to be uneconomical.  The wells were drilled and fractured with the same crossed linked system as discussed above.

All of the wells were vertical and required stimulation about every three years with a new fracture.  Around 2001, the “slick water fracture” technique was developed. This change required larger volumes of fresh water (1.2 million gallons per fracture on a vertical well) to be used in the fracturing process, a friction reducing polymer additive, and low concentrations of a proppant in the hydraulic fracture fluid.  Wells using this modified technique now can economically produce gas for over eight years without re-stimulation.  The fresh water is believed to dissolve salts from the shale over time and open up the natural fractures and fissures in the rock, allowing more gas to be produced.  In 2003, horizontal drilling rigs were brought into the Barnett Shale and the slick water fracture volume increased from one to eight plus million gallons per well.  The slick water fracture technique has become the standard for all of the shale formations for stimulation of the wells.

This map illustrates the location of the major shale formations that are discussed below:

The Marcellus Shale

The Marcellus Shale formation, located in the Appalachian regions of Pennsylvania, New York and West Virginia, is the major focus of the Company.  The Marcellus covers the largest land mass of any of the known shale zones to date, and it is located close to the densely populated north-eastern corridor of the United States.  The water returns from the slick water fracture contain significantly higher TDS levels than the Barnett Shale and also include, in certain cases, extremely high levels of calcium, barium, strontium and chloride ions.

At approximately 200,000 parts per million in TDS, the produced water from these regions is nearly seven times the salinity of the ocean.  The most common practice utilized by the gas production industry in Pennsylvania for the disposal of waste water streams produced by gas wells is to remove the oil, some of the heavy metals and simply discharge this water to the rivers and streams.  The volume of water used in the gas well fracture process has grown substantially over recent years with growth in both the absolute number of active wells and with increased volumes of water in each well.  STW believes that today, the initial daily returns of one Marcellus fracture well often exceed the volume of thousands of older oil and gas wells.

While there are about 800 Marcellus gas wells in operation in the Marcellus shale formation today, gas producers in the region are primarily engaged in exploratory drilling process activities.  The northern portion of the state reportedly has some of the best geological formations for gas production, but drilling activity has been curtailed as a result of limited water supply and limited capacity to dispose of waste water.  Because of economic considerations in local communities, the investment of several billion dollars by producers in lease acquisition for drilling purposes, and proximity to high population areas, management believes that drilling activity utilizing hydraulic fracturing methods will increase significantly in the future.

- 4 -

The Marcellus Shale Formation is believed to be approximately 30 million plus acres in size. In comparison, the Barnett Shale Formation is approximately 2 million acres in size and approximately 140 million barrels of produced water are disposed of in deep disposal wells annually. Each one of the stationary systems proposed by STW will be able to process approximately 23,000 barrels of water per day, and the mobile systems will be capable of processing 1,700 barrels per day. This is therefore a high priority focus for STW.

With the mountainous terrain in the Appalachian region, STW believes mobile or portable evaporation units may provide a key part of the solution in this market by helping gas producers minimize trucking in and out of production locations and their neighboring communities.  These systems may also be airlifted in and out of drilling locations. Central evaporation and crystallization would then be required to handle the remaining water and residual brine.  The central plants would also be equipped to generate calcium chloride and sodium chloride salts.  The sodium chloride would be processed as rock salt for use in de-icing highways for public safety.  As discussed above, revenue from these salts would impact the overall cost of reclamation, reinforcing the Company’s competitiveness in the region.

The Fayetteville Shale

Producers in Arkansas’ Fayetteville Shale face similar problems as those operating in the Marcellus, as there are very limited brine disposal options.  Most disposal wells in the Fayetteville shale are located near Ft. Smith; over a three hour drive from most of the producing gas wells. Although new disposal wells are being permitted and are under evaluation in the Conway area, gas producers remain uncertain as to whether the permitted volumes for these brine injection wells will be sufficient for current and future production needs.

The fracture system typically utilizes 50,000 to 65,000 barrels, or 2.0 to 2.8 million gallons of water. These wells typically flow back 1,000 to 1,500 bpd of contaminated frac water for the first few days and then decline to under 100 bpd for the next three months before finally declining to a rate of five bpd or less.  All of this flowback water is disposed of at land farms and disposal wells.  Recently the land farms have come under scrutiny due to claims that these operations fail to comply with applicable regulations and laws.  Several land farm operations have been shut down because of contamination of the areas surrounding these operations, significantly raising the cost of disposal to the producers.

Water quality varies with the location of the wells and can range from approximately 20,000 mg/l TDS for wells in the Searcy area to over 70,000 mg/l TDS for wells in the northern and western portionsf.  The Company believes water reclamation coupled with deep well injection could provide a very cost effective solution to producers in the Fayetteville zone.  The lower TDS in this shale, relative to other shales, would allow water recovery at rates in excess of 90% at 20,000 mg/l TDS, and 75% at TDS levels of approximately 70,000 mg/l.  These rates will dramatically reduce trucking cost to disposal wells, and will provide fresh water for new wells or other applications such as steam generation.

As part of the STW’s strategy in this region, the Company is actively seeking to educate gas producers on the advantages of water reclamation.

The Barnett Shale

As discussed above, the Barnett Shale, located in central and west-central Texas, was the first shale formation to be developed with production starting nearly 25 years ago.  In 2009, drilling activity was flat in the Barnett Shale at current gas prices.  A large influence for this leveling is the increasing activity in the other gas formation such as the Haynesville, Fayetteville and Marcellus.

The Piceance Basin

The conventional frac process in the Piceance has been to incorporate the typically low TDS flowback and produced waters as fracture fluids in new wells.  Previously, drilling has been completed throughout the year; however, several producers only fracture in the summer months.  For these producers, excess water produced in the winter required storage in surface containment facilities that created substantial environmental risk.  Treatment of this water prior to storage addressed this risk and resulted in a seasonally high demand for water reclamation during winter months.

Today, producers in the Piceance Basin are generally slowing down drilling activity while natural gas prices remain depressed.  Whatever produced water is currently generated is being hauled to other states for disposal.

Eagleford ShaleFormation

The Eagleford Shale is a recently discovered formation located in South Texas.  Several experimental wells have been completed and to date appear to be very profitable.  This area has limited supplies of fresh water, leading the Company to believe water reclamation will be a required solution in order for producers to access a sufficient supply of frac water in this market. Production of natural gas has been reported at levels in excess of 10 million cubic feet (“Mcf”) per day, and hundreds of barrels of condensate at some of the wells. The Company expects to intensify its efforts to address this market opportunity.

- 5 -

The Haynesville Shale

This shale formation covers the northern half of Louisiana, southern Arkansas and extends into northeastern Texas.  It is the highest pressure zone of all the shale formations discovered to date.  Most of the wells are horizontal, utilize the slick water fracture system, and each require about 6.5 million gallons of water.  Production of natural gas has been reported at levels in excess of 25 million cubic feet (“Mcf”) per day at some of the wells in the Haynesville shale formation.

Once production starts at typical gas wells in this region, a surge of water production occurs for a few days before water production declines to ten bpd or less.  There appears to be sufficient disposal well capacity in the Haynesville to handle present production needs.  The Company believes that more disposal wells are being added in southern Arkansas and northeastern Texas as needed.  STW believes that Legislators in Louisiana are currently reviewing policies on disposal wells and may alter these to increase the deep injection well disposal capacity.

The Cotton Valley zone actually produces most of the water in the area.  It has a TDS content of over 200,000 mg/l and therefore does not lend itself to economical water reclamation.  Crystallization would be required, which is more expensive and would generate a salt cake that is not required in the area.   Consequently, this region is not a high priority market for STW at this time.

Produced Water

Shale zones are typically dry geological formations devoid of any formation or connate water, and hence the fracture flowback water comprises most of water that returns following gas production.  Outside of shale formations, where most gas and oil production occurs, there is typically a reservoir of connate water in the production zone that generates “produced” water. Produced water is primarily salty water trapped in the reservoir rock and brought up along with oil and/or gas during production, and is the most common oil field waste.  The quality of produced water varies significantly in different parts of the world depending on the geology of the underlying formation.

In a large number of the oil fields in the USA, secondary or tertiary means of handling produced water storage, such as water floods and steam floods, are typically utilized. These are operations where the produced water is used to maintain reservoir pressure, prevent subsidence, and sweep the zone to remove the oil. Most of these water floods utilize a fresh water source as a supply so that sufficient volumes are available. As these fields age, less water is required for the flood, so excess contaminated brines concentrate and require disposal. As this water could be reclaimed with Thermal Evaporative Technologies, STW believes that the market for reclaiming produced water outside the shale reclamation projects represents a considerable opportunity for the Company.

Texas is the largest oil and gas production state in the nation and the produced water is unfit for use, poses a threat to the environment and is typically injected into deep injection wells. In accordance with Texas Railroad Commission regulations, water placed in these disposal wells is rendered permanently unavailable for re-use or consumption. The reclaimed water would available for many beneficial uses, including agricultural and environmental applications, as well as re-use in hydraulic fracturing operations. Deep injection well practices in every gas and oil producing region in the world pose the same detrimental environmental and resource conservation issues.  The water reclamation products and services offered by the Company could provide a significant part of the solution to all constituencies concerned.

In the steam floods of California, a large portion of the water is recycled through the water treatment facility and converted back to steam.  There are some fields that there is excess water in the millions of gallons per day that is low in TDS and could very economically be converted back to environmentally usable water.

Acid mine drainage (AMD)

AMD is another sensitive environmental issue in the Appalachian Mountain regions.  We believe it has impaired more than 4,600 miles of waterways in Pennsylvania alone. Drainage from old abandoned coal mines is acidic, and insoluble metal oxides precipitate when the drainage enters a river, lake or stream, damaging the marine ecosystem. The AMD discharge from a single mine or coal tailing pile can range from 10 to more than 10,000 gallons per minute. In just one example, the Lackawanna River in northeastern Pennsylvania is being contaminated from at least seven monitored AMD locations with estimated peak flow of 40 million gallons per day. STW has identified the state of Pennsylvania as a customer for AMD purification and   the Marcellus producers (eg Range Resources, Chesapeake Energy, Atlas Energy Resouces and Seneca Resources) as potential customers for the resultant reclaimed water.

Acid Mine Drainage is the number one environmental water issue throughout most of the Appalachian Mountains.  Coal was one of the largest industries in the region. Unproductive and unprofitable mines were abandoned. Over time a large number of these mining companies have gone out of business leaving the residual “dirty coal” and the water flowing from the mines as a responsibility of the states and federal government.  Dirty coal is the coal that lies near the edge of the main coal seam and contains a high concentration of dirt.

As the mines fill up with water overtime, the excess water flows out.  Due to contact with the minerals contained in the dirt, coal, salts and gases, the water tends to become acidic.  This lower pH tends to dissolve more ions or salts such as iron, aluminum, calcium, and sulfate.    Iron and other metals upon oxidation form insoluble salts such as iron oxide or rust.  Once the acid mine drainage enters a river, lake or stream, the water precipitates these metal oxides.  This forms an impervious film on the bed of the water destroying the marine ecosystem.

- 6 -

The Pennsylvania Department of Environmental Protection (“DEP”) typically constructs passive treatment plants that require large acreage, where the process is oxidation in large lagoons allowing the solids to precipitate and altering the pH level by adding certain chemicals such as lime.  The water leaving these systems will support the growth of plants and animals.  This process is inherently more time-consuming and expensive, and because of the land requirements, not suitable for all locations.

STW can provide AMD treatment using a specially-designed mobile unit and sell the processed AMD to the producers.  The state will retain ownership of the AMD, with STW having ownership rights to the processed water.

STW’s mobile AMD unit can handle about 250 gpm or about 360,000 gallons per day.  This mobile unit provides the same functionality as the current passive system, but in minutes compared to weeks and months and with a much smaller footprint. The state may provide incentives in the form of grants and/or subsidies that cover the cost of AMD processing.  The DEP has permits in place for the disposal of the filter-pressed sludge. STW is also reviewing all of the present passive system flow-rates and water quality for potential use as supply water to producers.

Brackish Water

World-wide, there are brackish water zones that contain large volumes of water.  The water contains dissolved salts in the 0.5 to 2% (5,000 to 20,000 mg/l TDS) range and hence unfit for human use.  This water can be treated to reduce the TDS below 500 mg/l or 0.05% TDS making the water fit for human consumption. Factors such as decreasing supplies of fresh ground and surface water, increased competition for surface water resources, and changes in population/demand centers are driving the need for brackish water for water supply.  STW’s potential customers are private companies and municipalities serving fast growing metropolitan areas where demand for water is outpacing the available supply.  For example, aquifers in the Texas Gulf Coast contain a large volume of brackish water (less than 10,000 ppm TDS) that, with desalinization, will help meet increasing demand in the region.

Legislative and Regulatory:

Progressively tighter regulations are demanding a thorough review of the entire water-use cycle in industrial applications with the ultimate goal of encouraging and/or mandating reclamation and re-use of water. STW works closely with Federal, State and local regulators and environmental agencies to share our expertise and knowledge on this complex issue and discuss our views on potential solutions.  The Company’s intimate knowledge of this process is a key tool to assist their customers to better understand the legislative and regulatory elements related to water management and advise them of various alternatives

Process

STW’s process is predicated upon a thorough understanding of the customer’s water needs and related issues. This understanding is developed through a series of interactive discussions with the customer. The next phase is data gathering and analysis. STW collects samples at various locations and at different time intervals which are then tested at independent laboratories and analyzed by STW. Based upon this analysis, STW would recommend a solution using the most appropriate technologies and negotiate the acquisition and financing of these technologies as well as contracts with engineering procurement construction (“EPC”). Finally, STW oversees the EPC process and operates the facility.

STW’s process is based upon a fundamental understanding of the core issue and developing an appropriate solution using our experience and expertise. It includes sampling and testing, analysis, design and as required by customers, implementation and operation. Some of the steps involved are described below:

·   The inlet water quality must be determined and measurement of Total Dissolved Solids (TDS), hardness, barium, strontium, bromine, sulfate and hydrocarbon concentrations are critical.

·   Multiple samples over time are taken to ensure consistency and accuracy of inlet water quality measurement.

·   An understanding and analysis of potential uses for the reclaimed water.

·   A site inspection to determine the various vessels needed such as tanks, pumps, pits, truck off loading racks, and engineering testing of the land.

·   An analysis of fluid volumes and their variability over time.

·   Length of time the water needs to be reclaimed at this site.

·   Determination of appropriate technology: fixed or mobile, evaporation, reverse osmosis or other.

·   Permitting as needed

·   An investigation of the handling of the concentrated brines and any other residue from the reclamation process.

·   Disposal options on the residue including potential use of the by-products.

Technology

STW has developed relationships with a number of manufacturers that offer best-of-class technologies applicable to its customer base. These technologies include thermal evaporation, membrane technology and reverse osmosis and are available as fixed or mobile units with varying capacities. Various pre and post-treatment options are available as necessary including crystallizers that process very high TDS (>150,000 mg/l).

- 7 -

Thermal Evaporation: This process is capable of handling waters that contain up to 150,000 mg/l TDS, with fresh water recovery rates from 50 to 90% or greater depending on inlet water quality. The recovered fresh water, or “distillate”, is highly purified water from the evaporative process and has multiple re-use applications. It is particularly applicable in the gas shale and oil production facilities for reclaiming frac and produced waters.

The technology is scalable and can be deployed as mobile units that can process 72,000 gallons per day (“gpd”), or as portable units that can process 216,000 gpd, or as fixed central units capable of processing up to 2,880,000 gpd.

Residual brine concentrate can, depending on local conditions and producer’s priorities, either be disposed off in deep injection wells or be treated further through a Crystallizer that reduces it into distillate and commercially valuable salt residuals.

Reverse Osmosis: Waters that are below 34,000 mg/l of total dissolved solids and contain low levels of barium, strontium, bromine, and sulfate can be reclaimed through a reverse osmosis unit (RO).  Reverse osmosis is the process of forcing a solvent from a region of high solute concentration through a semi-permeable membrane to a region of low solute concentration by applying a pressure in excess of the osmotic pressure.  The membranes used for reverse osmosis are generally designed to allow only water to pass through while preventing the passage of solutes (such as salt ions).  This process is best known for its use in desalination (removing the salt from sea water to get fresh water), but it has also been used to purify fresh water for medical, industrial and domestic applications. Recovery rates for seawater to drinking water are about 50%.

A stream of concentrated brine or higher TDS is the by-product.  This brine can be properly disposed of or utilized as a feed solution to a brine concentrator or crystallizer. The latter ensures higher quality water with lower TDS levels for industrial Uses.

Most oilfield waters cannot be processed through an RO membrane since they contain barium, strontium, or bromine. The barium and strontium are very large molecules and they plug the membrane and create damage or permanent fouling of the membrane.  Bromine and other such halogens react with the membrane and destroy its integrity.  There are few oil field waters that could be processed through this technology but a thorough study is required to ensure success.  STW Resources will utilize this technology where the water chemistry can be processed through RO membranes.

Membrane Bioreactor:  A Membrane BioReactor (“MBR”) is a combination of biological and ultrafiltration technologies.  The biological area provides the same process utilized in all sewage treatment facilities.  Bacteria are maintained in an aerobic condition which cause decay in all of the organic materials contained in the water, and oxidizing these organic materials into low molecular weight acids, usually acetic acid.  Maintaining the bacteria in an oxygen rich environment prevents mutatation or growth of any anaerobic bacteria, which would produce inorganic acids such as hydrogen sulfide.

A filter membrane removes the water fraction from the unit.  The membrane provides filtration in the 0.01 microns or lower range which is sufficient enough to remove viruses, bacteria, and other colloidal materials.  The water exiting the units is potable water and safe for human consumption.

Marketing & Sales

STW’s business proposition is to provide comprehensive, necessary water treatment solutions. We work closely with our customers to evaluate their water treatment needs, understand how these may change over time, assess the regulatory and economic factors and then design an optimal solution.  As illustrated in the chart to the right, STW offers a broad array of technical solutions coupled with a service suite and financial structuring options that provide our customers with the ability to obtain a turnkey solution to their waste water disposal challenges.

Gas Shales: Most of the natural gas producers in each of the shale formations are already well known to the Company.  STW personnel have developed many, and in some cases, long standing relationships with key personnel responsible for well completion and remedial operations at each gas producer.  STW monitors production plans at the producer level, the acreage acquisitions at the shale formations and trends that relate to the demand for water reclamation by region.  In addition, the Company maintains detailed databases that monitor drilling permits, rig counts and other key statistics that forecast gas production rates by geography.  These activities allow the Company to anticipate demand for its services and to prioritize its sales calling effort on those producers for whom fresh water supply is an issue or where shale water disposal pose the greatest challenges.

- 8 -

The foundation of the Company’s sales strategy is to become an integral part of its customer’s water management function.  This involves identifying and finding solutions to customer needs through a multi–step, consultative approach:

·   Evaluate drilling program and production expansion plans.

·   Identify and define fracture water supply needs and waste brine generation levels.

·   Study the flowback water volumes and chemistry over time.

·   Generate economic models jointly with producers, with full consideration of all costs of obtaining, utilizing, and disposing of the water.

·   Evaluate various water reclamation options, from equipment to logistics, and   develop financial models for all the options.

·   Provide a customized presentation comparing present practices to all of the options of water reclamation available to the customer, for buy-in to the best scenarios.

·   Jointly develop a presentation of the best scenarios for water management (present and future) for use by upper management.  Support the presentation as required.

·   Review and determine optimal system design, location and financial structure.

·   Develop a time line for water reclamation implementation.

·   Execute definitive off-take and/or other agreements satisfactory to all parties.

STW is able to facilitate this part of the sales process through its detailed knowledge of the gas production process and economics, shale formation geology, frac water chemistry, well completion techniques and logistics and regional regulatory landscapes. This expertise reduces the time required during the evaluative stage of the sales process and fosters a positive working relationship with our customers.  STW then works together with its manufacturing partners to complete the technical solution, develop ancillary system requirements (balance of plant) evaluate cost and operating data, model the financial performance of the system and define remaining project parameters and an installation timeline.

Water reclamation is a new paradigm for natural gas producers. Educating them about the economic, environmental and political benefits is key to long-term adoption.

Some of the issues that operators are facing currently in the Marcellus Shale are:

·   Water consumption and usage restrictions on the Susquehanna River are very restrictive.

·   There are only 8 deep injection wells in Pennsylvania, all of which are already at or close to capacity. New deep wells are being drilled, but the permitting process and actual drilling costs are proving to be expensive.

·   Trucking costs from $3.10 to over $10 / barrel, and generate a number of complaints about truck traffic, noise and the associated wear and tear on the roads. The cost to dispose of the water into the commercial disposal wells is $1.50 to $3.00 per barrel in addition to the trucking costs.

·   Reclaimed water will not require a consumption permit for use, as it has already been consumed once.  Trucks can bring brine to the Water Reclamation facility and return with fresh water for the next fracture.

·   The crystallization process will produce rock salt that meets the requirements of ASTM Standards for road salt. PennDOT purchases between 600,000 and 1,000,000 tons of road salt each year and local municipalities purchase an additional 500,000 tons. An STW 1 million gal/day facility will produce approximately 88,500 to 106,000 tons of rock salt per year.

·   By 2011 any new permits for disposal to the rivers will require total dissolved solids (TDS) removal.

At this time, in the Marcellus Shale, only a couple of operators have the necessary scale for a captive facility. Most operators are still in the exploratory drilling stage, with single wells being drilled over a wide region.

Based on the geographical mountainous terrain, the producers are constructing the well sites on the higher elevations so that they do not interfere with the agricultural and cattle ranch business conducted in the valleys.  In a large number of examples a multiple well pad is constructed and then the wells are directional drilled and completed in the Marcellus.  One central water pit is permitted to hold the drilling and fracture water.  As the fracture is conducted, the flowback and produced water is presently trucked to an approved disposal facility.  In some cases the producers are recycling some of the early low TDS flowback water by filtration and then blending into the new fresh water.  All of the fresh water utilized by all of the wells must be trucked to the site and then all of the flowback and produced water is trucked away.

STW would locate mobile evaporation equipment at the well site.  The flowback water would be processed and the distilled water generated would be placed into the fracture water pit.  The residual brine from the evaporation process would be trucked to an approved disposal facility or taken to a STW central crystallizer.  The crystallizer would provide additional fresh water that could be trucked (2 way freight) back to the fracture pit.  About 98% of the available water from the residual brine or the high TDS produced water would be recovered.  Additional bi-products of sodium chloride for use in Highway deicing and a solution of calcium chloride would be generated.

- 9 -

Competition

In the oil and gas industry, current fracturing and produced water disposal methods – deep injection wells and surface water disposal – represent the Company’s greatest source of competition.

Brine Discharge / Deep Injection Wells

In many gas shale fields, disposal through a deep injection well offers a cost-effective (though environmentally questionable) alternative to water reclamation.  If suitable geology exists, high TDS flowback waters can be disposed by injection into a deep discharge brine well.  There are operative brine discharge wells in each of the major shale formations, particularly in the Barnett shale formation in Texas where many empty oil wells are converted for brine discharge use.  There are only eight such discharge wells in the state of Pennsylvania. Management believes these are presently operating at close to capacity.

Surface Water Disposal

Similarly, surface water disposal facilities (rivers, streams and drainage creeks) offer a competitive alternative to water reclamation.  At river discharge facilities, flowback and produced waters are treated to remove naturally occurring radioactive materials, some suspended solids and well completion chemicals before discharge.  Dissolved salts are not removed and therefore are added to surface water systems where they degrade water quality, pollute the environment and disrupt wildlife habits.  Many states have taken action to reduce or eliminate altogether the availability of surface water disposal for gas well waste water streams.

In the Marcellus shale, there are several treatment facilities that remove only the oil and heavy metals, then discharge the water to certain rivers (where permitted), and range in size from 20,000 to 200,000 gallons per day.  The treatment does not remove salts, so the waters that are being discharged into the river system retain high TDS contamination levels.  In April of 2009, the Pennsylvania DEP regulated this type of treatment by limiting it to existing permitted facilities only through January 2011, at which time treatment to remove the TDS (salts) will have to be implemented.

The following companies provide pre-discharge brine treatment solutions:

The Company accepts flowback and produced waters from gas producers operating in the Marcellus and other regions in Pennsylvania, removes the oil, heavy metals, and discharges the water to certain rivers in Pennsylvania.  Advanced Waste operates one discharge facility in the western part of the Pennsylvania. Sunbury operates an experimental river discharge site in conjunction with the Pennsylvania Department of Environmental Protection.  Sunbury’s primary business is the operation of waste coal fired power plants, and it has obtained a permit to discharge significant volumes of contaminated water into certain rivers in Pennsylvania.  Acid Mine Drainage is presently processed through large acreage passive systems.  These systems provide oxidation followed by a long settling time for the heavy metals to precipitate and possibly some pH adjustment before the water enters the river or stream.  There are several companies that construct such facilities under contract with the governmental agency.  At this time there is no one that provides mobile AMD processing.

Legal Proceedings

Except for the current dispute with GE Water & Process Technologies (“GE Water”), we are currently not a party to any legal or administrative proceedings and are not aware of any pending or threatened legal or administrative proceedings against us in all material aspects. We may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business.

STW entered into a Memorandum of Understanding with GE Water, a unit of General Electric Company, dated February 14, 2008 (“MOU”) to jointly develop off-take agreements with oil and gas operators for the deployment of multiple water reclamation systems throughout Texas, Arkansas, Louisiana and the Appalachian Basin.  STW and GE Water formalized their relationship on May 22, 2008, by entering into a definitive Teaming Agreement (“Teaming Agreement”), which superseded the MOU.  The Teaming Agreement was drafted in accordance with the terms of the MOU and provides greater certainty as to each party’s responsibilities and as to the process of entering into agreements with and providing services to customers.  The Teaming Agreement sets forth the terms and conditions that will govern STW and GE Water relationship when STW is successful in selling its services to an identified prospect.

In April 2008, STW entered into a purchase order with GE Water (“Purchase Order”), for the purchase of a modularized produced water evaporator system (the “Evaporator System”) capable of processing approximately 720,000 gallons per day.  The total commitment under the Purchase Order was $14.5 million, to be paid over eight installments.  As of September 30, 2009, STW has paid a total of approximately $4.7 million.  Included in this total is $300,000 of its $1.5 million second installment payment which was due at the end of June 2008.  STW is currently in arrears on the remaining $1.2 million under the second installment payment and is also in arrears in its third installment payment of $3.6 million which was due on November 28, 2008, the fourth installment payment of $1.5 million which was due on February 27, 2009, and the fifth installment payment of $1.8 million which was due on August 28, 2009.  The total of all amounts invoiced and unpaid, including accrued interest of approximately $998,000, through September 30, 2009, totaled $9.0 million.  In addition, pursuant to the terms of the Purchase Order, STW is required to post a letter of credit securing the balance of the payments due under the Purchase Order, totaling $1.9 million, which STW has not yet done.  Finally, in April 2009, STW issued a change order to the Purchase Order to increase the overall processing capacity to approximately one million gallons per day.  This change order obligated STW to additional payments totaling approximately $1.2 million.

- 10 -

On January 12, 2009, GE Water sent a notice of default with respect to the past due payments on the Evaporator System, and the required posting of the letter of credit, as set forth under the Purchase Order, with a requirement that such default be cured within 30 days from the date of the notices.  GE Water took no further action with respect to the notice of default until August 13, 2009.

On August 13, 2009, GE Water provided STW a six month additional grace period, through February 13, 2010.  At the end of the additional six month grace period, if STW has not met its obligations, GE Water represented that it would meet with STW to determine the state of the investment market and grant or not grant an additional grace period, as necessary.  If, after February 13, 2010, GE Water elected to not extend STW’s payment obligations, GE Water could foreclose on the Evaporator System, resulting in the loss of payments advanced to date by STW and future use of the Evaporator System under construction.

On October 1, 2009, GE Water sent a letter to STW unilaterally announcing to STW that GE was canceling STW’s Purchase Order due to STW’s inability to pay the current amounts due.  GE Water also demanded a “termination” payment of $750,000.  In the same letter, GE Water unilaterally announced it was cancelling the Teaming Agreement citing GE Water’s belief that STW was insolvent.  GE Water prefaced its cancellation of the Purchase Order and Teaming Agreement on a failure of GE Water and STW to renegotiate a substitute Teaming Agreement.  On October 8, 2009, STW responded to GE Water in writing rejecting GE Water’s unilateral termination of the Purchase Order and Teaming Agreements, among other things including that GE Water had the contractual requirement to arbitrate certain of the disputed matters raised by GE Water’s October 1, 2009 letter. In discussions in December 2009 between STW management and GE Water, GE Water expressed continued interest in working with STW by providing technical support and a willingness to resolve their differences, pending the results of STW’s merger and capital raise in February2010.

Number of Employees

Other than our directors and officers, presently we have one employee including one full time employee.

Property

Our principal offices are located at 619 West Texas Avenue, Suite 126, Midland, Texas  79701, which includes 1,250 square feet in office space.  We pay $1,200 per month in rent and our lease is month to month.

- 11 -

RISK FACTORS

Our limited operating history makes it difficult for us to evaluate our future business prospects and make decisions based on those estimates of our future performance.

We did not begin operations of our business until February 2008.  We have a limited operating history and have generated limited revenue.  As a consequence, it is difficult, if not impossible, to forecast our future results based upon our historical data.  Reliance on the historical results may not be representative of the results we will achieve, particularly in our combined form.  Because of the uncertainties related to our lack of historical operations, we may be hindered in our ability to anticipate and timely adapt to increases or decreases in revenues or expenses.  If we make poor budgetary decisions as a result of unreliable historical data, we could be less profitable or incur losses, which may result in a decline in our stock price. 

STW’s results of operations have not resulted in profitability and we may not be able to achieve profitability going forward.

STW incurred a net loss amounting to $6,310,500 for the period from inception (January 28, 2008) through September 30, 2009.  In addition, as of September 30, 2009, STW has liabilities of $12,122,949. If we incur additional significant operating losses, our stock price, may decline, perhaps significantly.

Our management is developing plans to alleviate the negative trends and conditions described above.  Our business plan is speculative and unproven. There is no assurance that we will be successful in executing our business plan or that even if we successfully implement our business plan, that we will be able to curtail our losses now or in the future.  Further, as we are a new enterprise, we expect that net losses will continue and our working capital deficiency will exacerbate.

We depend upon key personnel and need additional personnel.

Our success depends on the continuing services of Stanley Weiner, our chief executive officer and director.  The loss of Mr. Weiner could have a material and adverse effect on our business operations.  Additionally, the success of the Company’s operations will largely depend upon its ability to successfully attract and maintain competent and qualified key management personnel. As with any company with limited resources, there can be no guaranty that the Company will be able to attract such individuals or that the presence of such individuals will necessarily translate into profitability for the Company.  Our inability to attract and retain key personnel may materially and adversely affect our business operations.

We must effectively manage the growth of our operations, or our company will suffer.

To manage our growth, we believe we must continue to implement and improve our operational and marketing departments. We may not have adequately evaluated the costs and risks associated with this expansion, and our systems, procedures, and controls may not be adequate to support our operations. In addition, our management may not be able to achieve the rapid execution necessary to successfully offer our products and services and implement our business plan on a profitable basis. The success of our future operating activities will also depend upon our ability to expand our support system to meet the demands of our growing business. Any failure by our management to effectively anticipate, implement, and manage changes required to sustain our growth would have a material adverse effect on our business, financial condition, and results of operations.

Our business requires substantial capital, and if we are unable to maintain adequate financing sources our profitability and financial condition will suffer and jeopardize our ability to continue operations.

We require substantial capital to support our operations.  If we are unable to maintain adequate financing or other sources of capital are not available, we could be forced to suspend, curtail or reduce our operations, which could harm our revenues, profitability, financial condition and business prospects.

Regulatory requirements may have a negative impact upon our business.

While our services are subject to substantial regulation under federal, state, and local laws, we believe that the services are materially in compliance with all applicable laws. However, to the extent the laws change, if we introduce new services in the future or if we commence working in a new area, some or all of our services may not comply with applicable federal, state, or local laws. Further, certain federal, state, and local laws and industrial standards currently regulate electrical and electronics equipment. Although standards for electric vehicles are not yet generally available or accepted as industry standards, our products may become subject to federal, state, and local regulation in the future. Compliance with this regulation could be burdensome, time consuming, and expensive.

Our automobile products are subject to environmental and safety compliance with various federal and state regulations, including regulations promulgated by the EPA, NHTSA, and various state boards, and compliance certification is required for each new model year. The cost of these compliance activities and the delays and risks associated with obtaining approval can be substantial. The risks, delays, and expenses incurred in connection with such compliance could be substantial.

- 12 -

Risks associated with the collection, treatment and disposal of wastewater may impose significant costs.

Our wastewater collection, treatment and disposal operations of our subsidiaries are subject to substantial regulation and involve significant environmental risks. If collection systems fail, overflow or do not operate properly, untreated wastewater or other contaminants could spill onto nearby properties or into nearby streams and rivers, causing damage to persons or property, injury to aquatic life and economic damages, which may not be recoverable in rates.  Liabilities resulting from such damage could adversely and materially affect our business, results of operations and financial condition. Moreover, in the event that we are deemed liable for any damage caused by overflow, our losses might not be covered by insurance policies, and such losses may make it difficult for us to secure insurance in the future at acceptable rates.

If the Company is unable to reach an agreement with GE, GE will retain possession of the Evaporator System and retain all payments made to GE to date, which would significantly reduce the overall value of the Company and may result in the Company ceasing operations.

STW entered into a Memorandum of Understanding with GE Water, a unit of General Electric Company, dated February 14, 2008 (“MOU”) to jointly develop off-take agreements with oil and gas operators for the deployment of multiple water reclamation systems throughout Texas, Arkansas, Louisiana and the Appalachian Basin.  STW and GE Water formalized their relationship on May 22, 2008, by entering into a definitive Teaming Agreement (“Teaming Agreement”), which superseded the MOU.  The Teaming Agreement was drafted in accordance with the terms of the MOU and provides greater certainty as to each party’s responsibilities and as to the process of entering into agreements with and providing services to customers.  The Teaming Agreement sets forth the terms and conditions that will govern STW and GE Water relationship when STW is successful in selling its services to an identified prospect.

In April 2008, STW entered into a purchase order with GE Water (“Purchase Order”), for the purchase of a modularized produced water evaporator system (the “Evaporator System”) capable of processing approximately 720,000 gallons per day.  The total commitment under the Purchase Order was $14.5 million, to be paid over eight installments.  As of September 30, 2009, STW has paid a total of approximately $4.7 million.  Included in this total is $300,000 of its $1.5 million second installment payment which was due at the end of June 2008.  STW is currently in arrears on the remaining $1.2 million under the second installment payment and is also in arrears in its third installment payment of $3.6 million which was due on November 28, 2008, the fourth installment payment of $1.5 million which was due on February 27, 2009, and the fifth installment payment of $1.8 million which was due on August 28, 2009.  The total of all amounts invoiced and unpaid, including accrued interest of approximately $998,000, through September 30, 2009, totaled $9.0 million.  In addition, pursuant to the terms of the Purchase Order, STW is required to post a letter of credit securing the balance of the payments due under the Purchase Order, totaling $1.9 million, which STW has not yet done.  Finally, in April 2009, STW issued a change order to the Purchase Order to increase the overall processing capacity to approximately one million gallons per day.  This change order obligated STW to additional payments totaling approximately $1.2 million.

On January 12, 2009, GE Water sent a notice of default with respect to the past due payments on the Evaporator System, and the required posting of the letter of credit, as set forth under the Purchase Order, with a requirement that such default be cured within 30 days from the date of the notices.  GE Water took no further action with respect to the notice of default until August 13, 2009.

On August 13, 2009, GE Water provided STW a six month additional grace period, through February 13, 2010.  At the end of the additional six month grace period, if STW has not met its obligations, GE Water represented that it would meet with STW to determine the state of the investment market and grant or not grant an additional grace period, as necessary.  If, after February 13, 2010, GE Water elected to not extend STW’s payment obligations, GE Water could foreclose on the Evaporator System, resulting in the loss of payments advanced to date by STW and future use of the Evaporator System under construction.

On October 1, 2009, GE Water sent a letter to STW unilaterally announcing to STW that GE was canceling STW’s Purchase Order due to STW’s inability to pay the current amounts due.  GE Water also demanded a “termination” payment of $750,000.  In the same letter, GE Water unilaterally announced it was cancelling the Teaming Agreement citing GE Water’s belief that STW was insolvent.  GE Water prefaced its cancellation of the Purchase Order and Teaming Agreement on a failure of GE Water and STW to renegotiate a substitute Teaming Agreement.  On October 8, 2009, STW responded to GE Water in writing rejecting GE Water’s unilateral termination of the Purchase Order and Teaming Agreements, among other things including that GE Water had the contractual requirement to arbitrate certain of the disputed matters raised by GE Water’s October 1, 2009 letter. In discussions in December 2009 between STW management and GE Water, GE Water expressed continued interest in working with STW by providing technical support and a willingness to resolve their differences, pending the results of STW’s merger and capital raise in January 2010.

If the Company is unable to reach an agreement with GE Water whereby STW is again able to proceed with the Purchase Order and the Teaming Agreement, the Company would lose its rights to the Evaporator System (this is currently the Company’s only significant asset), which could result in the Company ceasing operations and, in turn, would result in a complete loss of your investment.

- 13 -

We will require significant capital requirements for equipment, commercialization and overall success.

We will require additional financing for our operations, to purchase equipment and to establish a customer base.  We anticipate that we will require a minimum of $10.0 to $15.0 million in additional capital over the next six months to pursue our business plan.  We cannot assure you that we will obtain any additional financing through any other means.  Additional financing may not be available to us on acceptable terms, if at all.  Unless we raise additional financing, we will not have sufficient funds to complete the purchase of equipment and commercialization of our services.

Our additional financing requirements could result in dilution to existing stockholders.

We will require additional financings obtained through one or more transactions which effectively dilute the ownership interests of holders of our Common Stock.  We have the authority to issue additional shares of Common Stock and Preferred Stock as well as additional classes or series of ownership interests or debt obligations which may be convertible into any class or series of ownership interests in the Company.  The Company is authorized to issue 100,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock.  Such securities may be issued without the approval or other consent of the holders of the Common Stock.

A small number of existing shareholders own a significant amount of our Common Stock, which could limit your ability to influence the outcome of any shareholder vote.

Our executive officers, directors and shareholders holding in excess of 5% of our issued and outstanding shares, beneficially own over31.9% of our Common Stock, before giving effect to the Offering. Under our Articles of Incorporation and Nevada law, the vote of a majority of the shares outstanding is generally required to approve most shareholder action.  As a result, these individuals will be able to significantly influence the outcome of shareholder votes for the foreseeable future, including votes concerning the election of directors, amendments to our Articles of Incorporation or proposed mergers or other significant corporate transactions.

We face competition.

We face competition from existing companies in reclamation of oil and gas waste water space that provide similar services to the Company’s.  Our competitors may have longer operating histories, greater name recognition, broader customer relationships and industry alliances and substantially greater financial, technical and marketing resources than we do.  Our competitors may be able to respond more quickly than we can to new or emerging technologies and changes in customer requirements.

We rely on confidentiality agreements that could be breached and may be difficult to enforce.

Although we believe that we take reasonable steps to protect our intellectual property, including the use of agreements relating to the non-disclosure of our confidential information to third parties, as well as agreements that provide for disclosure and assignment to us of all rights to the ideas, developments, discoveries and inventions of our employees and consultants while we employ them, such agreements can be difficult and costly to enforce.  Although we generally seek to enter into these types of agreements with our consultants, advisors and research collaborators, to the extent that such parties apply or independently develop intellectual property in connection with any of our projects, disputes may arise concerning allocation of the related proprietary rights.  If a dispute were to arise enforcement of our rights could be costly and the result unpredictable.  In addition, we also rely on trade secrets and proprietary know-how that we seek to protect, in part, through confidentiality agreements with our employees, consultants, advisors or others.

Despite the protective measures we employ, we still face the risk that: agreements may be breached; agreements may not provide adequate remedies for the applicable type of breach; our trade secrets or proprietary know-how may otherwise become known; our competitors may independently develop similar technology; or our competitors may independently discover our proprietary information and trade secrets.

We have not paid dividends in the past and do not expect to pay dividends in the future.  Any return on investment may be limited to the value of our common stock

We have never paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting it at such time as the board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if its stock price appreciates.

Our stock price and trading volume may be volatile, which could result in substantial losses for our stockholders.

The equity trading markets may experience periods of volatility, which could result in highly variable and unpredictable pricing of equity securities. The market price of our common stock could change in ways that may or may not be related to our business, our industry or our operating performance and financial condition. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. We have experienced significant volatility in the price of our stock over the past few years. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. In addition, the stock markets in general can experience considerable price and volume fluctuations.

- 14 -

We have not voluntary implemented various corporate governance measures, in the absence of which, shareholders may have more limited protections against interested director transactions, conflict of interest and similar matters.

Recent Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the adoption of various corporate governance measures designed to promote the integrity of the corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as the NYSE or the NASDAQ Stock Market, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges are those that address board of directors' independence, audit committee oversight, and the adoption of a code of ethics. While we intend to adopt certain corporate governance measures such as a code of ethics and established an audit committee, Nominating and Corporate Governance Committee, and Compensation Committee of our board of directors, we presently do not have any independent directors. We intend to expand our board membership in future periods to include independent directors. It is possible that if we were to have independent directors on our board, stockholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. For example, in the absence of audit, nominating and compensation committees comprised of at least a majority of independent directors, decisions concerning matters such as compensation packages to our senior officers and recommendations for director nominees may be made by our sole director who has an interest in the outcome of the matters being decided. Prospective investors should bear in mind our current lack of both corporate governance measures and independent directors in formulating their investment decisions.

We may be exposed to potential risks relating to our internal controls over financial reporting and our ability to have those controls attested to by our independent auditors.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX 404"), the Securities and Exchange Commission adopted rules requiring smaller reporting companies, such as our company, to include a report of management on the company's internal controls over financial reporting in their annual reports for fiscal years ending on or after December 15, 2007.  We will be required to include the management report in the annual report for the year ending December 31, 2009. In addition, for our fiscal year ending December 31, 2009 the independent registered public accounting firm auditing our financial statements must also attest to and report on management's assessment of the effectiveness of our internal controls over financial reporting as well as the operating effectiveness of our internal controls. In the event we are unable to receive a positive attestation from our independent auditors with respect to our internal controls, investors and others may lose confidence in the reliability of our financial statements and our ability to obtain financing as needed could suffer.

If a public market for our common stock develops, trading will be limited under the SEC’s penny stock regulations, which will adversely affect the liquidity of our common stock.

The trading price of our common stock is less than $5.00 per share and, as a result, our common stock is considered a "penny stock," and trading in our common stock would be subject to the requirements of Rule 15g-9 under the Exchange Act. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. Generally, the broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser's written consent prior to the transaction.

SEC regulations also require additional disclosure in connection with any trades involving a "penny stock," including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of securities in the secondary market because few broker or dealers are likely to undertake these compliance activities. In addition to the applicability of the penny stock rules, other risks associated with trading in penny stocks could also be price fluctuations and the lack of a liquid market. An active and liquid market in our common stock may never develop due to these factors.

- 15 -

MANAGEMENT’S DISCUSSION AND ANALYSIS

Forward Looking Statements

Some of the statements contained in this Form 8-K that are not historical facts are "forward-looking statements" which can be identified by the use of terminology such as "estimates," "projects," "plans," "believes," "expects," "anticipates," "intends," or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this Form 8-K, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include without limitation:

 Our ability to attract and retain management;

 Our ability to raise capital when needed and on acceptable terms and conditions;

 The intensity of competition;

 General economic conditions;

 Changes in regulations and our ability obtain permits from jurisdictions in which we operate; and

 The extent to which the market for water reclamation services exists and the pace at which it may grow if at all.

 All written and oral forward-looking statements made in connection with this Form 8-K that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements.

Our Plan of Operation should be read in conjunction with our financial statements included herein.

Overview

On January 21, 2010, Woozyfly entered into an Agreement and Plan of Merger (“Merger Agreement”) with STW Acquisition, Inc. (“Acquisition Sub”), a wholly owned subsidiary of the Company, STW Resources, Inc. (“STW”) and certain shareholders of STW controlling a majority of the issued and outstanding shares of STW.  Pursuant to the Merger Agreement, STW will be merged into the Acquisition Sub resulting in an exchange of all of the issued and outstanding shares of STW for shares of the Company on a one for one basis. At such time, STW will become a wholly owned subsidiary of the Company.  The Merger Agreement is subject to the Bankruptcy Court confirmation as well as standard closing conditions.

On February 9, 2010, the Court entered an order confirming the Seconded Amended Plan of Reorganization (the “Plan”) pursuant to which the Plan and the Merger was approved.   It is expected that the Plan will be effective February 19, 2010 (the “Effective Date”). The

principal provisions of the Plan are as follows:

·   MKM, the DIP Lender, shall receive 400,000 shares of common stock and 2,140,000 shares of preferred stock;

·   the holders of the Convertible Notes shall receive 1,760,000 shares of common stock;

·   general unsecured claims shall received 100,000 shares of common stock; and

·   the Company’s equity interest shall be extinguished and cancelled.

On February 12, 2009, pursuant to the terms of the Merger Agreement, STW merged with and into Acquisition Sub, which became a wholly-owned subsidiary of the Company (the “Merger”).  In consideration for the Merger and STW becoming a wholly-owned subsidiary of the Company, the Company issued an aggregate of 26,543,075 (the “STW Acquisition Shares”) shares of common stock to the shareholders of STW at the closing of the merger and all derivative securities of STW as of the Merger became derivative securities of Woozyfly including options and warrants to acquire 12,613,002 shares of common stock at an exercise price ranging from $3.00 to $8.00 with an exercise period ranging from July 31, 2011 through November 12, 2014 and convertible debentures in the principal amount of $1,467,903 with a conversion price of $0.25 and maturity dates ranging from April 24, 2010 through November 12, 2010.

- 16 -

Considering that, following the merger, the shareholders of STW control the majority of our outstanding voting common stock and we effectively succeeded our otherwise minimal operations to those that are theirs, STW is considered the accounting acquirer in this reverse-merger transaction.  A reverse-merger transaction is considered, and accounted for as, a capital transaction in substance; it is equivalent to the issuance of STW securities for our net monetary assets, which are deminimus, accompanied by a recapitalization. Accordingly, we have not recognized any goodwill or other intangible assets in connection with this reverse merger transaction. STW is the surviving and continuing entities and the historical financials following the reverse merger transaction will be those of STW.  We were a "shell company" (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) immediately prior to our acquisition of STW pursuant to the terms of the Merger Agreement.  As a result of such acquisition, our operations our now focused on the provision of customized water reclamation services.  Consequently, we believe that acquisition has caused us to cease to be a shell company as we no longer have nominal operations.

Results of Operations

Nine Months Ended September 30, 2009 Compared to Nine months Ended September 30, 2008

Revenue.Revenue generated for the nine months ended September 30, 2009 and 2008 was $34,000 and $0 respectively.  Revenue for 2009 was generated in conjunction with a test of its technology for a potential customer.

Expenses. Our expenses for the nine months ended September 30, 2009 were $3,246,480, and consisted of payroll and payroll taxes ($1,634,830), legal and professional fees ($779,124), stock based compensation ($600,300) and ($232,226)  in other administrative expenses including travel to the prospective sites.  Our expenses for the nine months ended September 30, 2008 were $1,725,444 and consisted of payroll and payroll taxes ($728,662), legal and professional fees ($501,119), stock based compensation ($202,557) and ($293,106)  in other administrative expenses.  The reason for the increase in comparing the nine months ended September 30, 2008 to the same period for 2009 was due to increased in activity in evaluating the water reclamation market and to the company’s process for permitting sites in Pennsylvania which included the hiring of additional employees.

Net loss.Net loss for the nine months ended September 30, 2009 and 2008 were $3,663,932 and $1,822,348, respectively.

Year Ended December 31, 2008

Revenue.We did not generate revenue for the year ended December 31, 2008.   

Expenses. Our expenses for the year ended December 31, 2008 were $2,525,763 and consisted of payroll and payroll taxes ($1,023,433), legal and professional fees ($714,865), stock based compensation ($233,493) and ($553,972)  in other administrative expenses including travel to the prospective sites.   

Net loss. Net loss for the year ended December 31, 2008 was $2,646,568.

Liquidity and Capital Resources

As of December 31, 2008, we had current assets of $69,751 including cash of $17,639 and current liabilities of $5,720,104.  As of September 30, 2009, we had current assets of $204,587 including cash of $75,654 and current liabilities of $12,122,949.

Operating Activities

Our operating activities from continuing operations resulted in a net cash used by operations of $911,186 for the nine months ended September 30, 2009 compared to net cash used by operations of $910,182 for the nine months ended September 30, 2008.  The net cash used by operations for the nine months ended September 30, 2009 reflects a net loss of $3,663,932 offset by depreciation of $20,360, amortization of debt issue costs of $303,547, notes payable issued for deferred compensation of $800,436, stock based compensation of $600,300 and the fair value of equity issued for services of $273,983, account payables and other accrued expenses of $674,210 and other minor factors.   The net cash used by operations for the nine months ended September 30, 2008 reflects a net loss of $1,822,348 offset by depreciation of $5,702, stock based compensation of $202,557, and account payables and other accrued expenses of $767,123 and other minor factors.

Investing Activities

Our investing activities resulted in a net cash outflow of $3,387 for the nine months ended September 30, 2009 compared to a net cash outflow of $4,627,248 for the nine months ended September 30, 2008.  Cash used in investing activities principally represents acquisition of property and equipment offset by proceeds from the sale of assets.

Financing Activities

Our financing activities resulted in a cash inflow of $972,588 for the nine months ended September 30, 2009 and $5,824,285 for the nine months ended September 30, 2009, which represents both issuances of notes payable and sales of equity by STW.

- 17 -

Notes Payable

In April 2008, STW issued promissory notes (“April 2008 Notes”) totaling $1,100,000 bearing interest at 10%. These notes were repaid in full in June 2008.

In September 2008, STW entered into a securities purchase agreement for the issuance of a 12% promissory note (“2008 September Bridge Note”) in the principal amount of $125,000.

In December 2008, STW entered into a securities purchase agreement with the Chairman and Chief Executive Officer for the issuance of a 10% promissory note (“CEO Bridge Note”) in the principal amount of $75,000.

During 2008, STW also entered into various vehicle and insurance financing contracts.  The amount outstanding at December 31, 2008 was $99,102.

In January 2009, STW entered into a securities purchase agreement for the issuance of a 10% promissory note (“January 2009 Bridge Note”) in the principal amount of $50,000.  In addition, STW entered into a securities purchase agreement for the issuance of a 15% promissory note in the principal amount of $400,000.

In March 2009, STW entered into a securities purchase agreement with the September 2008 Bridge Investor providing for the rollover of the $125,000 principal amount outstanding under the 2008 September Bridge Note and advancing an additional $50,000.

In April 2009, STW commenced an offering of its 12% Convertible Notes (“2009 12% Convertible Notes”).  The convertible notes bear interest at 12% and are convertible at the option of the shareholder into shares of STW’s common stock.    Through September 30, 2009 the Company had issued a total of $650,000 face value of its 2009 12% Convertible Notes for cash.

In October and November 2009, STW received $90,000 in proceeds from issuance of additional 12% Convertible Notes, which provided the funding to remain in operation during the fourth quarter of 2009.

Equity Issuances

On January 28, 2008, STW issued 8,100,000 shares of Common Stock at $0.0001 per share for total consideration of $81.

In April 2008, STW designated the Series A Preferred Stock, with a par value of $0.0001 per share, and authorized the issuance of 100 shares to STW’s Chairman and Chief Executive Officer.  In addition, STW issued 5,980,000 shares of Common Stock at $0.0445 per share for total consideration of $266,110.  STW then commenced a unit offering (the “$2.00 Unit Offering”) whereby each unit consisted of one share of STW’s Common Stock and a warrant to acquire one and one-half shares of STW’s Common Stock as follows: (i) 0.5 shares at an exercise price equal to $3.00 per share, (ii) 0.5 shares at an exercise price equal to $4.00 per share, and (iii) 0.5 shares at an exercise price equal to $8.00 per share. Each Warrant is exercisable for three years from date of issue.  As of December 31, 2008, STW sold an aggregate of 3,467,500 units for gross proceeds of $6.9 million.  

STW also issued 700,000 Common Shares for investment banking compensation associated with this offering.  These shares were valued at an aggregate of $98,800, based on the estimated fair value of STW’s Common Stock at that date.

In connection with the April 2008 Notes, STW issued a total of 275,000 shares of Common Stock which were valued at an aggregate of $12,238, based upon the price of STW’s shares of Common Stock issued under the most recent private placement offering prior to the issuance of the April 2008 Notes.  Upon the extension of the April 2008 Notes in June 2008, STW issued a total of 41,325 additional shares of Common Stock.  These additional shares of Common Stock were valued at an aggregate of $11,157, based on the estimated fair value of the Company’s Common Stock at that date.

In connection with the September 2008 Bridge Note, STW issued a total of 62,500 shares of Common Stock which were valued at an aggregate of $16,875, based upon the estimated fair value of STW’s Common Stock at that date.

In connection with the CEO Bridge Note, STW issued a total of 37,500 shares of Common Stock which were valued at an aggregate of $10,125, based upon the estimated fair value of STW’s Common Stock at that date.

Stock Based Compensation

Since Inception (January 28, 2008), STW issued 6.8 million shares of its Common Stock to directors, employees and certain consultants.  As of September 30, 2009, 200,000 of these shares have been forfeited.   During the period from Inception (January 28, 2008) through December 31, 2008, STW recognized $233,493 in compensation cost associated with the issuance of these shares and recognized an additional $600,300 during the nine months ended September 30, 2009.  At September 30, 2009, STW had no remaining compensation cost to be recognized related to these issuances.

- 18 -

Warrants

As of December 31, 2008, STW had 5,739,900 warrants outstanding to acquire STW’s Common Stock.  As of September 30, 2009 STW had 12,411,401 warrants outstanding to acquire STW’s Common Stock.

Presently, due to the lack of revenue we are not able to meet our operating and capital expenses. The success of our ability to continue as a going concern is dependent upon successful permitting of our sites obtaining customers for water reclamation services, and maintaining a break even or profitable level of operations. We have incurred operating losses since inception, and this is likely to continue through the third quarter of 2010. 

The financial requirements of our Company will be dependent upon the financial support through credit facilities and additional sales of our equity securities.  The issuance of additional equity securities by us may result in a significant dilution in the equity interests of our current shareholders. Should additional financing be needed for our continued operations we will need to obtain it on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, we will not be able to meet our other obligations as they become due and we will be forced to scale down or perhaps even cease our operations.

We can give no assurance that we will be successful in implementing any phase, all phases of the proposed business plan, or that we will be able to continue as a going concern.

Credit Facility

Credit Facility

Presently we have no revolving Credit Facility established.  If needed, it will be necessary to establish a line of credit and it will need to be on favorable terms.

Off-Balance Sheet Arrangements

STW does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on STW's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Commitments

STW entered into a Memorandum of Understanding with GE Water & Process Technologies (“GE Water”), a unit of General Electric Company, dated February 14, 2008 (“MOU”) to jointly develop off-take agreements with oil and gas operators for the deployment of multiple water reclamation systems throughout Texas, Arkansas, Louisiana and the Appalachian Basin.  STW and GE Water formalized their relationship on May 22, 2008, by entering into a definitive Teaming Agreement (“Teaming Agreement”), which superseded the MOU.  The Teaming Agreement was drafted in accordance with the terms of the MOU and provides greater certainty as to each party’s responsibilities and as to the process of entering into agreements with and providing services to customers.  The Teaming Agreement sets forth the terms and conditions that will govern STW and GE Water relationship when STW is successful in selling its services to an identified prospect.

In April 2008, STW entered into a purchase order with GE Water (“Purchase Order”), for the purchase of a modularized produced water evaporator system (the “Evaporator System”) capable of processing approximately 720,000 gallons per day.  The total commitment under the Purchase Order was $14.5 million, to be paid over eight installments.  As of September 30, 2009, STW has paid a total of approximately $4.7 million.  Included in this total is $300,000 of its $1.5 million second installment payment which was due at the end of June 2008.  STW is currently in arrears on the remaining $1.2 million under the second installment payment and is also in arrears in its third installment payment of $3.6 million which was due on November 28, 2008, the fourth installment payment of $1.5 million which was due on February 27, 2009, and the fifth installment payment of $1.8 million which was due on August 28, 2009.  The total of all amounts invoiced and unpaid, including accrued interest of approximately $998,000, through September 30, 2009, totaled $9.0 million.  In addition, pursuant to the terms of the Purchase Order, STW is required to post a letter of credit securing the balance of the payments due under the Purchase Order, totaling $1.9 million, which STW has not yet done.  Finally, in April 2009, STW issued a change order to the Purchase Order to increase the overall processing capacity to approximately one million gallons per day.  This change order obligated STW to additional payments totaling approximately $1.2 million.

On January 12, 2009, GE Water sent a notice of default with respect to the past due payments on the Evaporator System, and the required posting of the letter of credit, as set forth under the Purchase Order, with a requirement that such default be cured within 30 days from the date of the notices.  GE Water took no further action with respect to the notice of default until August 13, 2009.

On August 13, 2009, GE Water provided STW a six month additional grace period, through February 13, 2010.  At the end of the additional six month grace period, if STW has not met its obligations, GE Water represented that it would meet with STW to determine the state of the investment market and grant or not grant an additional grace period, as necessary.  If, after February 13, 2010, GE Water elected to not extend STW’s payment obligations, GE Water could foreclose on the Evaporator System, resulting in the loss of payments advanced to date by STW and future use of the Evaporator System under construction.

- 19 -

On October 1, 2009, GE Water sent a letter to STW unilaterally announcing to STW that GE was canceling STW’s Purchase Order due to STW’s inability to pay the current amounts due.  GE Water also demanded a “termination” payment of $750,000.  In the same letter, GE Water unilaterally announced it was cancelling the Teaming Agreement citing GE Water’s belief that STW was insolvent.  GE Water prefaced its cancellation of the Purchase Order and Teaming Agreement on a failure of GE Water and STW to renegotiate a substitute Teaming Agreement.  On October 8, 2009, STW responded to GE Water in writing rejecting GE Water’s unilateral termination of the Purchase Order and Teaming Agreements, among other things including that GE Water had the contractual requirement to arbitrate certain of the disputed matters raised by GE Water’s October 1, 2009 letter. In discussions in December 2009 between STW management and GE Water, GE Water expressed continued interest in working with STW by providing technical support and a willingness to resolve their differences, pending the results of STW’s merger and capital raise in February2010.

Critical Accounting Policies and Estimates

The following accounting principles and practices of STW are set forth to facilitate the understanding of data presented in the consolidated financial statements:

Nature of operations

STW Resources, Inc. (“STW” or the “Company”) is a development stage Nevada corporation formed on January 28, 2008, to utilize state of the art water reclamation technologies to reclaim fresh water from highly contaminated oil and gas hydraulic fracture flow-back salt water that is produced in conjunction with the production of oil and gas.  STW has been working to establish contracts with oil and gas operators for the deployment of multiple water reclamation systems throughout Texas, Arkansas, Louisiana and the Appalachian Basin of Pennsylvania and West Virginia.  STW, in conjunction with energy producers, operators, various state agencies and legislators, are working to create an efficient and economical solution to this complex problem.  STW is also evaluating the deployment of similar technology in the municipal wastewater industry, the Acid Mine Drainage polluted water problems in the northeastern United States, and brackish aquifer reclamation for reuse.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Property and depreciation

Property and equipment are recorded at cost and depreciation is provided using the straight-line method over the estimated useful lives of the assets.  Leasehold improvements are capitalized and amortized over the lesser of the life of the lease or the estimated useful life of the asset.

 Expenditures for major additions or improvements, which extend the useful lives of assets, are capitalized.  Minor replacements, maintenance and repairs, which do not improve or extend the lives of the assets, are charged to operations as incurred.  Disposals are removed at cost less accumulated depreciation, and any resulting gain or loss is reflected in current operations.

Income taxes

STW follows SFAS No. 109, “Accounting for Income Taxes” for recording the provision for income taxes.  Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled.  Deferred income tax expenses or benefits are based on the changes in the asset or liability during each period.  If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized.  Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.  Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods.  Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate.  Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.

At Inception (January 28, 2008), STW adopted Financial Accounting Standards Board Interpretation Number 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which is intended to clarify the accounting for income taxes prescribing a minimum recognition threshold for a tax provision before being recognized in the consolidated financial statements.  FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  As a result, STW has concluded that it does not have any unrecognized tax benefits or any additional tax liabilities after applying FIN 48.  The adoption of FIN 48 therefore had no impact on STW’s consolidated financial statements.

Concentrations

Financial instruments that potentially subject STW to concentration of credit risk consist of cash.  From time to time, STW has cash in its bank accounts in excess of federally insured limits.

- 20 -

STW anticipates entering into long-term, fixed-price contracts for its services with select oil and gas producers and municipal utilities.  STW will control credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures.

Subsequent events

STW evaluates events and transactions occurring subsequent to the date of the financial statements for matters requiring recognition or disclosure in the financial statements. The accompanying financial statements consider events through February 12, 2010.

- 21 -

MANAGEMENT

Executive Officers and Directors

Below are the names and certain information regarding STW’s executive officers and directors following the acquisition of STW.

Name	Age	Position
Stanley Weiner	56	Chairman of the Board of Directors and Chief Executive Officer
Eric Stoppenhagen (1)	36	Director
Marty Walter	51	Vice President of Field Operations
D. Grant Seabolt, Jr., Esq.	55	In-House Counsel and Corporate Secretary

(1) Mr. Stoppenhagen has agreed to resign as a director of the Company subject to the filing and mailing of the schedule 14f information statement.

Officers are elected annually by the Board of Directors (subject to the terms of any employment agreement), at its annual meeting, to hold such office until an officer’s successor has been duly appointed and qualified, unless an officer sooner dies, resigns or is removed by the Board.

Background of Executive Officers and Directors

Stanley T. Weiner, a 30 year veteran of the oil and gas industry, has explored, drilled and operated oil and gas properties in the United States and in South America. Previously, Mr. Weiner served as president and CEO of Molecular Solutions, LLC, and was founder and CEO of Weiner Investments Inc, and American Crude Oil, Inc.

Eric Stoppenhagen, through his consulting company, Venor, Inc., provides financial and management services to small to medium-sized companies that either are public or desire to become public. He provides temporary CFO services to these companies, which includes as transaction advice, preparation of security filings and advice regarding compliance with corporate governance requirements. Mr. Stoppenhagen has more than ten years of financial experience having served in an executive capacity for several public and private companies; including as Vice President of Finance  and subsequently Interim President of Trestle Holdings, Inc. from 2003 to 2009; Interim President and Director of WoozyFly, Inc. from 2009 to 2010; Interim President of Trist Holdings, Inc. from 2007 to 2010; CFO and Director of AuraSource, Inc. from 2008 to 2010; CFO of GetFugu, Inc. in 2009; and, CFO of Jardinier Corp. from 2007 to 2008. Mr. Stoppenhagen is a Certified Public Accountant and holds a Juris Doctorate and Masters of Business Administration both from George Washington University. Additionally, he holds a Bachelor of Science in Finance and a Bachelor of Science in Accounting both from Indiana University.

Marty Walter has 25 years of experience in the specialty chemical, petrochemical, and cryogenics industries in the areas of operations, safety, environmental, customer service and logistics.  Prior to joining STW Resources, Mr. Walter was the Operations Manager for NuCo2, Inc.  Prior to that, he was a manager for Distribution and Office Services for Betz Energy Chemicals, and Assistant Plant Manager for Betz Laboratories.

D. Grant Seabolt, Jr., Esq. is an “AV” rated, 29-year law practitioner and principal in the Dallas, Texas law firm of the Law Office of Grant Seabolt, where he advises small businesses, entrepreneurs, start-up companies and mature companies in sophisticated business transactions, including mergers, acquisitions and financings.  He is a noted arbitrator and is a “Credentialed Distinguished Mediator.”  Prior to entering private practice, Mr. Seabolt served as a Marine Corps Judge Advocate (attaining rank of Colonel in the Reserves) and as a Division Attorney with The Dow Chemical Company.  Mr. Seabolt holds the following degrees: LL.M (Master of Laws in International and Comparative Law, with highest honors), National Law Center, George Washington University, 1984; J.D., Univ. of Alabama School of Law (Bench & Bar Honor Society), 1979; and B.A. (Accounting), Birmingham-Southern College, 1976. 

- 22 -

Executive Compensation

Summary Compensation Table

Name and Principal Position	Year	Salary ($)	Bonus ($)	(5) Stock Awards ($)		(6) Stock Options ($)	Non-equity Incentive Plan Compensation ($)	Non-Qualified Deferred Compensation Earnings ($)	All Other Compensation ($)	Total ($)
Gene Brock, President (1)	2008	$334,000			$13,350						$347,350
	2007	$0
Stanley T Weiner, CEO Chairman	2008	$221,000			$89,000						$310,000
	2007	$0
G. Wade Stubblefield , CFO (1)	2008	$109,083			$25,312						$134,395
	2007	$0
Marty Walter ,  V P   Operations	2008	$102,500			$13,500						$116,000
	2007	$0

*Date of Inception January 8, 2008

(1) Have resigned as executive officers of the Company.

Outstanding Equity Awards at Fiscal Year-End

STW does not have any outstanding equity awards.

DIRECTOR COMPENSATION

STW has not paid any fees to its directors.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information, as of February 12, 2010 with respect to the beneficial ownership of the outstanding common stock by (i) any holder of more than five (5%) percent; (ii) each of the Company’s executive officers and directors; and (iii) the Company’s directors and executive officers as a group. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned.

Name of Beneficial Owner (1)	Common Stock Beneficially Owned		Percentage of Common Stock (2)
Stanley Weiner*		6,447,500		22.44%
Eric Stoppenhagen*
Marty Walter*		200,000		0.70%
D. Grant Seabolt, Jr., Esq.*		50,000		0.17%
Paul Difrancesco		2,469,537		8.60%
All officers and directors as a group (4 persons)		6,697,500		23.31%

*Executive officer and/or director of the Company.

- 23 -

 ** Less than 1%

(1)   Except as otherwise indicated, the address of each beneficial owner is c/o STW Resources, Inc., 619 West Texas Avenue, Suite 126, Midland, Texas  79701.

(2)   Applicable percentage ownership is based on 28,728,075 shares of common stock outstanding as of February 12, 2010, together with securities exercisable or convertible into shares of common stock within 60 days of February 12, 2010 for each stockholder.  Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.  Shares of common stock that are currently exercisable or exercisable within 60 days of February 12, 2010 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

- 24 -

DESCRIPTION OF SECURITIES

The Company’s authorized capital stock consists of 100,000,000 shares of common stock at a par value of $0.001 per share and 10,000,000 shares of preferred stock at a par value of $0.001 per share.  As of February 12, 2009, there are 28,728,075 shares of the Company’s common stock issued and outstanding that are held by approximately 65 stockholders of record and 2,140,000 shares of preferred stock issued and outstanding held by one shareholder.

Holders of the Company’s common stock are entitled to one vote for each share on all matters submitted to a stockholder vote.  Holders of common stock do not have cumulative voting rights.  Therefore, holders of a majority of the shares of common stock voting for the election of directors can elect all of the directors.  Holders of the Company’s common stock representing a majority of the voting power of the Company’s capital stock issued, outstanding and entitled to vote, represented in person or by proxy, are necessary to constitute a quorum at any meeting of stockholders.  A vote by the holders of a majority of the Company’s outstanding shares is required to effectuate certain fundamental corporate changes such as liquidation, merger or an amendment to the Company’s articles of incorporation.

Holders of the Company’s common stock are entitled to share in all dividends that the board of directors, in its discretion, declares from legally available funds.  In the event of liquidation, dissolution or winding up, each outstanding share entitles its holder to participate pro rata in all assets that remain after payment of liabilities and after providing for each class of stock, if any, having preference over the common stock. The

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

The shares of our common stock have been historically qouted on the OTC Bulletin Board under the symbol “WZYFQ”.  As a result of the Bankruptcy, our common stock will be extinguished and we expect that our shares of common stock will cease trading or being quoted on the OTCBB.  We expect to have a registered broker dealer file an application to have our shares quoted on the OTCBB.

The following table sets forth, for the fiscal quarters indicated, the high and low sale price for our common stock, as reported on the OTC Bulletin Board.

Quarterly period	High		Low
Fiscal year ended December 31, 2008:
Third Quarter	$	5.25	$	0.88
Fourth Quarter	$	0.88	$	0.15
Fiscal year ended December 31, 2009:
First Quarter	$	0.15	$	0.15
Second Quarter	$	0.15	$	0.15
Third Quarter	$	0.15	$	0.15
Fourth Quarter	$	0.15	$	0.15

Prior to the third quarter, our stock was not actively traded.

Holders of our Common Stock

As of February 12, 2010, there were approximately 65 stockholders of record of our common stock.

Dividends

The Company has never declared or paid any cash dividends on its common stock. The Company currently intends to retain future earnings, if any, to finance the expansion of its business. As a result, the Company does not anticipate paying any cash dividends in the foreseeable future.

Securities Authorized for Issuance Under Equity Compensation Plans

The Company does not have an authorized equity compensation plan.   

- 25 -

INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company’s directors and executive officers are indemnified as provided by the Nevada Corporation law and its Bylaws. These provisions state that the Company’s directors may cause the Company to indemnify a director or former director against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, actually and reasonably incurred by him as a result of him acting as a director. The indemnification of costs can include an amount paid to settle an action or satisfy a judgment.  Such indemnification is at the discretion of the Company’s board of directors and is subject to the Securities and Exchange Commission’s policy regarding indemnification.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, or otherwise, The Company has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.

Item 3.02  Unregistered Sales of Equity Securities.

On February 12, 2009, pursuant to the terms of the Merger Agreement, STW merged with and into Acquisition Sub, which became a wholly-owned subsidiary of the Company (the “Merger”).  In consideration for the Merger and STW becoming a wholly-owned subsidiary of the Company, the Company issued an aggregate of 26,543,075 (the “STW Acquisition Shares”) shares of common stock to the shareholders of STW at the closing of the merger and all derivative securities of STW as of the Merger became derivative securities of Woozyfly including options and warrants to acquire 12,613,002 shares of common stock at an exercise price ranging from $3.00 to $8.00 with an exercise period ranging from July 31, 2011 through November 12, 2014 and convertible debentures in the principal amount of $1,467,903 with a conversion price of $0.25 and maturity dates ranging from April 24, 2010 through November 12, 2010.

This issuance of these above securities is exempt from the registration requirements under Rule 4(2) of the Securities Act of 1933, as amended, and/or Rule 506 as promulgated under Regulation D.

On February 9, 2010, the Court entered an order confirming the Seconded Amended Plan of Reorganization (the “Plan”) pursuant to which the Plan and the Merger was approved.   It is expected that the Plan will be effective February 19, 2010 (the “Effective Date”). The

principal provisions of the Plan are as follows:

·   MKM, the DIP Lender, shall receive 400,000 shares of common stock and 2,140,000 shares of preferred stock;

·   the holders of the Convertible Notes shall receive 1,760,000 shares of common stock;

·   general unsecured claims shall received 100,000 shares of common stock; and

·   the Company’s equity interest shall be extinguished and cancelled.

The offer and sale of the above securities pursuant to the Plan and the Confirmation Order was exempt from registration under the Securities Act of 1933, as amended, pursuant to section 1145(a) of the Bankruptcy Code.  Section 1145(a) of the Bankruptcy Code generally exempts from such registration requirements the issuance of securities if the following conditions are satisfied: (i) the securities are issued or sold under a Chapter 11 plan by (a) a debtor, (b) one of its affiliates participating in a joint plan with the debtor or (c) a successor to a debtor under the plan and (ii) the securities are issued entirely in exchange for a claim against or interest in the debtor or such affiliate, or are issued principally in such exchange and partly for cash or property.

Item 3.03        Material Modification to Rights of Security holders

The information set forth in Item 1.01 and Item 3.02 of this Current Report on Form 8-K is incorporated by reference into this Item 3.03.

Item 5.01 Changes in Control of Registrant.

The information set forth in Item 1.01 of this Current Report on Form 8-K is incorporated by reference into this Item 5.01.

Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers.

The information set forth in Item 1.01 of this Current Report on Form 8-K is incorporated by reference into this Item 5.02.

Item 5.06  Change in Shell Company Status.

As a result of the consummation of the acquisition of STW described in Item 1.01 of this Current Report on Form 8-K, we are no longer a shell corporation as that term is defined in Rule 405 of the Securities Act and Rule 12b-2 of the Exchange Act.

- 26 -

Item 9.01 Financial Statements and Exhibits

Financial Statements of Business Acquired

(a)           Filed herewith are the following:

Audited financial statements of STW Resources, Inc. as of December 31, 2008 (See Exhibit 99.2)

Unaudited financial statements STW Resources, Inc. as of September 30, 2009 (See Exhibit 99.3)

(b)          Pro Forma Financial Information  

Not Applicable

(c)           Shell Company Transactions

Not Applicable

(d)           Exhibits

Exhibit No.	Description
3.1 3.2 10.1	Amendment to the Articles of Incorporation (to be filed by amendment) Articles of Merger between STW Acquisition, Inc. and STW Resources, Inc. Agreement and Plan of Merger for proposed merger between Woozyfly, Inc., Merger Sub, and STW Resources, Inc. dated January 17, 2010. (1)
21.1	List of Subsidiaries
99.1	Order Confirming the Second Amended Plan of Reorganization of Woozyfly, Inc.
99.2	Audited financial statements of STW Resources, Inc. as of December 31, 2008
99.3	Unaudited financial statements STW Resources, Inc. as of September 30, 2009

 (1)           Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on January 26, 2010.

- 27 -

  SIGNATURES

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

	WOOZYFLY, INC.
Dated: February 12, 2010	By:	/s/ Stanley Weiner
		Name: Stanley Weiner
		Title: Chief Executive Officer and Chairman of the Board of Directors

- 28 -

EX-3.2

 

EX-21.1

Exhibit 21.1

List of Subsidiaries

STW Resources, Inc.,  a Nevada corporation

EX-99.1

UNITED STATES BANKRUPTCY COURT

THE SOUTHERN DISTRICT OF NEW YORK

______________________________

In re:                                                      |           Chapter 11

|           Case No. 09-13022

WOOZYFLY, INC.                                                      |

|

Debtor.                                |

______________________________|

ORDER CONFIRMING THE SECOND AMENDED PLAN

OF REORGANIZATION OF WOOZYFLY, INC.

Woozyfly, Inc., the debtor and debtor in possession (the “Debtor”) in the above

captioned chapter 11 case (the “Chapter 11 Case”) pending under chapter 11 of title 11 of the

United States Code (11 U.S.C. §§ 101 et seq., the “Bankruptcy Code”), having proposed and

filed the Second Amended Chapter 11 Plan of Reorganization of Woozyfly, Inc., dated

November 23, 2009 (the “Plan”);1 and the Court having entered an Order which permitted the

Debtor to solicit acceptance to the Plan; and the Court having conducted a hearing on February

4, 2010, to consider confirmation of the Plan (the “Hearing”); and the Court having considered

(a) the Plan and the exhibits thereto, and (b) the proffered testimony admitted into evidence at

the Hearing; and no objections having been lodged to the Plan; and the Court being familiar with

the Plan and other relevant factors affecting the Chapter 11 Case; and the Court having taken

judicial notice of the entire record of the Chapter 11 Case; and the Debtor having submitted the

Certification of Andrea Fischer, Esq. affirming that Classes 3 and 4 had accepted the Plan and

the Court having found that due and proper notice has been given with respect to the Hearing and

1 All capitalized terms used but not defined herein shall have the respective meanings ascribed to such terms in the

Plan.

the deadlines and procedures for objections to the Plan; and upon the record of the Hearing, and

after due deliberation thereon, and sufficient cause appearing therefor;

IT IS HEREBY FOUND AND CONCLUDED,2 that

JURISDICTION AND VENUE

A. The Court has jurisdiction to conduct the Hearing and to confirm the Plan

pursuant to 28 U.S.C. § 1334.

B. Confirmation of the Plan is a core proceeding pursuant to 28 U.S.C.

§ 157(b), and this Court has jurisdiction to enter a final order with respect thereto.

C. The Debtor is a proper Debtor under section 109 of the Bankruptcy Code

and is a proper proponent of the Plan under section 1121(a) of the Bankruptcy Code.

JUDICIAL NOTICE

D. This Court takes judicial notice of the docket of the Chapter 11 Case

maintained by the Clerk of the Court and/or its duly-appointed agent, including, without

limitation, all pleadings and other documents filed, all orders entered, and evidence and

arguments made, proffered or adduced at the hearings held before the Court during the pendency

of the Chapter 11 Case.

STANDARDS FOR CONFIRMATION UNDER

SECTION 1129 OF THE BANKRUPTCY CODE

E. Section 1129(a)(1). The Plan complies with all applicable provisions of

the Bankruptcy Code, including, without limitation, the requirements of sections 1122 and 1123

as follows:3

2 The Findings of Fact and Conclusions of Law contained herein constitute the findings of fact and conclusions of law

required to be entered by this Court pursuant to Rule 52 of the Federal Rules of Civil Procedure, as made applicable

herein by Rules 7052 and 9014 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”). To the

extent any finding of fact constitutes a conclusion of law, it is adopted as such. To the extent any conclusion of law

constitutes a finding of fact, it is adopted as such.

2

 In accordance with section 1122(a) of the Bankruptcy Code, Article II of the Plan classifies each Claim against and Interest in the Debtor into a class containing only substantially similar Claims or Interests;

 In accordance with section 1123(a)(1) of the Bankruptcy Code, Article II of the Plan properly classifies all Claims and Interests that require classification;

 In accordance with section 1123(a)(2) of the Bankruptcy Code, Article III of the Plan properly identifies and describes each class of Claims that is unimpaired by the Plan;

 In accordance with section 1123(a)(3) of the Bankruptcy Code, Article III of the Plan properly identifies and describes the treatment of each impaired class of Claims or Interests;

 In accordance with section 1123(a)(4) of the Bankruptcy Code, the Plan provides the same treatment for each Claim or Interest in a particular class unless the holder of such a Claim or Interest agrees to less favorable treatment;

 In accordance with section 1123(a)(5) of the Bankruptcy Code, the Plan provides adequate means for its implementation, including, without limitation, the provisions regarding post-Effective Date corporate management, governance, and actions in Articles V and VI;

 In accordance with section 1123(a)(6) of the Bankruptcy Code, the Reorganized Debtor’s operating agreement shall contain provisions prohibiting the issuance of non-voting equity securities;

 In accordance with section 1123(a)(7) of the Bankruptcy Code, the provisions of the Plan and the Reorganized Debtor’s operating agreement regarding the manner of selection of officers and directors are consistent with the interests of creditors and equity security holders and with public policy.

F. Section 1129(a)(2). The Debtor has complied with all applicable

provisions of the Bankruptcy Code, including, without limitation, the requirements of sections

1125 and 1126 as follows:4

3 See S. Rep. No. 989, 95th Cong., 2d Sess. 126, reprinted in 1978 U.S.C.C.A.N. 5787, 5912 (1978); H.R. Rep. No.

595, 95th Cong., 1st Sess. 412, reprinted in 1978 U.S.C.C.A.N. 5962, 6368 (1977); See In re Johns-Manville Corp.,

68 B.R. 618, 629-30 (Bankr. S.D.N.Y. 1986), as modified, 78 B.R. 407 (S.D.N.Y. 1987), aff’d, 843 F.2d 636 (2d Cir.

1988) (“Objections to confirmation raised under § 1129(a)(1) generally involve the failure of a plan to conform to the

requirements of § 1122(a) or § 1123.”).

4 See In re Johns-Manville Corp., 68 B.R. 618, 629-30 (Bankr. S.D.N.Y. 1986), as modified, 78 B.R. 407 (S.D.N.Y.

1987), aff’d 843 F.2d 636 (2d Cir. 1988) (“Objections to confirmation raised under § 1129(a)(2) generally involve the

alleged failure of the plan proponent to comply with § 1125 and § 1126 of the Code”).

3

 All Persons entitled to receive notice of the Disclosure Statement, the Plan and the Hearing have received proper, timely, and adequate notice in accordance with the Approval and Procedures Order and the applicable provisions of the Bankruptcy Code and the Bankruptcy Rules, and have had an opportunity to appear and be heard with respect thereto;

 The Debtor has solicited votes with respect to the Plan in good faith and in a manner consistent with the Bankruptcy Code, the Bankruptcy Rules and any applicable orders of this Court. Accordingly, the Debtor is entitled to the protections afforded by section 1125(e) of the Bankruptcy Code and the exculpation provisions set forth in Article IX of the Plan;

 The Plan was voted on by two classes of impaired Claims that were entitled to vote pursuant to the Bankruptcy Code and the Bankruptcy Rules, and Class 5 did not vote on was deemed to reject;

 Each of Classes 3 and 4 have accepted the Plan by at least two-thirds in amount and a majority in number of the Claims in such classes actually voting; and

 The determination of Debtor with respect to the voting on the Plan validly and correctly sets forth the tabulation of votes, as required by the Bankruptcy Code and Bankruptcy Rules.

G. Section 1129(a)(3). The Plan has been proposed in good faith and not by

any means forbidden by law. In so finding, the Court has considered the totality of the

circumstances in this Chapter 11 Case. The Plan is the result of arm’s length negotiations and

achieves the goal of consensual reorganization embodied by the Bankruptcy Code. Further, the

Plan’s indemnification, exculpation, release, and injunction provisions have been negotiated in

good faith, are consistent with sections 105, 524(e), 1123(b)(6), 1129, and 1142 of the

Bankruptcy Code, and are each necessary to the Debtor’s successful reorganization.

H. Section 1129(a)(4). No payment for services or costs in connection with

the Chapter 11 Case or the Plan has been made by the Debtor other than payments that have been

authorized by order of the Court. All such payments to be made will be subject to review and

approval by this Court.

4

I. Section 1129(a)(5). The Debtor has disclosed the identity and nature of

compensation of all insiders to be employed or retained by the Reorganized Debtor, as well as

the identities of each Person that is proposed to serve as an officer or director thereof. Such

disclosure by the Debtor is due and proper and the appointment or continuation in office of the

identified Persons is consistent with the interests of creditors, equity security holders, and with

public policy.

J. Section 1129(a)(6). The Plan does not provide for any changes in rates

that require regulatory approval of any governmental agency.

K. Section 1129(a)(7). Each holder of an impaired Claim that has not

accepted the Plan will, on account of such Claim receive or retain property under the Plan having

a value, as of the Effective Date, that is not less than the amount that such holder would receive

or retain if the Debtor were liquidated under chapter 7 of the Bankruptcy Code.

L. Section 1129(a)(8). The Plan has been accepted by all impaired classes of

Claims and Interests. Nevertheless, as more fully explained below, the Plan is confirmable

because it satisfies 1129(b)(1) of the Bankruptcy Code with respect to such non-accepting

classes of Claims and Interests.

M. Section 1129(a)(9). The Plan provides treatment for Administrative

Claims and priority Claims that is consistent with the requirements of section 1129(a)(9) of the

Bankruptcy Code.

N. Section 1129(a)(10). The Plan has been accepted by at least one class of

impaired Claims that was entitled to vote on the Plan without including any acceptance of the

Plan by any insider.

5

O. Section 1129(a)(11). Confirmation of the Plan is not likely to be followed

by the liquidation or the need for the further financial reorganization of the Reorganized Debtor.

P. Section 1129(a)(12). The Plan provides for the payment of all fees

payable under section 1930, title 28, United States Code by the Debtor on the Effective Date (or

as soon as practicable thereafter). After the Effective Date and until this Chapter 11 Case is

closed, converted, or dismissed, the Plan provides for the payment by the Reorganized Debtor of

all such fees as they become due.

Q. Section 1129(b)(2). The Plan does not discriminate unfairly and is fair

and equitable to each class of Claims or Interests that has not accepted the Plan. Holders of

Claims in Class 3 and 4 under the Plan will receive consideration that is significantly different in

nature and quality than the cash they are owed and that is unlikely to be worth more than the full

amount of their Claims. Holders of Interests will receive no property under the Plan.

Nevertheless, the Plan is fair and equitable because it does not provide a recovery to any holder

of an Interest that is junior to the Class 4 of unsecured creditors that are not being paid in full.

Similarly, the Plan does not “discriminate unfairly” because each dissenting class is treated

substantially equally to similarly situated classes and no holder of a Claim or Interest is likely to

receive more than it is legally entitled to receive on account of its Claim or Interest.

R. Section 1129(c). The Plan is the only plan that has been filed in the

Chapter 11 Case that has been found to satisfy the requirements of subsections (a) and (b) of

section 1129 of the Bankruptcy Code. Accordingly, the requirements of section 1129(c) of the

Bankruptcy Code have been satisfied.

S. Section 1129(d). No party in interest, including but not limited to any

governmental unit, has requested that the Court deny confirmation of the Plan on grounds that

6

the principal purpose of the Plan is the avoidance of taxes or the avoidance of the application of

section 5 of the Securities Act of 1933, and the principal purpose of the Plan is not such

avoidance. Accordingly, the Plan satisfies the requirements of section 1129(d) of the

Bankruptcy Code.

T. The Reorganized Debtor Will Not be Insolvent Nor Left With

Unreasonably Small Capital. As of the occurrence of the Effective Date and after taking into

account the transactions contemplated by the Plan, the Reorganized Debtor’s capital is not

unreasonably small to its business or any contemplated or undertaken transaction.

U. Merger and Other Documents. The Plan Proponents have made adequate

and sufficient disclosure of (i) the adoption of new or amended and restated certificates of

incorporation and bylaws or similar constituent documents for the Reorganized Debtor, (ii) the

distributions to be made pursuant to the Plan, (iii) the issuance for distribution, in accordance

with the terms of the Plan, of the Reorganized Debtor Common Stock and (iv) the agreement and

plan of merger and the Merger Documents effectuating the Merger.

V. Merger. The Merger, as memorialized in the Plan and the Plan

Supplement, is essential to the Plan and provides material and substantial consideration to the

Post-Confirmation Assets to provide meaningful distributions to the Creditors that would be

impossible to deliver without the Merger. The Merger is fair and reasonable and in the best

interests of the Debtor, Creditors and the Estate.

W. Distributions of Reorganized Debtor Common Stock. The issuance and

distribution of the Reorganized Debtor Common Stock to holders of the DIP Claim, and Claims

in Class 3 and Class 4 as contemplated by the Plan, constitutes the offer sale of security of the

Debtor, of an affiliate participating in a joint plan with the Debtor, or of a successor to the Debtor

7

under the Plan, and are exempt from the requirements of section 5 of the Securities Act of 1933,

as amended (the “Securities Act” ), and any other federal, state, or local law securities

registration requirements by virtue of section 1145 of Bankruptcy Code. Without limiting the

forgoing, pursuant to Section 1145(a)(1) of the Bankruptcy Code, the offering, issuance and

distribution of the Reorganized Debtor Common Stock on behalf of the DIP Claim, and to Class

3 and Class 4 pursuant to the Plan shall be exempt from Section 5 of the Securities Act and any

state local law requiring registration prior to the offering, issuance, distribution or sale of

securities. All Reorganized Debtor Common Stock to be issued pursuant to the Plan to the

Holders of the DIP Claim, and Allowed Claims in Class 3 and Class 4 shall be issued by

Reorganized Debtor to the Holder of such Claim for which such securities are to be issued under

the Plan.

ACCORDINGLY, IT IS HEREBY ORDERED, ADJUDGED AND DECREED,

that

A. General.

1. The Plan is hereby confirmed and the record of the Hearing is hereby closed.

2. In accordance with section 1141(a) of the Bankruptcy Code and upon the

occurrence of the Effective Date, the Plan shall be binding upon and inure to the benefit of (i) the

Debtor and its respective successors and assigns, (ii) the holders of Claims and Interests and their

respective successors and assigns (whether or not they voted to accept the Plan, whether or not

they are impaired under the Plan, and whether or not any such holder has filed, or is deemed to

have filed a proof of Claim or proof of Interest), (iii) any other Person giving, acquiring, or

receiving property under the Plan, (iv) any party to an executory contract or unexpired lease of

the Debtor and (v) each of the foregoing’s respective heirs, successors, assigns, trustees,

executors, administrators, affiliates, officers, directors, agents, representatives, attorneys,

8

beneficiaries, or guardians, if any. All settlements, compromises, releases, discharges,

exculpations and injunctions set forth in the Plan shall be, and hereby are, effective and binding

on all Persons who may have had standing to assert such settled, released, discharged,

exculpated, or enjoined Causes of Action and no other Entity shall possess such standing to

assert such Causes of Action after the Effective Date.

3. On the Effective Date, except as otherwise provided in the Plan, title to all

property of the Estate shall be vested in the Reorganized Debtor, in accordance with the terms of

the Plan, free and clear of all liens, Claims, and encumbrances and, in accordance with section

1141 of the Bankruptcy Code, any prohibitions upon such being null and void without further

action.

B. Discharge and Releases.

4. From and after the Effective Date, neither the Debtor, its Affiliates, any of their

respective directors, officers, employees, members, attorneys, consultants, advisors, and agents

(acting in such capacity), shall have or incur any liability to any Entity for any act taken or

omitted to be taken in connection with the Debtor’s restructuring, including the formulation,

preparation, dissemination, implementation, confirmation or approval of the Plan, or any

contract, instrument, release or other agreement or document provided for, or contemplated in

connection with, the consummation of the transactions set forth in the Plan; provided, however,

that the foregoing provisions shall not affect the liability of any Person that otherwise would

result from any such act or omission to the extent that act or omission is determined in a Final

Order to have constituted gross negligence or willful misconduct. Any of the foregoing parties

in all respects shall be entitled to rely upon the advice of counsel with respect to their duties and

responsibilities under the Plan.

9

Nothing in this Order or in section 6.14 of the Plan shall (1) be construed to

release or exculpate any entity from fraud, gross negligence, willful misconduct, malpractice,

criminal conduct, unauthorized use of confidential information that causes damages, or ultra

vires acts, or (ii) limit the liability of the professionals of the debtor or the reorganized debtor to

their respective clients pursuant to (x) DR 6-102 of the New York Lawyer’s Code of Professional

Responsibility or (y) any similar disciplinary rule imposed upon such professionals by the code

of professional responsibility of any other state.

5. On the Effective Date, and except as otherwise provided in the Plan or in this

Order, entry of this Order acts as a discharge of and injunction against all Causes of Action

against the Debtor or its Estate that arose before the Effective Date to the extent permitted by

section 1141 of the Bankruptcy Code.

6. As of the Effective Date, except as otherwise provided in the Plan or in this

Order, all Entities who have been, are, or may be holders of Claims against or Interests in the

Debtor shall be enjoined from taking any actions described in section 9.2 of the Plan against or

affecting the Debtor or its Estate, Assets, or Indemnities (to the extent such would result in an

Indemnified Obligation), other than actions brought to enforce any rights or obligations under the

Plan and appeals, if any, from this Order.

7. As of the Effective Date, the Debtor shall be deemed to have waived and released

its present and former directors, officers, employees, members, attorneys, consultants, advisors,

and agents (acting in such capacity) who were directors, officers, employees, members,

attorneys, consultants, advisors or agents, respectively, at any time during the Chapter 11 Case

from any and all Claims or Causes of Action of the Debtor, including without limitation, Causes

of Action which the Debtor as Debtor in possession otherwise has legal power to assert,

10

compromise, or settle in connection with the Chapter 11 Case, arising on or prior to the Effective

Date; provided, however, that (i) contractual obligations owed by such Person to the Debtor and

(ii) Causes of Action relating to such Person’s actions or omissions determined in a Final Order

to have constituted gross negligence or intentional fraud shall not be waived and released.

8. As of the Effective Date, all Entities are permanently enjoined from commencing,

conducting, or continuing in any manner, directly or indirectly, or otherwise prosecuting, any

action, suit, or proceeding of any kind, on account of any Cause of Action which is exculpated,

discharged, or released under the Plan or this Order.

C. Plan Implementation.

9. The Debtor and Reorganized Debtor, as the case may be, and any authorized

officer thereof, are authorized to undertake or cause to be undertaken any and all acts and actions

contemplated by the Plan or required to consummate and implement the provisions of the Plan,

prior to, on, and after the Effective Date, including without limitation, entering, executing,

delivering, filing or recording any agreements, instruments, or documents necessary to

implement the Plan (including, without limitation, filing amended or new certificates of

incorporation, by-laws or other corporate documents with the appropriate governmental

authorities) and all such actions taken or caused to be taken shall be deemed to have been

authorized and approved by the Bankruptcy Court.

10. On the Effective Date, except as otherwise provided in the Plan or this Order, all

agreements, instruments, indentures, notes, warrants, options, share certificates, or other

documents (other than any insurance policy of the Debtor) evidencing, giving rise to, or

governing any Claim or Interest shall be deemed canceled and annulled without further act or

action under any applicable agreement, law, regulation, order, or rule, and the obligations of the

11

Debtor under such agreements, instruments, indentures, notes, warrants, options, share

certificates, or other documents shall be discharged.

11. Each federal, state, commonwealth, local, foreign or other governmental agency is

hereby directed and authorized to accept any and all documents, and instruments necessary or

appropriate to effectuate, implement, or consummate the transactions contemplated by the Plan

and this Order.

12. All transactions effected by the Debtor during the pendency of the Chapter 11

Case from the Petition Date through the Confirmation Date are approved and ratified.

D. Merger

13. The Merger contemplated in the Plan is hereby approved. The Debtor or any

officer thereof, are hereby authorized to take any and all actions necessary or appropriate to

implement, effectuate, and consummate any and all documents or transactions in furtherance of

the Merger pursuant to the Plan. Except for any restraints set forth in the Plan, the approvals and

authorizations specifically set forth in this Confirmation Order are nonexclusive and are not

intended to limit the authority of the Debtor or the Reorganized Debtor or any officer thereof,

from taking any action necessary to effectuate the Merger Transaction. The effectiveness of the

Merger is subject to additional conditions set forth in the Merger Documents.

E. Plan Distributions.

14. On and after the Effective Date, distributions on account of Allowed Claims shall

be effectuated pursuant to the Plan.

15. All applications for payment of fees and reimbursement of expenses by

professionals retained in this Chapter 11 Case as well as parties seeking compensation pursuant

to section 503 of the Bankruptcy Code must be filed with the Court by the date that is no later

than forty-five (45) days after the Effective Date (or, if such date is not a Business Day, by the

12

next Business Day thereafter). Any Entity that fails to file such an application or request on or

before such date shall be forever barred from asserting such Administrative Claim against the

Debtor or the Reorganized Debtor, or their property, and the holder thereof shall be enjoined

from commencing or continuing any action, employment of process or act to collect, offset or

recover such Administrative Claim. Applications for approval of professionals’ fees not

previously awarded during the pendency of the Chapter 11 Case may be included in such

professionals’ final applications as set forth herein and in the Plan. Objections, if any, to Fee

Claims shall be filed and served not later than five (5) business days prior to the date set by the

Court for the hearing to consider such requests.

F. Reorganized Debtor Common Stock

16. Issuance of Reorganized Debtor Common Stock: On the Effective Date, the

Reorganized Debtor shall issue shares as follows (a) 1,760,000 shares of Reorganized Debtor

Common Stock, which shall be distributed to the Noteholders; (b) 500,000 shares of

Reorganized Debtor Common Stock and 2,140,00 shares of Reorganized Debtor Convertible

Preferred Stock, which shall be distributed to the DIP Lender and (c) 26,443,075 shares of

Reorganized Debtor Common Stock, which shall be distributed to the Old STW Shareholders.

The Reorganized Debtor shall be responsible for distribution of such shares as provide in the

Plan. Pursuant to Section 1145(a)(1) of the Bankruptcy Code, the offering, issuance and

distribution of the Reorganized Debtor Common Stock on behalf of the DIP Claim, and to Class

3 and Class 4 pursuant to the Plan shall be exempt from Section 5 of the Securities Act and any

state or local law requiring registration prior to the offering, issuance, distribution or sale of

securities.

17. Cancellation of Instrument and Stock. On the Effective Date, other than the

Reorganized Debtor Common Stock and the common stock, options and warrants or other

13

securities issued or to be issued to the holders (or other persons or entities entitled to be issued

such interests) of any such interests as of the Effective Date, (i) all Interests in the Debtor; (ii)

and all stock options (including, but not limited to, all stock options granted to the Debtor’s

employees) in the Debtor; (iii) any and all warrants in the Debtor; and (iv) any instrument

evidencing or creating any indebtedness or obligation of the Debtor, except such instruments that

are issued under the Plan or the Merger Documents, shall be cancelled and extinguished.

Additionally, as of the Effective Date, all Interests in the Debtor, and any and all warrants,

options, rights, or interests with respect to equity interests in the Debtor that have been

authorized to be issued but that have not been issued shall be deemed cancelled and extinguished

without any further action of any party.

G. Miscellaneous.

18. The business and assets of the Debtor shall remain subject to the jurisdiction of

this Court until the Effective Date. From and after the Effective Date, this Court shall retain and

have exclusive jurisdiction of all matters arising out of this Chapter 11 Case pursuant to, and for

purposes of, subsection 105(a) and section 1142 of the Bankruptcy Code.

19. The Debtor or its authorized agent(s) shall serve a notice of entry of this Order by

regular mail, as provided in Bankruptcy Rule 2002(f)(7), to all parties previously served with the

Confirmation Hearing Notice, within ten (10) Business Days from the date of entry of this Order.

20. Except as otherwise provided in the Plan and this Order, notice of all subsequent

pleadings in the Chapter 11 Case shall be limited to counsel for the Debtor, the U.S. Trustee and

any party known to be directly affected by the relief sought.

21. The provisions of Bankruptcy Rule 3020(e) shall not apply to this Confirmation

Order, and the Debtor is authorized to consummate the Plan immediately upon entry of this

Order.

14

22. Failure specifically to include or reference particular sections or provisions of the

Plan or any related agreement or document in this Order shall not diminish or impair the

effectiveness of such sections or provisions, it being the intent of the Court that the Plan be

confirmed, and such related agreements or documents be approved, in their entirety.

23. All Entities holding Claims against the Debtor that are treated under the Plan are

hereby directed to execute, deliver, file, or record any document, and to take any action

necessary to implement, consummate, and otherwise effect the Plan in accordance with its terms,

and all such entities shall be bound by the terms and provisions of all documents executed and

delivered by them in connection with the Plan.

24. In accordance with section 1142 of the Bankruptcy Code, the Debtor and the

Reorganized Debtor, and any other Entity designated pursuant to the Plan are hereby authorized,

empowered and directed to issue, execute, deliver, file and record any document, and to take any

action necessary or appropriate to implement, consummate and otherwise effectuate the Plan in

accordance with its terms, and all such Entities shall be bound by the terms and provisions of all

documents issued, executed and delivered by them as necessary or appropriate to implement or

effectuate the transactions contemplated by the Plan.

25. Pursuant to Section 3.5 of the Plan, all unpaid U.S. Trustee Fees incurred before

the Effective Date shall be timely paid by the Debtor in the ordinary course as such U.S. Trustee

Fees become due and payable. All unpaid U.S. Trustee Fees incurred after the Effective Date

shall be timely paid by the Reorganized Debtor in the ordinary course as such U.S. Trustee Fees

become due and payable. Until the case is closed, the Reorganized Debtor will comply with

section 1106(a)(7) of the Bankruptcy Code and Rule 2015(a)(5) regarding post-confirmation

reporting.

15

26. In the event of an inconsistency between the Plan, on the one hand, and any other

agreement, instrument, or document intended to implement the provisions of the Plan, on the

other, the provisions of the Plan shall govern (unless otherwise expressly provided for in such

agreement, instrument, or document). In the event of any inconsistency between the Plan, Plan

Document or any agreement, instrument, or document intended to implement the Plan, on the

one hand, and this Order, on the other, the provisions of this Order shall govern.

27. The provisions of this Order are integrated with each other and are non-severable

and mutually dependent.

28. This Confirmation Order is a final order and the period in which an appeal must

be filed shall commence immediately upon the entry hereof.

29. The Plan shall be substantially consummated when the transactions described in

section 5.1 of the Plan shall have occurred or shall have been waived or otherwise provided for.

Dated:                      New York, New York

February 9, 2010

_______s/ James M. Peck_______________

HONORABLE JAMES M. PECK

UNITED STATES BANKRUPTCY JUDGE

16

EX-99.2

Financial Statements of

STW RESOURCES, INC.

(a Development Stage Company)

As of December 31, 2008, and for the Period from Inception (January 28, 2008) through December 31, 2008

INDEPENDENT AUDITOR’S REPORT

To the Board of Directors and Shareholders of

STW Resources, Inc.

(A Development Stage Company)

We have audited the accompanying balance sheet of STW Resources, Inc. (the Company) (a development stage company) as of December 31, 2008, and the related statements of operations, shareholders’ equity and cash flows for the period from Inception (January 28, 2008) to December 31, 2008.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of STW Resources, Inc. as of December 31, 2008 and the results of its operations and its cash flows for the period from Inception (January 28, 2008) to December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company is in the development stage, has not attained profitable operations and is dependent upon obtaining adequate financing to fulfill its business activities.  These factors raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Weaver and Tidwell, L.L.P. 

WEAVER AND TIDWELL, L.L.P.

Houston, Texas

November 30, 2009

24 Greenway Plaza

Suite 1800

Houston, Texas 77046-2404

713.850.8787

F 713.850.1673

WWW.WEAVERANDTIDWELL.COM

AN INDEPENDENT MEMBER OF

BAKER TILLY

INTERNATIONAL

OFFICES IN

DALLAS                              FORT WORTH                              HOUSTON                              SAN ANTONIO

1

STW RESOURCES, INC.
(A Development Stage Company)
Balance Sheet
December 31, 2008
Assets
Current assets
Cash and cash equivalents	$	17,639
Other current assets		52,112
Total current assets		69,751
Property and equipment, net of accumulated
depreciation of $13,640		9,759,939
Total Assets	$	9,829,690
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable	$	5,465,972
Accrued expenses		18,332
Notes payable - current		235,800
Total current liabilities		5,720,104
Note payable - non-current		62,181
Commitments and contingencies
Shareholders' equity
Series A Preferred stock, par value $.00001 per share,
Authorized 10,000,000 shares, Issued and outstanding
100 shares		-
Common stock, par value $.00001 per share,
Authorized 250,000,000 shares, Issued and outstanding
23,463,825 shares		235
Paid-in capital		6,693,738
Deficit accumulated during the development stage		(2,646,568	)
		4,047,405
Total Liabilities and Shareholders' Equity	$	9,829,690
The accompanying notes are an integral part of these financial statements.

2

STW RESOURCES, INC.
(A Development Stage Company)
Statement of Operations
For the period from Inception (January 28, 2008) through December 31, 2008
Revenues	$	-
Costs and expenses
General and administrative
Salaries and benefits		1,023,433
Professional fees		714,865
Stock-based compensation		233,493
Travel		249,398
Other		304,574
Total general and administrative		2,525,763
Operating loss		(2,525,763	)
Other expense
Interest, net		120,805
Total other expense		120,805
Loss before income taxes		(2,646,568	)
Income taxes		-
Net loss	$	(2,646,568	)
The accompanying notes are an integral part of these financial statements.

3

STW RESOURCES, INC.
(A Development Stage Company)
Statement of Cash Flows
For the period from Inception (January 28, 2008) through December 31, 2008
Cash flows from operating activities
Net loss	$	(2,646,568	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		13,640
Fair value of common shares attached to notes payable		50,395
Amortization of debt issue costs		55,100
Stock-based compensation		233,493
Changes in operating assets and liabilities:
Increase in prepaid expenses and other current assets		(52,112	)
Increase in accounts payable and accrued expenses		629,714
Net cash used in operating activities		(1,716,338	)
Cash flows from investing activities
Acquisition of property and equipment		(4,918,989	)
Net cash used in investing activities		(4,918,989	)
Cash flows from financing activities
Issuance of notes payable		1,410,819
Repayment of notes payable		(1,112,840	)
Debt issue costs		(55,100	)
Equity issuances, net		6,410,087
Net cash provided by financing activities		6,652,966
Net increase in cash and cash equivalents		17,639
Cash at beginning of period		-
Cash at end of period	$	17,639
Supplemental cash flow information:
Cash paid for interest	$	21,080
Non-cash investing and financing activities:
Non-cash capital expenditures	$	4,854,590
The accompanying notes are an integral part of these financial statements.

4

STW RESOURCES, INC.
(A Development Stage Company)
Statement of Shareholders' Equity
For the period from Inception (January 28, 2008) through December 31, 2008
											Deficit Accumulated
	Preferred Stock				Common Stock				Paid-in		During the
	Shares		Amount		Shares		Amount		Capital		Development Stage			Total
January 28, 2008, equity offering		100	$	-		8,100,000	$	81	$	-	$	-		$	81
April 1, 2008, issuance of common stock in
connection with notes payable		-		-		275,000		3		12,235		-			12,238
April 9, 2008, equity offering		-		-		5,980,000		60		266,050		-			266,110
April 14, 2008, unit offering, net		-		-		4,167,500		42		6,143,852		-			6,143,894
June 1, 2008, issuance of common stock in
connection with notes payable		-		-		41,325		-		11,157		-			11,157
September 29, 2008, issuance of common stock
in connection with note payable		-		-		62,500		1		16,874		-			16,875
December 29, 2008, issuance of common stock
in connection with note payable		-		-		37,500		-		10,125		-			10,125
Stock -based compensation		-		-		4,800,000		48		233,445		-			233,493
Net loss		-		-		-		-		-		(2,646,568	)		(2,646,568	)
Total Shareholders' Equity, December 31, 2008		100	$	-		23,463,825	$	235	$	6,693,738	$	(2,646,568	)	$	4,047,405
The accompanying notes are an integral part of these financial statements.

5

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2008

1.   Organization, Nature of Activities and Basis of Presentation

STW Resources, Inc. (“STW” or the “Company”) is a development stage Nevada corporation formed on January 28, 2008, to utilize state of the art water reclamation technologies to reclaim fresh water from highly contaminated oil and gas hydraulic fracture flow-back salt water that is produced in conjunction with the production of oil & gas.  STW has been working to establish contracts with oil and gas operators for the deployment of multiple water reclamation systems throughout Texas, Arkansas, Louisiana and the Appalachian Basin of Pennsylvania and West Virginia.  STW, in conjunction with energy producers, operators, various state agencies and legislators, are working to create an efficient and economical solution to this complex problem.  The Company is also evaluating the deployment of similar technology in the municipal wastewater industry.

Status of Relationship with GE Water & Process Technologies

STW entered into a Memorandum of Understanding with GE Water & Process Technologies (“GE Water”), a unit of General Electric Company, dated February 14, 2008 (“MOU”) to jointly develop off-take agreements with oil and gas operators for the deployment of multiple water reclamation systems throughout Texas, Arkansas, Louisiana and the Appalachian Basin.  STW and GE Water formalized their relationship on May 22, 2008, by entering into a definitive Teaming Agreement (“Teaming Agreement”), which superseded the MOU.  The Teaming Agreement was drafted in accordance with the terms of the MOU and provides greater certainty as to each party’s responsibilities and as to the process of entering into agreements with and providing services to customers.  The Teaming Agreement sets forth the terms and conditions that will govern the STW and GE Water relationship when STW is successful in selling its services to an identified prospect.

In April 2008, STW entered into a purchase order with GE Water (“Purchase Order”), for the purchase of a modularized produced water evaporator system (the “Evaporator System”) capable of processing approximately 720,000 gallons per day.  The total commitment under the Purchase Order was $14.5 million, to be paid over eight installments.  As of September 30, 2009, the Company has paid a total of approximately $4.7 million.  Included in this total is $300,000 of its $1.5 million second installment payment which was due at the end of June 2008.  The Company is currently in arrears on the remaining $1.2 million under the second installment payment and is also in arrears in its third installment payment of $3.6 million which was due on November 28, 2008, the fourth installment payment of $1.5 million which was due on February 27, 2009, and the fifth installment payment of $1.8 million which was due on August 28, 2009.  The total of all amounts invoiced and unpaid, including accrued interest, through September 30, 2009, totaled $9.0 million.  In addition, pursuant to the terms of the Purchase Order, the Company is required to post a letter of credit securing the balance of the payments due under the Purchase Order, totaling $1.9 million, which the Company has not yet done.  Finally, in April 2009, the Company issued a change order to the Purchase Order to increase the overall processing capacity to approximately one million gallons per day.  This change order obligated the Company to additional payments totaling approximately $1.2 million.

On January 12, 2009, GE Water sent a notice of default with respect to the past due payments on the Evaporator System, and the required posting of the letter of credit, as set forth under the Purchase Order, with a requirement that such default be cured within 30 days from the date of the

6

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2008

notices.  GE Water took no further action with respect to the notice of default until August 13, 2009.

On August 13, 2009, GE Water provided the Company a six month additional grace period, through February 13, 2010.  At the end of the additional six month grace period, if the Company has not met its obligations, GE Water represented that it would meet with the Company to determine the state of the investment market and grant or not grant an additional grace period, as necessary.  If, after February 13, 2010, GE Water elected to not extend the Company’s payment obligations, GE Water could foreclose on the Evaporator System, resulting in the loss of payments advanced to date by the Company and future use of the Evaporator System under construction.

On October 1, 2009, GE Water sent a letter to STW unilaterally announcing to STW that GE was canceling the Company’s Purchase Order due to STW’s inability to pay the current amounts due.  GE Water also demanded a “termination” payment of $750,000.  In the same letter, GE Water unilaterally announced it was cancelling the Teaming Agreement citing GE Water’s belief that STW was insolvent.  GE Water prefaced its cancellation of the Purchase Order and Teaming Agreement on a failure of GE Water and STW to renegotiate a substitute Teaming Agreement.  On October 8, 2009, STW responded to GE Water in writing rejecting GE Water’s unilateral termination of the Purchase Order and Teaming Agreements, among other things including that GE Water had the contractual requirement to arbitrate certain of the disputed matters raised by GE Water’s October 1, 2009 letter.  Subsequently, GE Water replied to STW’s letter denying the Company’s allegations, but inviting the Company to meet in person with GE Water representatives to attempt to resolve their differences.  STW expects such meeting to be scheduled in the near future.

Going Concern

The Company from Inception (January 28, 2008) through December 31, 2008, did not have any revenues.  The Company has no significant operating history as of December 31, 2008, has accumulated losses and negative cash flow from operations since inception and is currently in default of amounts past due to GE Water.  From Inception (January 28, 2008) through December 31, 2008, management has raised equity and debt financing to fund operations and to provide working capital.  However, there is no assurance that in the future such financing will be available to meet the Company’s needs.

Management has undertaken steps as part of a plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond.  These steps include (a) raising additional capital and/or obtaining financing; (b) continue to work in good faith with GE Water to perform its obligations under the Teaming Agreement and the Purchase Order, (c) executing contracts with oil and gas operators and municipal utility districts; and (d) controlling overhead and expenses.  There can be no assurance that the Company can successfully accomplish these steps and it is uncertain that the Company will achieve a profitable level of operations and obtain additional financing.  There can be no assurance that any additional financings will be available to the Company on satisfactory terms and conditions, if at all.

In the event the Company is unable to continue as a going concern, the Company may elect or be required to seek protection from its creditors by filing a voluntary petition in bankruptcy or

7

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2008

may be subject to an involuntary petition in bankruptcy.  To date, management has not considered this alternative, nor does management view it as a likely occurrence.

The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.

The Company’s operations are located in the United States of America and the principal executive offices are located at 3417 Mercer, Suite D, Houston, TX 77027.

2.    Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include cash in banks and financial instruments with an original maturity of three months or less at the date of purchase.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist of cash.  From time to time, the Company has cash in its bank accounts in excess of federally insured limits.

The Company anticipates entering into long-term, fixed-price contracts for its services with select oil and gas producers and municipal utilities.  The Company will control credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures.

Fair Value of Financial Instruments

As at December 31, 2008, the fair value of cash, accounts payable, accrued expenses and notes payable, including amounts due to and from related parties, approximate carrying values because of the short-term maturity of these instruments.

Stock Based Compensation

On December 16, 2004, the Financial Accounting Standards Board issued SFAS No. 123(R) (revised 2004), "Share-Based Payment" which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation".  SFAS No. 123(R) superseded Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and amended SFAS No. 95, "Statement of Cash Flows".  Generally, the approach in SFAS No. 123(R) is similar to the

8

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2008

approach described in SFAS No. 123.  However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.  Pro-forma disclosure is no longer an alternative.  The effective date for the Company’s application of SFAS No. 123(R) was January 28, 2008 (date of inception).

There were no grants of employee options during the period from January 28, 2008 (date of inception) through December 31, 2008.  There were no unvested options outstanding as of the date of the Company’s adoption of SFAS No. 123(R).

Property and Equipment

Property and equipment are recorded at cost and depreciation is provided using the straight-line method over the estimated useful lives of the assets.  Leasehold improvements are capitalized and amortized over the lesser of the life of the lease or the estimated useful life of the asset.

Expenditures for major additions or improvements, which extend the useful lives of assets, are capitalized.  Minor replacements, maintenance and repairs, which do not improve or extend the lives of the assets, are charged to operations as incurred.  Disposals are removed at cost less accumulated depreciation, and any resulting gain or loss is reflected in current operations.

Impairment of Long-Lived Assets

The Company follows SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.  SFAS No. 144 requires that long-lived assets held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period.  The Company evaluates the recoverability of long-lived assets based upon forecasted discounted cash flows.  Should impairment in value be indicated, the carrying value of the long-lived assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset.  SFAS No. 144 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less disposal costs.

Segment reporting

The Company follows SFAS No. 130, “Disclosures about Segments of an Enterprise and Related Information”. The Company operates as a single segment and will evaluate additional segment disclosure requirements as it expands its operations.

Income taxes

The Company follows SFAS No. 109, “Accounting for Income Taxes” for recording the provision for income taxes.  Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled.  Deferred income tax expenses or benefits are based on the changes in the asset or liability during each period.  If available evidence suggests that it is more likely than not that

9

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2008

some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized.  Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.  Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods.  Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate.  Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.

At Inception (January 28, 2008), the Company adopted Financial Accounting Standards Board Interpretation Number 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which is intended to clarify the accounting for income taxes prescribing a minimum recognition threshold for a tax provision before being recognized in the consolidated financial statements.  FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  As a result, the Company has concluded that it does not have any unrecognized tax benefits or any additional tax liabilities after applying FIN 48.  The adoption of FIN 48 therefore had no impact on the Company’s consolidated financial statements.

Recently Adopted Accounting Pronouncement

In May 2009, the Financial Accounting Standards Board issued Statement of Financial Account Standard No. 165, “Subsequent Events,” which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. In particular, SFAS No. 165 sets forth:

·   The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; and

·   The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and

·   The disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

SFAS No. 165 is effective for interim or annual periods ending after June 15, 2009, and is to be applied prospectively.  The application of SFAS No. 165 will have no impact on the Company’s financial position, results of operations or cash flows.

3.   Property and Equipment

The Company’s property and equipment at December 31, 2008, consists principally of $9.6 million of work-in-progress on the Company’s first Evaporator System from GE Water.  Progress payments totaling $4.7 million have been paid-to-date, with a total of $4.8 million outstanding at

10

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2008

December 31, 2008, and included in accounts payable.  The Company capitalized a total of $150,132 of interest on past-due payments charged by GE Water during the period from Inception (January 28, 2008) through December 31, 2008, which is also outstanding at December 31, 2008, and included in accounts payable.  The Company recognized total depreciation expense of $13,640 during the period from Inception (January 28, 2008) through December 31, 2008, related to vehicles and furniture and fixtures which carry useful lives ranging from three to five years.

4.   Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consists principally of $4.9 million related to amounts due on the Company’s first Evaporator System from GE Water, including accrued interest, as well as various other amounts due primarily to formation costs and capital raising activities.

5.   Notes Payable

In April 2008, the Company issued promissory notes (the “April 2008 Notes”) totaling $1.1 million.   Each note bore interest at a rate of 10% per annum.  Principal and accrued but unpaid interest on each note was payable in full on June 1, 2008.  Pursuant to the terms of the April 2008 Notes, the Company was also required to issue one-quarter (0.25) share of Common Stock for each dollar of principal amount advanced.  A total of 275,000 shares of Common Stock were issued and were valued at an aggregate of $12,238, based upon the price of the Company’s shares of Common Stock issued under the most recent private placement offering prior to the issuance of the April 2008 Notes.  This value was recorded as a discount to the notes and amortized to interest expense using the effective interest rate method over the term of the notes.  The Company also incurred $55,100 of debt issue costs.  This cost was amortized to interest expense using the effective interest rate method over the term of the notes.

On June 1, 2008, the Company requested and obtained temporary waivers of repayment of the April 2008 Notes until the closing of additional equity funding.  In consideration of such extension, the Company issued to each note holder an additional 0.375 share of Common Stock for each dollar of principal advanced.  A total of 41,325 additional shares of Common Stock were issued.  These additional shares of Common Stock were valued at an aggregate of $11,157, based on the estimated fair value of the Company’s Common Stock at that date.  This amount was recorded as a discount to the April 2008 Notes and amortized to interest expense using the effective interest rate method over the term of the notes.

The April 2008 Notes were repaid in full during June 2008.

On September 29, 2008, the Company entered into a securities purchase agreement with an accredited investor (the “September 2008 Bridge Investor”) providing for the issuance by the Company to the September 2008 Bridge Investor of its 12% promissory note in the principal amount of $125,000 (the "September 2008 Bridge Note").  In addition to the September 2008 Bridge Note, the September 2008 Bridge Investor also received 62,500 shares of common stock of the Company.  These shares of Common Stock were valued at an aggregate of $16,875, based on the estimated fair value of the Company’s Common Stock at that date.  This amount was recorded as a discount to the September 2008 Bridge Note and will be amortized to interest expense using the effective interest rate method over the term of the notes.  The September 2008 Bridge Note matured on the earlier of 90 days from closing or upon closing of a private

11

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2008

placement by the Company.  Interest associated with this note is 12% per annum, payable on the maturity date.  In the event that all amounts due under the note are not paid by the maturity date, the Company is required to issue an additional 31,250 shares to the September 2008 Bridge Investor every 30 days that any amounts remain outstanding on the note.

On December 29, 2008, the Company entered into a securities purchase agreement with the Company’s Chairman and Chief Executive Officer for the issuance by the Company of its 10% promissory note in the principal amount of $75,000 (the "CEO Bridge Note").  In addition to the CEO Bridge Note, the CEO also received 37,500 shares of Common Stock of the Company.  These shares of Common Stock were valued at an aggregate of $10,125, based on the estimated fair value of the Company’s Common Stock at that date.  This amount was recorded as a discount to the CEO Bridge Note and will be amortized to interest expense using the effective interest rate method over the term of the note.  The CEO Bridge Note matures on the earlier of 90 days from closing or upon closing of a private placement by the Company.  Interest associated with the CEO Bridge Note is 10% per annum, payable on the maturity date.  

The Company has also entered into various vehicle and insurance financing contracts with amounts outstanding totaling $99,102 as of December 31, 2008.  Of this amount, $62,181 was reflected as notes payable – non-current at December 31, 2008, as the original maturity exceeded December 31, 2009.  However, the entire balance of the long-term total of $62,181 was repaid in 2009.

6.   Capital Stock

Preferred Stock

The Company has authorized 10,000,000 shares of Preferred Stock.  In April 2008, the Company designated the Series A Preferred Stock, with a par value of $0.0001 per share, and authorized the issuance of 100 shares to the Company’s Chairman and Chief Executive Officer.  The Series A Preferred Stock provides voting rights as if each share of Series A Preferred Stock is equal to 80,000 shares of the Company’s Common Stock.  The holder of Series A Preferred Stock is entitled to vote together with the holders of the Common Stock on all matters that the Common Stock is entitled to vote on.

Common Stock

The Company has authorized 250,000,000 shares of Common Stock.

On January 28, 2008, the Company issued 8,100,000 shares of Common Stock at $0.0001 per share for total consideration of $81.

On April 9, 2008, the Company issued 5,980,000 shares of Common Stock at $0.0445 per share for total consideration of $266,110.

On April 14, 2008, the Company commenced a unit offering (the “$2.00 Unit Offering”) whereby each unit consisted of one share of the Company’s Common Stock and a warrant to acquire one and one-half share of the Company’s Common Stock as follows: (i) 0.5 shares at an exercise price equal to $3.00 per share, (ii) 0.5 shares at an exercise price equal to $4.00 per share, and (iii) 0.5 shares at an exercise price equal to $8.00 per share. Each Warrant is

12

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2008

exercisable for three years from date of issue.  As of December 31, 2008, the Company had sold an aggregate of 3,467,500 units for gross proceeds of $6.9 million.  The Company incurred costs of $0.8 million in issuing the shares, resulting in net proceeds of $6.1 million.  The Company also issued 700,000 Common Shares for investment banking compensation associated with this offering.  These shares were valued at an aggregate of $98,800, based on the estimated fair value of the Company’s Common Stock at that date.

In connection with the April 2008 Notes, the Company issued a total of 275,000 shares of Common Stock which were valued at an aggregate of $12,238, based upon the price of the Company’s shares of Common Stock issued under the most recent private placement offering prior to the issuance of the April 2008 Notes.  Upon the extension of the April 2008 Notes in June 2008, the Company issued a total of 41,325 additional shares of Common Stock.  These additional shares of Common Stock were valued at an aggregate of $11,157, based on the estimated fair value of the Company’s Common Stock at that date.

In connection with the September 2008 Bridge Note, the Company issued a total of 62,500 shares of Common Stock which were valued at an aggregate of $16,875, based upon the estimated fair value of the Company’s Common Stock at that date.

In connection with the CEO Bridge Note, the Company issued a total of 37,500 shares of Common Stock which were valued at an aggregate of $10,125, based upon the estimated fair value of the Company’s Common Stock at that date.

Warrants

As of December 31, 2008, the Company had the following warrants outstanding to acquire the Company’s Common Stock:

	Underlying
	Common Shares
Warrants associated with $2.00 Unit offering
Exercisable at $3.00		1,733,750
Exercisable at $4.00		1,733,750
Exercisable at $8.00		1,733,750
		5,201,250
Broker warrants associated with $2.00 Unit offering
Exercisable at $3.00		179,550
Exercisable at $4.00		179,500
Exercisable at $8.00		179,500
		538,650
Total warrants outstanding		5,739,900

 

13

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2008

7.   Stock-Based Compensation

During 2008, the Company issued 4.8 million shares of the Company’s Common Stock to directors, employees and certain consultants.  The following table sets forth the number of shares issued, the fair value at date of issue and the period over which the shares vest:

	Number of		Fair
	Shares		Value per		Vesting
Date	Issued		Share		Period
April 22, 2008		2,550,000	$	0.0445	Immediate
April 22, 2008		350,000	$	0.0445	six months
May 8, 2008		100,000	$	0.0445	Immediate
May 19, 2008		1,300,000	$	0.0445	Immediate
October 1, 2008		50,000	$	0.27	Immediate
June 1, 2008		250,000	$	0.27	(a)
December 1, 2008		200,000	$	0.27	six months
		4,800,000
(a) These shares vest upon the earlier of (i) the initial public offering of the
Company's common shares, (ii) the involuntary termination of the employee
after December 31, 2008 or (iii) upon consent of the Company's Board of
Directors.

The Company recognized $233,493 in compensation cost associated with the issuance of these shares and, at December 31, 2008, had an additional $92,857 of compensation cost to be recognized in 2009 over the related vesting period.

8.   Commitments

In April 2008, the Company entered into an Equipment and Services Contract with GE Water with respect to the purchase by the Company of an Evaporator System, along with necessary pre-treatment facilities, capable of handling 500 gallons per minute of oil field fractionation and/or oil field produced waste water.  The contract price totaled $14.5 million.  The Company has made progress payments totaling $4.7 million, with the balance of the contract price payable upon the attainment of project milestones by GE Water over approximately 18 months. In April 2009, the Company issued a change order to increase the overall processing capacity to approximately one million gallons per day.  This change order obligated the Company to additional payments totaling approximately $1.2 million.  See Note 1.

14

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2008

9.   Related Party Transactions

In connection with the Company’s issuance of the April 2008 Notes, Viewpoint Securities, LLC (“Viewpoint”), the Company’s financial and capital markets advisor and of which one of its Partners is a member of the Company’s Board of Directors, advanced the Company $100,000 (the “Viewpoint Note”) pursuant to the terms of the April 2008 Notes and subsequent April 2008 Notes extension.  The Viewpoint Note was repaid in June 2008, along with accrued interest totaling $1,315 and the issuance of 28,750 shares of the Company’s Common Stock (see Note 5).  In addition, in connection with the issuance of the April 2008 Notes, the Company incurred a placement fee to Viewpoint totaling $55,100.

In connection with the Company’s issuance of the April 2008 Notes, the Company’s then Chief Financial Officer advanced the Company $100,000 (the “CFO Note”) pursuant to the terms of the April 2008 Notes and subsequent April 2008 Notes extension.  The CFO Note was repaid in June 2008, along with accrued interest totaling $1,671 and the issuance of 28,750 shares of the Company’s Common Stock (see Note 5).

In connection with the Company’s equity capital raising activities, the Company had incurred, as of December 31, 2008, a total of $825,266 in fees and expenses payable to Viewpoint and issued, pursuant to the terms of its arrangement with Viewpoint, 700,000 shares of Common Stock and 359,100 warrants to purchase one and one-half shares of the Company’s Common Stock on the same terms as the warrants issued in the $2.00 Unit Offering.  At December 31, 2008, the Company had a balance due Viewpoint of $219,899 recorded in accounts payable.

10.    Income Taxes

The Company’s net loss before income taxes totaled $2,646,568 for the period from Inception (January 28, 2008) through December 31, 2008.

The total provision for income taxes, which consist solely of U.S. Federal taxes, consist of the following:

	For the Period
	from Inception
	(January 28, 2008) to
	December 31, 2008
Current taxes	$	-
Deferred taxes		-
Total	$	-

15

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2008

A reconciliation of the tax on the Company’s loss for the year before income taxes and total tax expense is shown below:

	For the Period
	from Inception
	(January 28, 2008) to
	December 31, 2008
Income tax benefit at U.S. statutory rate	$	(926,299	)
Implied interest expense associated with
outstanding debt instruments		14,095
50% limitation of meals and entertainment		7,959
Increase in valuation allowance		904,245
	$	-

The components of net deferred tax assets and liabilities recognized are as follows:

	December 31, 2008
Deferred noncurrent tax asset:
Capitalized start up costs	$	930,514
Gross deferred noncurrent tax asset		930,514
Book-tax differences in property basis		(26,269	)
Valuation allowance		(904,245	)
Deferred noncurrent tax asset	$	-
Deferred noncurrent tax liability:
Book-tax differences in property basis	$	-
Deferred noncurrent tax liability	$	-
Net noncurrent tax asset	$	-

11.   Subsequent Events

In January 2009, the Company issued an additional 62,500 Units under its $2.00 Unit Offering and realized $93,051 in net proceeds.

During 2009, the Company issued 500,000 Common Shares for investment banking compensation to Viewpoint.

16

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2008

In January 2009, the Company issued a warrant to acquire 1,500,000 common shares at an exercise price of $4.00 for five years for professional services for business development consultation.  Using the Black Scholes pricing model, with volatility of 150%, a risk-free interest rate of 2.5% and a 0% dividend yield, the warrant was determined to have a fair value of $293,054, with such value recorded as professional fee expense and additional paid-in capital.

On January 2, 2009, and January 6, 2009, the Company entered into securities purchase agreements with two accredited investors (the “January 2009 Bridge Investors”) for the issuance by the Company of a 10% promissory note in the principal amount of $25,000 to each of the January 2009 Bridge Investors (the "January 2009 Bridge Notes").  In addition to the January 2009 Bridge Notes, the January 2009 Bridge Investors also each received 12,500 shares of Common Stock of the Company.  These shares of Common Stock were valued at an aggregate of $6,750, based on the estimated fair value of the Company’s Common Stock at that date.  This amount was recorded as a discount to the January 2009 Bridge Notes and will be amortized to interest expense using the effective interest rate method over the term of the notes.  The January 2009 Bridge Notes matured on the earlier of 90 days from closing or upon closing of a private placement by the Company.  Interest associated with the January 2009 Bridge Notes was 10% per annum, payable on the maturity date.

On January 14, 2009, the Company entered into a bridge loan letter agreement and a securities purchase agreement with an accredited investor (the “January 14, 2009 Bridge Investor”) for the issuance by the Company of a 15% promissory note in the principal amount of $400,000 to the January 14, 2009 Bridge Investors (the "January 14, 2009 Bridge Note").  In addition to the January 14, 2009 Bridge Notes, the January 14, 2009 Bridge Investors also received 50,000 shares of Common Stock of the Company.  These shares of Common Stock were valued at $13,500, based on the estimated fair value of the Company’s Common Stock at that date.  This amount was recorded as a discount to the January 14, 2009 Bridge Note and will be amortized to interest expense using the effective interest rate method over the term of the notes.   In connection with entering into the bridge loan letter agreement, the Company also issued warrants to acquire 480,000 shares of the Company’s Common Stock and paid $40,000 in fees.  The warrants are exercisable for a period of five years at an exercise price of $3.00 per share.  Using the Black Scholes pricing model, with volatility of 150%,  a risk-free interest rate of 2.5% and a 0% dividend yield, the warrants were determined to have a fair value of $97,232, with such value recorded as a discount to the January 14, 2009 Bridge Note and to additional paid-in capital.  This discount, along with the $40,000 in fees, will be amortized using the effective interest rate method over the term of the indebtedness.  The January 14, 2009 Bridge Note matured 90 days from closing.  Interest associated with the January 14, 2009 Bridge Note was 15% per annum, payable on the maturity date.

Effective February 24, 2009, the Company acquired, and retired, from its former Chairman and Chief Executive Officer, the 100 shares of Series A Preferred Stock then outstanding, in exchange for a commitment by the Company to issue its former Chairman and Chief Executive Officer a warrant to purchase 1.5 million shares of the Company’s Common Stock at $8.00 per share, with a five-year exercise period.

On March 24, 2009, the Company entered into a securities purchase agreement with the September 2008 Bridge Investor providing for the rollover of the $125,000 principal amount outstanding under the September 2008 Bridge Note and the advancing of an additional $50,000 (the “March 2009 Bridge Note”).  Pursuant to the terms of the September 2008 Bridge Note, the

17

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2008

Company issued penalty shares, totaling 93,750 additional shares of the Company’s Common Stock, to the September 2008 Bridge Investor  These shares of Common Stock were valued at an aggregate of $25,314, based on the estimated fair value of the Company’s Common Stock at that date.  This amount was recorded as a discount to the September 2008 Bridge Note and was amortized to interest expense using the effective interest rate method over the term of the note. In addition to the March 2009 Bridge Note, the September 2008 Bridge Investor also received an additional 200,000 shares of common stock of the Company.  These shares of Common Stock were valued at an aggregate of $54,000, based on the estimated fair value of the Company’s Common Stock at that date.  This amount was recorded as a discount to the March 2009 Bridge Note and was amortized to interest expense using the effective interest rate method over the term of the note.  The September 2008 Bridge Investor was also entitled to a $15,000 financing fee payable at maturity.  This fee was accrued as a discount to the March 2009 Bridge Note and was amortized to interest expense using the effective interest rate method over the term of the note.  The March 2009 Bridge Note matured on the earlier of 90 days from closing or upon closing of a private placement by the Company, with net proceeds to the Company of at least $1.0 million.  Interest associated with this note was 12% per annum, payable on the maturity date.   In the event that all amounts due under the note are not paid by the maturity date, the Company was required to issue an additional 40,000 shares to the September 2008 Bridge Investor every 30 days that any amounts remain outstanding on the note.

In April 2009, the Company commenced an offering of its 12% Convertible Notes (the “2009 12% Convertible Notes”).  Each 2009 12% Convertible Note is convertible, at any time at the option of the holder, into shares of the Company’s common stock, at an initial conversion price of $0.25 per share (the “Conversion Price”).   The 2009 12% Convertible Notes bear interest at 12% per annum and mature 12 months from the date of issuance.  For each 2009 12% Convertible Note purchased, each investor will receive a warrant  to purchase up to such number of shares of the Company’s common stock equal to one-half of the face amount of the 2009 12% Convertible Note divided by the Conversion Price.  The warrants shall be exercisable for a period of five years from the date of issuance at an exercise price of $3.00 per share.  Through September 30, 2009, the Company had issued a total of $650,000 face value of its 12% Convertible Notes.

In April 2009, the holders of the CEO Bridge Note, the January 2009 Bridge Notes, the January 14, 2009 Bridge Note and the March 2009 Bridge Note agreed to convert the $700,000 total of their outstanding notes into the 2009 12% Convertible Notes.

Beginning in February 2009, the Company has been unable to meet its contractual employment related obligations and has been accruing, as a component of accrued expenses, past due salaries to its employees and, as a component of accounts payable, severance payments payable to its former Chief Executive Officer and fees due its in-house counsel.  Through September 30, 2009, the Company, in partial satisfaction of these past due amounts, had issued $800,436 principal amount of 12% convertible notes (the “Deferred Compensation Convertible Notes”) on the basis of $2.00 of Deferred Compensation Convertible Note face value for each $1.00 of compensation deferred.  Each Deferred Compensation Convertible Note is convertible, at any time at the option of the holder, into shares of the Company’s common stock, at an initial conversion price of $0.25 per share (the “Conversion Price”).   The Deferred Compensation Convertible Notes bear interest at 12% per annum and mature 12 months from the date of issuance.

18

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2008

On August 28, 2009, the Company entered into a Letter of Intent ("LOI") with WoozyFly, Inc. ("WoozyFly"), a corporation incorporated under the laws of Nevada and its common shares are quoted on the Over-the-Counter Bulletin Board under the symbol "WZFL", whereby a subsidiary of WoozyFly will merge with and into the Company, with the Company continuing as the surviving corporation.  Pursuant to the LOI, there would be a one for one exchange of Woozyfly's shares of common stock and securities for all of the issued and outstanding voting capital stock of the Company.

19

EX-99.3

Financial Statements of

STW RESOURCES, INC.

(a Development Stage Company)

As of and for the three and nine months ended September 30, 2009

STW RESOURCES, INC.

TABLE OF CONTENTS

BALANCE SHEETS                                                                                                                     1

STATEMENTS OF OPERATIONS                                                                                            2

STATEMENTS OF CASH FLOWS                                                                                           3

STATEMENTS OF SHAREHOLDERS’ EQUITY                                                                    4

NOTES TO FINANCIAL STATEMENTS                                                                                5

STW RESOURCES, INC.
(A Development Stage Company)
Balance Sheets
	September 30,			December 31,
	2009			2008
	(Unaudited)			(Audited)
Assets
Current assets
Cash and cash equivalents	$	75,654		$	17,639
Other current assets		128,933			52,112
Total current assets		204,587			69,751
Property and equipment, net of accumulated
depreciation of $7,373 and $13,640		13,694,356			9,759,939
Total Assets	$	13,898,943		$	9,829,690
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable	$	9,734,054		$	5,465,972
Accrued expenses		388,401			18,332
Notes payable - current, net of $181,557 of unamortized
discount at September 30, 2009		2,000,494			235,800
Total current liabilities		12,122,949			5,720,104
Note payable - non-current		-			62,181
Commitments and contingencies
Shareholders' equity
Preferred stock, par value $.00001 per share,
Authorized 10,000,000 shares, Issued 100 shares at
December 31, 2008.  No shares issued at September 30, 2009		-			-
Common stock, par value $.00001 per share, Authorized
250,000,000 shares, issued 26,355,075 shares at
September 30, 2009, and 23,463,825 at December 31, 2008		264			235
Paid-in capital		8,086,230			6,693,738
Deficit accumulated during the development stage		(6,310,500	)		(2,646,568	)
Total shareholders' equity		1,775,994			4,047,405
Total Liabilities and Shareholders' Equity	$	13,898,943		$	9,829,690

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

1

STW RESOURCES, INC.
(A Development Stage Company)
Statements of Operations
(Unaudited)													Inception
													(January 28, 2008)
	Three Months Ended September 30,						Nine Months Ended September 30,						Through
	2009			2008			2009			2008			September 30, 2009
Revenues	$	-		$	-		$	34,000		$	-		$	34,000
Cost of Sales		-			-			35,355			-			35,355
		-			-			(1,355	)		-			(1,355	)
Expenses
General and administrative
Salaries and benefits		402,413			308,980			1,634,830			728,662			2,658,263
Professional fees		142,195			265,286			779,124			501,119			1,493,989
Stock-based compensation		-			16,223			600,300			202,557			833,793
Travel		20,480			68,520			73,378			126,685			322,776
Other		53,101			61,306			158,848			166,421			463,422
Total general and administrative		618,189			720,315			3,246,480			1,725,444			5,772,243
Operating loss		(618,189	)		(720,315	)		(3,247,835	)		(1,725,444	)		(5,773,598	)
Other expense
Interest, net		105,016			33			416,097			96,904			536,902
Total other expense		105,016			33			416,097			96,904			536,902
Loss before income taxes		(723,205	)		(720,348	)		(3,663,932	)		(1,822,348	)		(6,310,500	)
Income taxes		-			-			-			-			-
Net loss	$	(723,205	)	$	(720,348	)	$	(3,663,932	)	$	(1,822,348	)	$	(6,310,500	)

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

2

STW RESOURCES, INC.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)							Inception
							(January 28, 2008)			Inception
	For the Nine Months Ended						Through			(January 28, 2008)
	September 30,						September 30,			Through
	2009			2008			2009			December 31, 2008
Cash flows from operating activities
Net income (loss)	$	(3,663,932	)	$	(1,822,348	)	$	(6,310,500	)	$	(2,646,568	)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation		20,360			5,702			34,000			13,640
Write-off of project pilot costs		14,960			-			14,960			-
Amortization of debt issue costs		303,547			2,000			358,647			55,100
Fair value of common shares attached to notes payable		25,314			-			75,709			50,395
Notes payable issued for deferred compensation		800,436			-			800,436			-
Stock-based compensation		600,300			202,557			833,793			233,493
Fair value of equity issued for consulting services		273,983			-			273,983			-
Loss on sale of equipment		7,449			-			7,449			-
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses and other
current assets		32,189			(65,216	)		(19,923	)		(52,112	)
Increase in accounts payable and accrued expenses		674,210			767,123			1,303,924			629,714
Net cash used in operating activities		(911,186	)		(910,182	)		(2,627,524	)		(1,716,338	)
Cash flows from investing activities
Acquisition of property and equipment		(67,887	)		(4,627,248	)		(4,986,876	)		(4,918,989	)
Sale of equipment		64,500			-			64,500			-
Net cash used in investing activities		(3,387	)		(4,627,248	)		(4,922,376	)		(4,918,989	)
Cash flows from financing activities
Issuance of notes payable		1,150,000			1,326,358			2,560,819			1,410,819
Repayment of notes payable		(94,269	)		(1,107,731	)		(1,207,109	)		(1,112,840	)
Debt issue costs		(176,200	)		-			(231,300	)		(55,100	)
Equity issuances, net		93,057			5,605,658			6,503,144			6,410,087
Net cash provided by financing activities		972,588			5,824,285			7,625,554			6,652,966
Net increase in cash and cash equivalents		58,015			286,855			75,654			17,639
Cash at beginning of period		17,639			-			-			-
Cash at end of period	$	75,654		$	286,855		$	75,654		$	17,639
Supplemental cash flow information:
Cash paid for interest	$	8,006		$	19,479		$	29,086		$	21,080
Non-cash investing and financing activities:
Non-cash capital expenditures	$	4,006,006		$	1,339,013		$	8,860,596		$	4,854,590

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

3

STW RESOURCES, INC.
(A Development Stage Company)
Statements of Shareholders' Equity
(Unaudited)
														Deficit Accumulated
	Preferred Stock					Common Stock						Paid-in		During the
	Shares			Amount		Shares			Amount			Capital		Development Stage			Total
January 28, 2008, equity offering		100		$	-		8,100,000		$	81		$	-	$	-		$	81
April 1, 2008, issuance of common stock in
connection with notes payable		-			-		275,000			3			12,235		-			12,238
April 9, 2008, equity offering		-			-		5,980,000			60			266,050		-			266,110
April 14, 2008, unit offering, net		-			-		4,167,500			42			6,143,852		-			6,143,894
June 1, 2008, issuance of common stock in
connection with notes payable		-			-		41,325			-			11,157		-			11,157
September 29, 2008, issuance of common stock
in connection with note payable		-			-		62,500			1			16,874		-			16,875
December 29, 2008, issuance of common stock
in connection with note payable		-			-		37,500			-			10,125		-			10,125
Stock - based compensation		-			-		4,800,000			48			233,445		-			233,493
Net loss		-			-		-			-			-		(2,646,568	)		(2,646,568	)
Total Shareholders' Equity, December 31, 2008		100		$	-		23,463,825		$	235		$	6,693,738	$	(2,646,568	)	$	4,047,405
April 14, 2008, unit offering follow-on, net		-			-		570,500			6			93,050		-			93,056
January 2, 2009, issuance of common stock
in connection with note payable		-			-		12,500			-			3,375		-			3,375
January 6, 2009, issuance of common stock
in connection with note payable		-			-		12,500			-			3,375		-			3,375
January 14, 2009, issuance of common stock
in connection with note payable		-			-		50,000			1			13,499		-			13,500
January 30, 2009, issuance of common stock
in connection with September 29, 2008
note payable		-			-		31,250			-			8,438		-			8,438
February 24, 2009, retirement of preferred shares		(100	)		-		-			-			-		-			-
February 28, 2009, issuance of common stock
in connection with September 29, 2008
note payable		-			-		31,250			-			8,438		-			8,438
March 24, 2009, issuance of common stock
in connection with September 29, 2008
note payable		-			-		31,250			-			8,438		-			8,438
March 24, 2009, issuance of common stock
in connection with amendment of
September 29, 2008 note payable		-			-		200,000			2			53,998		-			54,000
Warrants issued in connection with the
2009 Convertible Note		-			-		-			-			277,450		-			277,450
Warrants issued for consulting services		-			-		-			-			180,651		-			180,651
Shares issued for consulting services		-			-		202,000			2			141,498		-			141,500
Stock -based compensation		-			-		1,950,000			20			600,280		-			600,300
Cancellation of restricted shares		-			-		(200,000	)		(2	)		2		-			0
Net loss		-			-		-			-			-		(3,663,932	)		(3,663,932	)
Total Shareholders' Equity, September 30, 2009		-		$	-		26,355,075		$	264		$	8,086,230	$	(6,310,500	)	$	1,775,994

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

4

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

1.   Organization, Nature of Activities and Basis of Presentation

STW Resources, Inc. (“STW” or the “Company”) is a development stage Nevada corporation formed on January 28, 2008, to utilize state of the art water reclamation technologies to reclaim fresh water from highly contaminated oil and gas hydraulic fracture flow-back salt water that is produced in conjunction with the production of oil and gas.  STW has been working to establish contracts with oil and gas operators for the deployment of multiple water reclamation systems throughout Texas, Arkansas, Louisiana and the Appalachian Basin of Pennsylvania and West Virginia.  STW, in conjunction with energy producers, operators, various state agencies and legislators, are working to create an efficient and economical solution to this complex problem.  The Company is also evaluating the deployment of similar technology in the municipal wastewater industry.

The Company has prepared the accompanying unaudited financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information.  These financial statements should be read together with the financial statements and notes in the Company’s 2008 audited financial statement.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  The accompanying financial statements reflect all adjustments and disclosures, which, in the Company’s opinion, are necessary for fair presentation.  All such adjustments are of a normal recurring nature.  The results of operations for the interim periods are not necessarily indicative of the results of the entire year.

On August 28, 2009, the Company entered into a Letter of Intent ("LOI") with WoozyFly, Inc. ("WoozyFly"), a corporation incorporated under the laws of Nevada and its common shares are quoted on the Over-the-Counter Bulletin Board under the symbol "WZFL", whereby a subsidiary of WoozyFly will merge with and into the Company, with the Company continuing as the surviving corporation.  Pursuant to the LOI, there would be a one for one exchange of Woozyfly's shares of common stock and securities for all of the issued and outstanding voting capital stock of the Company.

The Company’s operations are located in the United States of America and the principal executive offices are located at 3417 Mercer, Suite D, Houston, TX 77027.

Status of Relationship with GE Water & Process Technologies

STW entered into a Memorandum of Understanding with GE Water & Process Technologies (“GE Water”), a unit of General Electric Company, dated February 14, 2008 (“MOU”) to jointly develop off-take agreements with oil and gas operators for the deployment of multiple water reclamation systems throughout Texas, Arkansas, Louisiana and the Appalachian Basin.  STW and GE Water formalized their relationship on May 22, 2008, by entering into a definitive Teaming Agreement (“Teaming Agreement”), which superseded the MOU.  The Teaming Agreement was drafted in accordance with the terms of the MOU and provides greater certainty as to each party’s responsibilities and as to the process of entering into agreements with and providing services to customers.  The Teaming Agreement sets forth the terms and conditions that will govern the STW and GE Water relationship when STW is successful in selling its services to an identified prospect.

5

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

In April 2008, STW entered into a purchase order with GE Water (“Purchase Order”), for the purchase of a modularized produced water evaporator system (the “Evaporator System”) capable of processing approximately 720,000 gallons per day.  The total commitment under the Purchase Order was $14.5 million, to be paid over eight installments.  As of September 30, 2009, the Company has paid a total of approximately $4.7 million.  Included in this total is $300,000 of its $1.5 million second installment payment which was due at the end of June 2008.  The Company is currently in arrears on the remaining $1.2 million under the second installment payment and is also in arrears in its third installment payment of $3.6 million which was due on November 28, 2008, the fourth installment payment of $1.5 million which was due on February 27, 2009, and the fifth installment payment of $1.8 million which was due on August 28, 2009.  The total of all amounts invoiced and unpaid, including accrued interest of approximately $998,000, through September 30, 2009, totaled $9.0 million.  In addition, pursuant to the terms of the Purchase Order, the Company is required to post a letter of credit securing the balance of the payments due under the Purchase Order, totaling $1.9 million, which the Company has not yet done.  Finally, in April 2009, the Company issued a change order to the Purchase Order to increase the overall processing capacity to approximately one million gallons per day.  This change order obligated the Company to additional payments totaling approximately $1.2 million.

On January 12, 2009, GE Water sent a notice of default with respect to the past due payments on the Evaporator System, and the required posting of the letter of credit, as set forth under the Purchase Order, with a requirement that such default be cured within 30 days from the date of the notices.  GE Water took no further action with respect to the notice of default until August 13, 2009.

On August 13, 2009, GE Water provided the Company a six month additional grace period, through February 13, 2010.  At the end of the additional six month grace period, if the Company has not met its obligations, GE Water represented that it would meet with the Company to determine the state of the investment market and grant or not grant an additional grace period, as necessary.  If, after February 13, 2010, GE Water elected to not extend the Company’s payment obligations, GE Water could foreclose on the Evaporator System, resulting in the loss of payments advanced to date by the Company and future use of the Evaporator System under construction.

On October 1, 2009, GE Water sent a letter to STW unilaterally announcing to STW that GE was canceling the Company’s Purchase Order due to STW’s inability to pay the current amounts due.  GE Water also demanded a “termination” payment of $750,000.  In the same letter, GE Water unilaterally announced it was cancelling the Teaming Agreement citing GE Water’s belief that STW was insolvent.  GE Water prefaced its cancellation of the Purchase Order and Teaming Agreement on a failure of GE Water and STW to renegotiate a substitute Teaming Agreement.  On October 8, 2009, STW responded to GE Water in writing rejecting GE Water’s unilateral termination of the Purchase Order and Teaming Agreements, among other things including that GE Water had the contractual requirement to arbitrate certain of the disputed matters raised by GE Water’s October 1, 2009 letter. In discussions in December 2009 between STW management and GE Water, GE Water expressed continued interest in working with the Company by providing technical support and a willingness to resolve their differences, pending the results of STW’s merger and capital raise in January 2010.

6

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

Going Concern

The Company from Inception (January 28, 2008) through September 30, 2009, has not had any significant revenues.  The Company has no significant operating history as of September 30, 2009, has accumulated losses and negative cash flow from operations since inception and is currently in default of amounts past due to GE Water.  From Inception (January 28, 2008) through September 30, 2009, management has raised equity and debt financing to fund operations and to provide working capital.  However, there is no assurance that in the future such financing will be available to meet the Company’s needs.

Management has undertaken steps as part of a plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond.  These steps include (a) raising additional capital and/or obtaining financing; (b) continue to work in good faith with GE Water to perform its obligations under the Teaming Agreement and the Purchase Order, (c) executing contracts with oil and gas operators and municipal utility districts; and (d) controlling overhead and expenses.  There can be no assurance that the Company can successfully accomplish these steps and it is uncertain that the Company will achieve a profitable level of operations and obtain additional financing.  There can be no assurance that any additional financings will be available to the Company on satisfactory terms and conditions, if at all.

In the event the Company is unable to continue as a going concern, the Company may elect or be required to seek protection from its creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy.  To date, management has not considered this alternative, nor does management view it as a likely occurrence.

The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.

2.    Summary of Significant Accounting Policies

Recently Adopted Accounting Pronouncements

 In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles,” which has been primarily codified into ASC Topic 105, “Generally Accepted Accounting Standards.”  This guidance establishes the FASB Accounting Standards Codification, which officially commenced July 1, 2009, to become the single source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants.  All other accounting literature excluded from the Codification is considered nonauthoritative.  The subsequent issuances of new standards will be in the form of Accounting Standards Updates that will be included in the Codification.  Generally, the Codification does not change U.S. GAAP.  This statement is effective for financial statements issued for interim and

7

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

annual periods ending after September 15, 2009.  The Company has adopted this standard for the quarter ending September 30, 2009.  The standard has had a minimal effect on the Company’s financial statement disclosures, as all references to authoritative accounting literature are referenced in accordance with the Codification.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” which was primarily codified into FASB Accounting Standards Codification (ASC, also known collectively as the Codification) Topic 855, “Subsequent Events.” This guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. In particular, this statement sets forth:

·   The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; and

·   The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and

·   The disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

     ASC Topic 855 is effective for interim or annual periods ending after June 15, 2009, and is to be applied prospectively.  The Company adopted ASC Topic 855 as of June 30, 2009.  We evaluated all events or transactions that occurred after September 30, 2009, up through the date these financial statements became available for issue on January , 2010.    For further discussion about subsequent events, see Note 10 – Subsequent Events.

3.   Property and Equipment

The Company’s property and equipment at September 30, 2009, consists principally of $12.6 million of work-in-progress on the Company’s first Evaporator System from GE Water.  Progress payments totaling $4.7 million have been paid-to-date, with a total of $7.9 million outstanding at September 30, 2009, and included in accounts payable.  The Company capitalized a total of $150,132 of interest on past-due payments charged by GE Water during the period from Inception (January 28, 2008) through December 31, 2008, and an additional $838,444 during the period from January 1, 2009, through September 30, 2009, all which is outstanding at September 30, 2009, and included in accounts payable.

The Company recognized total depreciation expense of $13,640 during the period from Inception (January 28, 2008) through December 31, 2008, and an additional $20,360 during the period from January 1, 2009, through September 30, 2009, related to vehicles and furniture and fixtures which carry useful lives ranging from three to five years.

8

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

4.   Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses at September 30, 2009, consists principally of $9.0 million related to amounts due on the Company’s first Evaporator System from GE Water, including accrued interest of approximately $998,000, as well as various other amounts due primarily to formation costs and capital raising activities.

5.   Notes Payable

The Company’s notes payable at September 30, 2009 and December 31, 2008, consisted of the following:

	September 30,			December 31,
Name	2009			2008
September 2008 Bridge Note	$	-		$	125,000
CEO Bridge Note		-			75,000
2009 12% Convertible Notes:
Conversion of outstanding bridge notes		727,903			-
Cash issuances		650,000			-
Total 2009 12% Convertible Notes		1,377,903			-
Deferred Compensation Convertible Notes		800,436			-
Other Financing		3,712			97,981
Unamortized debt discount		(181,557	)		-
Total Notes Payable	$	2,000,494		$	297,981

April 2008 Notes

In April 2008, the Company issued promissory notes (the “April 2008 Notes”) totaling $1.1 million.   Each note bore interest at a rate of 10% per annum.  Principal and accrued but unpaid interest on each note was payable in full on June 1, 2008.  Pursuant to the terms of the April 2008 Notes, the Company was also required to issue one-quarter (0.25) share of Common Stock for each dollar of principal amount advanced.  A total of 275,000 shares of Common Stock were issued and were valued at an aggregate of $12,238, based upon the price of the Company’s shares of Common Stock issued under the most recent private placement offering prior to the issuance of the April 2008 Notes.  This value was recorded as a discount to the notes and amortized to interest expense using the effective interest rate method over the term of the notes.  The Company also incurred $55,100 of debt issue costs.  This cost was amortized to interest expense using the effective interest rate method over the term of the notes.

On June 1, 2008, the Company requested and obtained temporary waivers of repayment of the April 2008 Notes until the closing of additional equity funding.  In consideration of such extension, the Company issued to each note holder an additional 0.375 share of Common Stock for each dollar of principal advanced.  A total of 41,325 additional shares of Common Stock were issued.  These additional shares of Common Stock were valued at an aggregate of $11,157, based

9

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

on the estimated fair value of the Company’s Common Stock at that date.  This amount was recorded as a discount to the April 2008 Notes and amortized to interest expense using the effective interest rate method over the term of the notes.

The April 2008 Notes were repaid in full during June 2008.

September 2008 Bridge Note and March 2009 Bridge Note

On September 29, 2008, the Company entered into a securities purchase agreement with an accredited investor (the “September 2008 Bridge Investor”) providing for the issuance by the Company to the September 2008 Bridge Investor of its 12% promissory note in the principal amount of $125,000 (the "September 2008 Bridge Note").  In addition to the September 2008 Bridge Note, the September 2008 Bridge Investor also received 62,500 shares of common stock of the Company.  These shares of Common Stock were valued at an aggregate of $16,875, based on the estimated fair value of the Company’s Common Stock at that date.  This amount was recorded as a discount to the September 2008 Bridge Note and was amortized to interest expense using the effective interest rate method over the term of the notes.  The September 2008 Bridge Note matured on December 28, 2009.  Interest associated with this note was 12% per annum, payable on the maturity date.  In the event that all amounts due under the note were not paid by the maturity date, the Company was required to issue an additional 31,250 shares to the September 2008 Bridge Investor every 30 days that any amounts remain outstanding on the note.

On March 24, 2009, the Company entered into a securities purchase agreement with the September 2008 Bridge Investor providing for the rollover of the $125,000 principal amount outstanding under the September 2008 Bridge Note and the advancing of an additional $50,000 (the “March 2009 Bridge Note”).  Pursuant to the terms of the September 2008 Bridge Note, the Company issued penalty shares, totaling 93,750 additional shares of the Company’s Common Stock, to the September 2008 Bridge Investor.  These shares of Common Stock were valued at an aggregate of $25,314, based on the estimated fair value of the Company’s Common Stock at that date.  This amount was recorded as a discount to the September 2008 Bridge Note and was amortized to interest expense using the effective interest rate method over the term of the note.  In addition to the March 2009 Bridge Note, the September 2008 Bridge Investor also received an additional 200,000 shares of common stock of the Company.  These shares of Common Stock were valued at an aggregate of $54,000, based on the estimated fair value of the Company’s Common Stock at that date.  This amount was recorded as a discount to the March 2009 Bridge Note and was amortized to interest expense using the effective interest rate method over the term of the note.  The September 2008 Bridge Investor was also entitled to a $15,000 financing fee payable at maturity.  This fee was accrued as a discount to the March 2009 Bridge Note and was amortized to interest expense using the effective interest rate method over the term of the note.  The March 2009 Bridge Note matured on the earlier of 90 days from closing or upon closing of a private placement by the Company, with net proceeds to the Company of at least $1.0 million.  Interest associated with this note was 12% per annum, payable on the maturity date.   In the event that all amounts due under the note are not paid by the maturity date, the Company was required to issue an additional 40,000 shares to the September 2008 Bridge Investor every 30 days that any amounts remain outstanding on the note.

10

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

CEO Bridge Note

On December 29, 2008, the Company entered into a securities purchase agreement with the Company’s then Chairman and Chief Executive Officer for the issuance by the Company of its 10% promissory note in the principal amount of $75,000 (the "CEO Bridge Note").  In addition to the CEO Bridge Note, the CEO also received 37,500 shares of Common Stock of the Company.  These shares of Common Stock were valued at an aggregate of $10,125, based on the estimated fair value of the Company’s Common Stock at that date.  This amount was recorded as a discount to the CEO Bridge Note and was amortized to interest expense using the effective interest rate method over the term of the note.  The CEO Bridge Note matured on March 29, 2009.  Interest associated with the CEO Bridge Note was 10% per annum, payable on the maturity date.

January 2009 Bridge Notes

On January 2, 2009, and January 6, 2009, the Company entered into securities purchase agreements with two accredited investors (the “January 2009 Bridge Investors”) for the issuance by the Company of a 10% promissory note in the principal amount of $25,000 to each of the January 2009 Bridge Investors (the "January 2009 Bridge Notes").  In addition to the January 2009 Bridge Notes, the January 2009 Bridge Investors also each received 12,500 shares of Common Stock of the Company.  These shares of Common Stock were valued at an aggregate of $6,750, based on the estimated fair value of the Company’s Common Stock at that date.  This amount was recorded as a discount to the January 2009 Bridge Notes and was amortized to interest expense using the effective interest rate method over the term of the notes.  The January 2009 Bridge Notes matured on the earlier of 90 days from closing or upon closing of a private placement by the Company.  Interest associated with the January 2009 Bridge Notes was 10% per annum, payable on the maturity date.

January 14, 2009 Bridge Note

On January 14, 2009, the Company entered into a bridge loan letter agreement and a securities purchase agreement with an accredited investor (the “January 14, 2009 Bridge Investor”) for the issuance by the Company of a 15% promissory note in the principal amount of $400,000 to the January 14, 2009 Bridge Investors (the "January 14, 2009 Bridge Note").  In addition to the January 14, 2009 Bridge Notes, the January 14, 2009 Bridge Investors also received 50,000 shares of Common Stock of the Company.  These shares of Common Stock were valued at $13,500, based on the estimated fair value of the Company’s Common Stock at that date.  This amount was recorded as a discount to the January 14, 2009 Bridge Note and was amortized to interest expense using the effective interest rate method over the term of the notes.   In connection with entering into the bridge loan letter agreement, the Company also issued warrants to acquire 480,000 shares of the Company’s Common Stock and paid $40,000 in fees.  The warrants are exercisable for a period of five years at an exercise price of $3.00 per share.  Using the Black Scholes pricing model, with volatility of 100%,  a risk-free interest rate of 1.5% and a 0% dividend yield, the warrants were determined to have a fair value of $48,168, with such value recorded as a discount to the January 14, 2009 Bridge Note and to additional paid-in capital.  This discount, along with the $40,000 in fees, was amortized using the effective interest rate method over the term of the indebtedness.  The January 14, 2009 Bridge Note matured 90 days from closing.  Interest associated with the January 14, 2009 Bridge Note was 15% per annum, payable on the maturity date.  

11

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

2009 12% Convertible Notes

In April 2009, the Company commenced an offering of its 12% Convertible Notes (the “2009 12% Convertible Notes”).  Each 2009 12% Convertible Note is convertible, at any time at the option of the holder, into shares of the Company’s common stock, at an initial conversion price of $0.25 per share (the “Conversion Price”).   The 2009 12% Convertible Notes bear interest at 12% per annum and mature 12 months from the date of issuance.  For each 2009 12% Convertible Note purchased, each investor received a warrant  to purchase up to such number of shares of the Company’s common stock equal to one-half of the face amount of the 2009 12% Convertible Note divided by the Conversion Price.  The warrants are exercisable for a period of five years from the date of issuance at an exercise price of $3.00 per share.  Through September 30, 2009, the Company had issued a total of $650,000 face value of its 12% Convertible Notes for cash.

In April 2009, the holders of the CEO Bridge Note, the January 2009 Bridge Notes, the January 14, 2009 Bridge Note and the March 2009 Bridge Note agreed to convert the $700,000 total of their outstanding notes, plus accrued interest of $12,903 and deferred fees of $15,000, into the 2009 12% Convertible Notes.

In connection with the issuance of the 2009 12% Convertible Notes, the Company had issued 2,755,805 Warrants to acquire the Company’s common stock to investors and an additional 330,696 Warrants to acquire the Company’s common stock, all on the terms set forth above.  Using the Black Scholes pricing model, with volatility of 100%,  a risk-free interest rate of 2.5% and a 0% dividend yield, the warrants were determined to have a fair value of $277,449, with such value recorded as a discount to the 2009 12% Convertible Notes and to additional paid-in capital.  This discount will be amortized using the effective interest rate method over the term of the indebtedness.

Deferred Compensation Convertible Notes

Beginning in February 2009, the Company has been unable to meet its contractual employment related obligations and has been accruing, as a component of accrued expenses, past due salaries to its employees and, as a component of accounts payable, severance payments payable to its former Chief Executive Officer and fees due its in-house counsel.  Through September 30, 2009, the Company, in partial satisfaction of these past due amounts, had issued $800,436 principal amount of 12% convertible notes (the “Deferred Compensation Convertible Notes”) on the basis of $2.00 of Deferred Compensation Convertible Note face value for each $1.00 of compensation deferred.  Each Deferred Compensation Convertible Note is convertible, at any time at the option of the holder, into shares of the Company’s common stock, at an initial conversion price of $0.25 per share (the “Conversion Price”).   The Deferred Compensation Convertible Notes bear interest at 12% per annum and mature 12 months from the date of issuance.

Other Financings

The Company has also entered into various vehicle and insurance financing contracts with amounts outstanding totaling $97,981 as of December 31, 2008.  Of this amount, $62,181 was reflected as notes payable – non-current at December 31, 2008, as the original maturity exceeded

12

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

December 31, 2009.  However, the entire balance of the long-term total of $62,181 was repaid in 2009.

6.   Capital Stock

Preferred Stock

The Company has authorized 10,000,000 shares of Preferred Stock.  In April 2008, the Company designated the Series A Preferred Stock, with a par value of $0.0001 per share, and authorized the issuance of 100 shares to the Company’s then Chairman and Chief Executive Officer.  The Series A Preferred Stock provides voting rights as if each share of Series A Preferred Stock is equal to 80,000 shares of the Company’s Common Stock.  The holder of Series A Preferred Stock is entitled to vote together with the holders of the Common Stock on all matters that the Common Stock is entitled to vote on.

Effective February 24, 2009, the Company acquired, and retired, from its former Chairman and Chief Executive Officer, the 100 shares of Series A Preferred Stock then outstanding, in exchange for a commitment by the Company to issue its former Chairman and Chief Executive Officer a warrant to purchase 1.5 million shares of the Company’s Common Stock at $8.00 per share, with a five-year exercise period.

Common Stock

The Company has authorized 250,000,000 shares of Common Stock.

On January 28, 2008, the Company issued 8,100,000 shares of Common Stock at $0.0001 per share for total consideration of $81.

On April 9, 2008, the Company issued 5,980,000 shares of Common Stock at $0.0445 per share for total consideration of $266,110.

On April 14, 2008, the Company commenced a unit offering (the “$2.00 Unit Offering”) whereby each unit consisted of one share of the Company’s Common Stock and a warrant to acquire one and one-half share of the Company’s Common Stock as follows: (i) 0.5 shares at an exercise price equal to $3.00 per share, (ii) 0.5 shares at an exercise price equal to $4.00 per share, and (iii) 0.5 shares at an exercise price equal to $8.00 per share. Each Warrant is exercisable for three years from date of issue.  As of December 31, 2008, the Company had sold an aggregate of 3,467,500 units for gross proceeds of $6.9 million.  The Company incurred costs of $0.8 million in issuing the shares, resulting in net proceeds of $6.1 million.  The Company also issued 700,000 Common Shares for investment banking compensation associated with this offering.  These shares were valued at an aggregate of $98,800, based on the estimated fair value of the Company’s Common Stock at that date. In January 2009, the Company issued an additional 500,000 Common Shares for investment banking compensation and 62,500 Units under its $2.00 Unit Offering, realizing gross proceeds of $125,000.  The Company incurred costs of $31,944, resulting in net proceeds of $93,056.

In connection with the April 2008 Notes, the Company issued a total of 275,000 shares of Common Stock which were valued at an aggregate of $12,238, based upon the price of the

13

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

Company’s shares of Common Stock issued under the most recent private placement offering prior to the issuance of the April 2008 Notes.  Upon the extension of the April 2008 Notes in June 2008, the Company issued a total of 41,325 additional shares of Common Stock.  These additional shares of Common Stock were valued at an aggregate of $11,157, based on the estimated fair value of the Company’s Common Stock at that date.

In connection with the September 2008 Bridge Note, the Company issued a total of 62,500 shares of Common Stock which were valued at an aggregate of $16,875, based upon the estimated fair value of the Company’s Common Stock at that date.

In connection with the CEO Bridge Note, the Company issued a total of 37,500 shares of Common Stock which were valued at an aggregate of $10,125, based upon the estimated fair value of the Company’s Common Stock at that date.

Warrants

In January 2009, the Company issued a warrant to acquire 1,500,000 common shares at an exercise price of $4.00 for five years for professional services for business development consultation.  Using the Black Scholes pricing model, with volatility of 100%, a risk-free interest rate of 1.5% and a 0% dividend yield, the warrant was determined to have a fair value of $132,483, with such value recorded as professional fee expense and additional paid-in capital.

Total Dilutive Securities

As of September 30, 2009, the Company had the following dilutive securities to acquire the Company’s Common Stock outstanding:

	Number of
	Underlying		Exercise
Security	Common Shares		Price		Term
Warrants associated with the
$2.00 Unit Offering		5,844,900	$	3.00		2011 - 2012
Warrants issued for
Professional Services		1,500,000	$	4.00		2014
Warrant associated with the
January 14, 2009 Bridge Note		480,000	$	3.00		2014
Warrant associated with the
acquisition of the Company's
Preferred Shares oustanding		1,500,000	$	8.00		2014
2009 12% Convertible Notes		5,511,611	$	0.25		2010
Deferred Compensation
Convertible Notes		3,201,742	$	0.25		2010
Warrants associated with the
2009 12% Convertible Notes		3,086,501	$	3.00		2014
		21,124,754

14

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

7.   Stock-Based Compensation

Since Inception (January 28, 2008), the Company issued 6.8 million shares of the Company’s Common Stock to directors, employees and certain consultants.  As of September 30, 2009, 200,000 of these shares have been forfeited.  The following table sets forth the number of shares outstanding, the fair value at date of issue and the period over which the shares vest:

	Number of		Fair
	Shares		Value per		Vesting
Date	Issued		Share		Period
April 22, 2008		2,550,000	$	0.0445	Immediate
April 22, 2008		350,000	$	0.0445	six months
May 8, 2008		100,000	$	0.0445	Immediate
May 19, 2008		1,300,000	$	0.0445	Immediate
October 1, 2008		50,000	$	0.27	Immediate
June 1, 2008		250,000	$	0.27	13 months
February 10, 2009		800,000	$	0.27	Immediate
May 31, 2009		200,000	$	0.27	Immediate
June 1, 2009		150,000	$	0.25	Immediate
June 15, 2009		800,000	$	0.25	Immediate
		6,550,000

During the period from Inception (January 28, 2008) through December 31, 2008, the Company recognized $233,493 in compensation cost associated with the issuance of these shares and recognized an additional $600,300 during the nine months ended September 30, 2009.  At September 30, 2009, the Company had no remaining compensation cost to be recognized related to the issuances set forth above.

8.   Commitments

In April 2008, the Company entered into an Equipment and Services Contract with GE Water with respect to the purchase by the Company of an Evaporator System, along with necessary pre-treatment facilities, capable of handling 500 gallons per minute of oil field fractionation and/or oil field produced waste water.  The contract price totaled $14.5 million.  The Company has made progress payments totaling $4.7 million, with the balance of the contract price payable upon the attainment of project milestones by GE Water over approximately 18 months. In April 2009, the Company issued a change order to increase the overall processing capacity to approximately one million gallons per day.  This change order obligated the Company to additional payments totaling approximately $1.2 million.  See Note 1.

9.   Related Party Transactions

In connection with the Company’s issuance of the April 2008 Notes, Viewpoint Securities, LLC (“Viewpoint”), the Company’s financial and capital markets advisor and of which one of its Partners is a member of the Company’s Board of Directors, advanced the Company $100,000 (the

15

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

“Viewpoint Note”) pursuant to the terms of the April 2008 Notes and subsequent April 2008 Notes extension.  The Viewpoint Note was repaid in June 2008, along with accrued interest totaling $1,315 and the issuance of 28,750 shares of the Company’s Common Stock (see Note 5).  In addition, in connection with the issuance of the April 2008 Notes, the Company incurred a placement fee to Viewpoint totaling $55,100.

In connection with the Company’s issuance of the April 2008 Notes, the Company’s then Chief Financial Officer advanced the Company $100,000 (the “CFO Note”) pursuant to the terms of the April 2008 Notes and subsequent April 2008 Notes extension.  The CFO Note was repaid in June 2008, along with accrued interest totaling $1,671 and the issuance of 28,750 shares of the Company’s Common Stock (see Note 5).

In connection with the Company’s capital raising activities, the Company had incurred, as of September 30, 2009, a total of $982,787 in fees and expenses payable to Viewpoint and issued, pursuant to the terms of its arrangement with Viewpoint, 1,200,000 shares of Common Stock and 366,600 warrants to purchase one and one-half shares of the Company’s Common Stock on the same terms as the warrants issued in the $2.00 Unit Offering and 330,696 warrants to purchase shares of the Company’s Common Stock on the same terms as the warrants issued with the 2009 12% Convertible Notes.  At September 30, 2009, the Company had a balance due Viewpoint of $161,787 recorded in accounts payable.

10.   Subsequent Events

Effective January 17, 2010, the Company, through a Shareholder Consent of a majority of its shareholders, entered into an Agreement and Plan of Merger with WoozyFly, Inc. ("WoozyFly"), a corporation incorporated under the laws of Nevada and its common shares are quoted on the Over-the-Counter Bulletin Board under the symbol "WZYFQ", whereby a subsidiary of WoozyFly will merge with and into the Company, with the Company continuing as the surviving corporation.  WoozyFly, Inc. has filed for Chapter 11 bankruptcy protection and has requested the bankruptcy court approve a plan pursuant to which WoozyFly, through a subsidiary, acquire STW Resources in a one for one exchange of 26,543,075 shares of common stock and securities of WoozyFly for all of the issued and outstanding voting capital stock of the Company, and allow WoozyFly to exit bankruptcy.  This transaction is currently pending approval by the bankruptcy court.

In October and November the company issued and additional $50,000 and $40,000 face value of its 12% Convertible Notes respectively.

16