UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x	Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2006.

¨	Transition report pursuant to section 13 or 15(d) of the Securities Exchange act of 1934

For the transition period from to

Commission File No. 0-50072

Energytec, Inc.

(Exact name of registrant as specified in its charter)

Nevada

75-2835634

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

14785 Preston Road, Suite 550, Dallas, Texas 75254

(Address of principal executive offices and Zip Code)

(972) 789-5136

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days, (3) is not a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 69,703,657 shares of common stock as of November 13, 2006.

TABLE OF CONTENTS


ITEM NUMBER AND CAPTION		Page

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of September 30, 2006 (unaudited) and December 31, 2005	3

	Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2006 and 2005 (unaudited)	5

	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Year Ended December 31, 2005 and Nine Months Ended September 30, 2006 (unaudited)	6

	Condensed Consolidated Statements of Cash Flows for the Three Months and Nine Months Ended September 30, 2006 and 2005 (unaudited)	7

	Notes to Condensed Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	25

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	26

Item 1A.	Risk Factors	26

Item 5.	Other Information	27

Item 6.	Exhibits	27

	Signatures	28

ENERGYTEC, INC.

Consolidated Balance Sheets

September 30, 2006 (Unaudited) and December 31, 2005


	September 30, 2006		December 31, 2005
	(Unaudited)		(Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,593,031	$	4,037,284
Accounts receivable, revenue		581,974		879,583
Accounts receivable, rock sales		26,032		—
Accounts receivable, joint interests		2,589,264		2,211,118
Accounts receivable, programs		—		596,700
Accounts receivable, other		159,380		64,738
Accounts receivable, related party		87,670		84,295
Refundable income taxes		—		1,636,474
Prepaid expenses and other current assets		172,265		—

TOTAL CURRENT ASSETS		5,209,617		9,510,192

PROPERTY AND EQUIPMENT
Oil and gas properties, successful efforts		34,173,449		31,303,209
Gas pipeline		1,640,238		1,595,979
Oil and gas supplies		335,718		221,391
Well service and related equipment		4,716,157		5,891,495

		40,865,563		39,012,074
Less accumulated depreciation, depletion and amortization		2,226,622		1,735,711

NET PROPERTY AND EQUIPMENT		38,638,941		37,276,363

OTHER ASSETS
Long-term receivables, advance payments		6,976,717		4,898,187
Loan origination fee (net of accumulated amortization of $11,510 at September 30, 2006)		8,221		—
Railroad Commission bond		250,000		—

TOTAL OTHER ASSETS		6,964,938		4,898,187

	$	51,083,496	$	51,684,742

(Continued)

ENERGYTEC, INC.

Consolidated Balance Sheets (Continued)

September 30, 2006 (Unaudited) and December 31, 2005


	September 30, 2006			December 31, 2005
	(Unaudited)			(Audited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	3,142,463		$	3,229,122
Accounts payable, revenue		1,490,140			1,324,483
Income taxes payable		—			—
Turnkey costs payable		6,529,834			8,169,906
Other current liabilities		1,272,807			314,783
Line of credit		3,840,000			—
Debenture bonds		125,000			125,000
Notes payable, current maturities		740,104			448,744

TOTAL CURRENT LIABILITIES		17,140,349			13,612,038

LONG-TERM LIABILITIES
Notes payable, net of current maturities		519,180			518,646
Asset retirement obligation		2,404,413			2,252,464
Deferred federal income taxes		345,253			1,882,643

TOTAL LONG-TERM LIABILITIES		3,268,846			4,653,753

TOTAL LIABILITIES		20,409,195			18,265,791

COMMITMENTS AND CONTINGENCIES (NOTE 7)
SHAREHOLDERS’ EQUITY
Preferred stock (10,000,000 shares authorized, none issued and outstanding, $.001 par)		—			—
Common stock (90,000,000 shares authorized and 69,703,657 issued and outstanding, and 69,648,406 issued and 69,648,406 outstanding, respectively, $.001 par)		69,705			69,650
Additional paid-in capital		35,205,215			35,094,768
Retained deficit		(4,600,620	)		(1,745,467	)

TOTAL SHAREHOLDERS’ EQUITY		30,674,300			33,418,951

	$	51,083,496		$	51,684,742

The accompanying notes are an integral part

of these consolidated financial statements

ENERGYTEC, INC.

Unaudited Consolidated Statements of Operations

For the Three Months and Nine Months Ended September 30, 2006 and 2005 (Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
REVENUES
Oil and gas revenue	$	1,030,860		$	388,122		$	3,580,058		$	1,080,701
Drilling revenue		—			514,229			—			514,229
Well service revenue		477,019			895,149			2,355,319			2,373,803
Gas sales		569,169			505,310			1,782,012			1,203,416
Rock and chemical sales		64,825			—			162,990			—
Gain on sale of working interests		—			1,387,946			—			4,289,391
Gain on sale of drilling program		—			205,269			—			1,929,416

TOTAL REVENUES		2,141,873			3,896,025			7,880,379			11,390,956

EXPENSES
Oil and gas expenses
Lease operating		347,897			263,682			1,202,977			949,509
Well service expenses		981,726			1,177,462			4,489,895			2,713,242
Drilling expenses		—			366,629			—			366,629
Gas purchases		550,478			460,653			1,727,949			1,076,025
Rock pit expenses		56,181			—			129,179			—
Depreciation, depletion and amortization		281,002			198,117			785,226			572,654
Environmental remediation		62,602			978,138			647,456			978,138
Interest expense		111,249			112,869			248,031			225,905
General and administrative expenses		1,086,701			637,759			3,053,467			2,114,524

TOTAL EXPENSES		3,477,836			4,195,309			12,284,179			8,996,626

OTHER INCOME (EXPENSE)
Interest income		1,631			1,277			5,736			4,078
Loss on sale of well service and related equipment		(144,434	)		—			(139,296	)		—
Miscellaneous income		104,257			—			144,816			—

TOTAL OTHER INCOME (EXPENSE)		(38,546	)		1,277			11,257			4,078

NET (LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES		(1,374,509	)		(298,007	)		(4,392,543	)		2,398,408
BENEFIT OF (PROVISION FOR) INCOME TAXES		481,078			43,888			1,537,390			(924,401	)

NET (LOSS) INCOME	$	(893,431	)	$	(254,119	)	$	(2,855,153	)	$	1,474,007

(LOSS) EARNINGS PER SHARE
Basic	$	(0.01	)	$	—		$	(0.04	)	$	0.03

Diluted	$	(0.01	)	$	—		$	(0.04	)	$	0.03

The accompanying notes are an integral part

of these consolidated financial statements

ENERGYTEC, INC.

Consolidated Statements of Changes in Shareholders’ Equity

For the Year Ended December 31, 2005, and Nine Months Ended September 30, 2006 (Unaudited)


	Number of Shares			Preferred Stock $.001 Par Value		Common Stock $.001 Par Value			Additional Paid-In Capital			Treasury Stock			Retained (Deficit)			Total
BALANCE, December 31, 2004 (Audited)	$	59,534,281		$	—	$	59,535		$	20,594,763		$	(36,351	)	$	(1,341,893	)	$	19,276,054
Treasury stock retired		(186,053	)		—		(186	)		(36,165	)		36,351			—			—
Capital stock issued for cash		5,623,540			—		5,624			14,010,963			—			—			14,016,587
Capital stock issued for services		25,000			—		25			49,975			—			—			50,000
Capital stock issued upon conversion of debenture		25,000			—		25			49,975			—			—			50,000
Capital stock issued under stock compensation plan		214,668			—		215			429,669			—			—			429,884
Capital stock issued for stock dividend		4,411,970			—		4,412			(4,412	)		—			—			—
Net loss		—			—		—			—			—			(403,574	)		(403,574	)

BALANCE, December 31, 2005		69,648,406			—		69,650			35,094,768			—			(1,745,467	)		33,418,951
Capital stock issued under stock compensation plan		55,251			—		55			110,447			—			—			110,502
Net loss		—			—		—			—			—			(2,855,153	)		(2,855,153	)

BALANCE, September 30, 2006		69,703,657		$	—	$	69,705		$	35,205,215		$	—		$	(4,600,620	)	$	30,674,300

The accompanying notes are an integral part

of these consolidated financial statements

ENERGYTEC, INC.

Consolidated Statements of Cash Flows

For the Three Months and Nine Months Ended September 30, 2006 and 2005 (Unaudited)


	Three Months Ended Sept. 30,						Nine Months Ended Sept. 30,
	2006			2005			2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income	$	(893,431	)	$	(254,119	)	$	(2,855,153	)	$	1,474,007
Adjustments to reconcile net (loss) income to net cash used in operating activities											—
Loss on sale of fixed assets		144,434			—			139,296			—
Gain on sale of working interest		—			336,201			—			(4,289,391	)
Gain on sale of drilling program		—			(1,929,416	)		—			(1,929,416	)
Capital stock issued for services		—			40,000			—			40,000
Capital stock issued under stock compensation plan		36,834			330,589			110,502			330,589
Depreciation, depletion and amortization		281,002			198,117			785,226			572,654
Changes in assets and liabilities
Accounts receivable, trade		73,435			—			(26,032	)
Accounts receivable, revenue		54,027			(150,779	)		297,609			(418,365	)
Accounts, receivable programs		—			789,480			596,700			(1,904,960	)
Accounts receivable, other		(77,975	)		1,235,151			(94,642	)		(723,979	)
Accounts receivable, related party		(1,125	)		(3,375	)		(3,375	)		(3,375	)
Prepaid expenses and other current assets		50,990			—			(172,265	)		—
Prepaid income taxes		1,636,474			(748,854	)		1,636,474			(748,854	)
Acquisition of Railroad Commission Bond					—			(250,000	)		—
Accounts payable and accrued expenses		(1,198,708	)		212,766			(86,659	)		922,834
Accounts payable, revenue		264,980			248,488			165,657			450,379
Turnkey costs payable		(47,838	)		(4,175,976	)		(1,640,072	)		2,391,032
Other current liabilities		—			468,638			958,024			—
Federal income taxes payable		—			(825,969	)		—			(1,669,977	)
Deferred federal income taxes		(481,078	)		146,278			(1,537,390	)		779,853

Net cash flows provided by (used in) operating activities		(157,979	)		(4,082,780	)		(1,976,100	)		(4,726,969	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(496,081	)		(3,177,771	)		(4,132,947	)		(14,157,148	)
Proceeds from sale of property and equipment		2,050,000			3,453,440			2,061,000			12,534,600
Advance revenue payments		(249,573	)		(1,305,526	)		(2,456,611	)		(3,503,865	)

Net cash flows used in investing activities		1,304,346			(1,029,857	)		(4,528,558	)		(5,126,413	)

(Continued)

ENERGYTEC, INC.

Consolidated Statements of Cash Flows

For the Three Months and Nine Months Ended September 30, 2006 and 2005 (Unaudited)


	Three Months Ended Sept. 30,						Nine Months Ended Sept. 30,
	2006			2005			2006			2005
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable		(151,838	)		(186,030	)		(390,345	)		(384,047	)
Proceeds provided from borrowings on notes payable		—			—			591,019			—
Proceeds provided from draws on line of credit		175,000			—			4,419,731			—
Payments on line of credit		(240,000	)					(560,000	)
Proceeds provided from sale of stock subscriptions		—						—			5,499,140

Net cash flows provided by financing activities		(216,838	)		(186,030	)		4,060,405			5,115,093

NET INCREASE (DECREASE) IN CASH		929,529			(5,298,667	)		(2,444,253	)		(4,738,289	)
CASH, beginning		663,502			7,128,308			4,037,284			6,567,930

CASH, ending	$	1,593,031		$	1,829,641		$	1,593,031		$	1,829,641

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
Cash paid for interest	$	111,249		$	28,541		$	248,031		$	225,905

Cash paid for income taxes	$	—		$	—		$	—		$	2,360,586

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Capital stock issued under stock compensation plan	$	36,834		$	—		$	110,502		$	330,589

Assets acquired through notes payable	$	—		$	—		$	91,219		$	—

Loan origination fee taken from draw on line of credit	$	—		$	—		$	19,731		$	—

Capital stock issued for conversion of debenture	$	—		$	—		$	—		$	50,000

Capital stock issued for services	$	—		$	—		$	—		$	40,000

The accompanying notes are an integral part

of these consolidated financial statements

ENERGYTEC, INC.

AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

1. BASIS OF PRESENTATION

These condensed consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair presentation of the results for the periods reported. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. Certain reclassifications of prior year data have been made to conform to 2006 classifications. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report filed on Form 10-K with the Securities and Exchange Commission July 20, 2006. The Company’s exploration and production activities are accounted for under the “successful efforts” method.

2. EARNINGS (LOSS) PER SHARE


	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
NET (LOSS) INCOME PER COMMON SHARE
Net (loss) income	$	(893,431	)	$	(254,119	)	$	(2,855,153	)	$	1,474,007
Weighted average number of common shares outstanding		69,688,310			61,970,238			69,669,893			62,005,090
Net (loss) income per common share	$	(0.01	)	$	0.00		$	(0.04	)	$	0.03
NET (LOSS) INCOME PER COMMON SHARE ASSUMING DILUTION
Net (loss) income	$	(893,431	)	$	(254,119	)	$	(2,855,153	)	$	1,474,007
Effect of reduction in interest on debentures assuming conversion Jan. 1		6,500			6,500			6,500			6,500

	$	(886,931	)	$	(260,619	)	$	(2,848,653	)	$	1,467,507

Weighted average number of common shares outstanding		69,766,157			62,032,738			69,746,314			62,031,812
Net (loss) income per common share assuming dilution	$	(0.01	)	$	0.00		$	(0.04	)	$	0.03

3. ASSET RETIREMENT OBLIGATION

Effective January 1, 2003, the Company adopted SFAS No. 143, “Accounting for Asset Retirement Obligations”. Pursuant to this accounting standard, the Company recognized additional net liabilities at September 30, 2006 and December 31, 2005, of approximately $151,949 and $1,628,161, respectively, for asset retirement obligations related to the future costs of plugging and abandoning its oil and gas properties, the removal of equipment and facilities from lease acreage and returning such land to its original condition. These costs reflect the legal obligations associated with the normal operation of oil and gas properties and were capitalized by increasing the carrying amounts of the related long-lived assets by the fair value of these obligations, discounted to their present value. The additional liabilities recognized for the year ended December 31, 2005, are associated with 20 additional wells drilled in our Talco/Trix-Liz Field and Sulphur Bluff Field, the acquisition of 61 wells in our Como Field and the rising costs of plugging and abandonment costs. Additionally, the Company expended $307,001 during 2005 to plug wells in accordance with Texas Railroad Commission regulations.

The changes in the carrying amount of the Company’s asset retirement obligations for the nine months and three months ended September 30, 2006, are as follows.


	Three Months Ended September 30,					Nine Months Ended September 30,
	2006			2005		2006			2005
Balance at beginning of period	$	2,352,705		$	654,775	$	2,252,464		$	624,303
Accretion expense		51,708			15,789		112,423			46,261
Payments		(61,509	)		—		(681,310	)
Liabilities incurred		61,509			—		720,839			—

Balance at end of period	$	2,404,413		$	670,564	$	2,404,413		$	670,564

Accretion expense is included in “Depreciation, depletion, and amortization” in the accompanying condensed consolidated statements of operations.

4. BORROWINGS

The Company’s borrowings consist of a note payable to a bank totaling $659,894, secured by the Company’s Redwater properties, and a letter of credit of $25,000, which secures a bond on the Company’s Wyoming properties, two vehicle loans totaling $69,686, two insurance financing agreements for $54,704, a proposed settlement on final costs of restoration and remediation totaling $450,000, and debenture notes totaling $125,000. None of these borrowings contain any significant debt covenants or restrictions on dividend payments. The letter of credit bears interest at 7.5% and was due along with all accrued interest on September 10, 2006. The Company has renewed the letter of credit, extending the due date to September 10, 2007.

The vehicle loans are due in monthly installments of $1,272 and $1,262 through March 31, 2009, and bear no interest. The insurance financing agreement for general liability insurance and an umbrella policy bears interest at 8.5% per annum and is due in monthly installments of $11,488 per month through December 24, 2006. During the quarter ended June 30, 2006, the Company renewed its automobile and fleet insurance and entered into a second financing agreement which bears interest at 9.75% per annum and is due in monthly installments of $4,765 per month through March 2, 2007

The note payable to the bank bears interest at 8% and is payable in monthly installments of $35,312 of principal plus interest. The loan is collateralized by accounts receivable and by various oil and gas properties or other equipment and matures April 2008.

Future maturities required under the terms of the above debt are as follows:


Year Ended September 30,	Amount
2007	$	740,104
2008		491,557
2009		27,623

		$1,259,284

On February 27, 2006, the Company entered into a loan agreement with Gladewater National Bank for $4,000,000. The loan bears interest at 1% above the Wall Street Prime Rate and matures February 27, 2007. Monthly principal payments of $80,000 plus interest are due on the 27^th of each month beginning March 27, 2006. Production payments related to the properties collateralizing the loan are deposited directly with Gladewater National Bank. Any excess funds, after the monthly principal and interest payments are available for the general use of the Company.

The loan is an open end credit facility. The Company took an advance of $2,000,000 on February 27, 2006, with two additional advances of $1,000,000 each on March 16, 2006 and April 12, 2006. As monthly principal payments are made, the Company may draw an amount equivalent to the principal reduction. The Company drew $95,000 and $80,000, respectively, in July and

August 2006, but no additional draws were taken in September or October 2006. This loan is collateralized by the Company’s mineral interest in the Quitman Field. During the term of the loan, the bank will periodically re-evaluate the value of the properties pledged to secure the loan to determine compliance with the loan borrowing base which equals 80% of the present worth of the properties pledged, as calculated by the bank, discounted 17.5%, or 80% of the average of the preceding six months’ net monthly income times 32 months, whichever is less. If the loan exceeds the borrowing base as calculated, the Company will have 30 days to pledge additional collateral or make a principal reduction on the loan. In connection with the loan, the Company can make no additional loans to officers of the Company, or from the date of the loan agreement, may not increase the salary of any officer by more than 10% annually. Additionally, the Company may not form any new subsidiary or merge or invest in or consolidate with any other entity or sell, lease, assign, transfer, or otherwise dispose of all or substantially all of the Company’s assets pledged as collateral on the loan.

On October 19, 2006, the Company agreed to a proposed settlement of the final costs of remediation and restoration related to the November 2004 oil spill. The terms of the proposed settlement call for twenty-four equal installments of $18,750 beginning November 20, 2006. The agreement bears no interest and is not collateralized. In case of default, the Company has ten days to cure the default. Should the Company fail to cure the default, the Company is subject to an agreed judgment and the creditor could then proceed against whatever non-exempt assets are owned by the Company. (See Note 6)

5. INCOME TAXES

The Company accounts for income taxes pursuant to SFAS No. 109, ‘Accounting for Income Taxes”, which requires the establishment of deferred tax assets and liabilities for the recognition of future deductions or taxable amounts and operating loss and tax credit carry forwards. Deferred federal income tax expense or benefit is recognized as a result of the change in the deferred tax asset or liability during the year using the currently enacted tax laws and rates that apply to the period in which they are expected to affect taxable income. Valuation allowances are established, if necessary, to reduce deferred tax assets to the amounts that will more likely than not be realized.

The Company’s provision for income taxes reflects the federal income taxes calculated at the statutory rates and state taxes calculated at the statutory rates net of any federal income tax benefit. The Company’s statutory rate and effective tax rate are approximately 35%. A reconciliation of income tax expense at the statutory federal and state income tax rates to income tax expense at the Company’s effective tax rate for the nine months and the three months ended September 30, 2006 and 2005 is as follows:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2006		2005			2006		2005
Income tax, benefit (expense) statutory rates	$	481,078	$	136,834		$	1,537,390	$	(793,567	)
State taxes, net		—		(92,946	)		—		(130,834	)

Benefit of (provision for) income taxes	$	481,078	$	43,888		$	1,537,390	$	(924,401	)

The following temporary differences gave rise to the deferred tax asset and liability at:


	September 30, 2006		December 31, 2005
Deferred tax asset:
Balance, January 1	$	440,028	$	210,385
Effect of impairment of long-lived assets not currently deductible		—		229,643
Effect of current year net loss		2,043,211		—

Net deferred tax asset		2,483,239		440,028

Deferred tax liability:
Balance, January 1		2,322,671		1,567,264
Effect of intangible drilling costs expensed for tax purposes which were capitalized for financial statement purposes		505,821		755,407

Gross deferred tax liability		2,828,492		2,322,671

Net deferred tax liability	$	345,253	$	1,882,643

6. ENVIRONMENTAL ISSUES

In November 2004, an oil spill of eight barrels occurred on land where several of the Company’s wells are located. The remediation and restoration of the land is governed by the Texas Railroad Commission and other attendant regulatory authorities. During November and December 2004, the Company incurred approximately $520,000 of costs related to the remediation and restoration. During the year ended December 31, 2005, an additional $2,365,242 of such costs were incurred and paid or accrued. This amount includes $325,000 to cover remediation and restoration of the area pursuant to various regulatory authorities. These payments were made in addition to the work performed that was necessary for release and clearance from the RRC and the EPA. An additional $100,000 was accrued as of March 31, 2006, and was subsequently paid. The Company has negotiated with the landowner and the State of Texas to reach a final determination of the costs of remediation and restoration. The final settlement has been recorded as an expense with the related obligation included in notes payable. (Note 4)

7. COMMITMENTS AND CONTINGENCIES

Put Option

In connection with a private placement of the Company’s common stock, which ended December 22, 2005, investors were given a contractual right to put the shares back to Energytec on November 15, 2006, at a price of $3.75 per share if the per share market price does not exceed $3.75 per share at the close of business on November 14, 2006. Payment on shares put back to the Company would be due on November 30, 2006, under the agreement. A total of 3,037,046 shares were sold in the private placement resulting in a potential liability related to the put option totaling $11,388,923. Energytec is investigating whether it has a basis for claiming the put options are void or voidable on the grounds that Frank W Cole, former CEO/CFO, lacked the power and authority to grant the put option, or whether under Nevada law Energytec is required to pay on exercise of the put options if the effect would be to render Energytec unable to pay its debts as they become due in the usual course of business.

Legal Matters

The Company has filed various complaints and is the defendant in various actions as discussed in “Recent Developments – Litigation and Potential Claims” ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, and disclosed in PART I. ITEM 1. BUSINESS “RECENT DEVELOPMENTS” included in the annual report filed on Form 10-K for the year ended December 31, 2005.

8. SUBSEQUENT EVENTS

On October 30, 2006, Energytec entered into a purchase and sale agreement for the sale of its Wyoming Thermal Recovery Project. (Project) According to the terms of that agreement, Energytec is to receive payment for its approximate 44% working interest position and a separate payment for all of its data and technical files assembled in support of the Project. Both payments would aggregate approximately $45 million, net of expenses and before any Federal or state income taxes, if all of the terms of the agreement are fulfilled. Further, the sale applies to the holders of the other 56% of the working interest as well as the holders of approximately 15% of overriding royalty interests. Energytec, royalty owners, and the other working interest owners will share ratably in the closing costs and fees associated with the sales transaction. The closing date was originally scheduled for November 15, 2006, subject to the holders of 80% of the working interests (including Energytec) and holders of 80% of the overriding royalty interests tendering their written acceptance of the sale and other conditions customary for transactions of this type. However, pursuant to a request from the purchaser we agreed to an extension of the closing until December 29, 2006, to address issues and concerns that arose when a small group of third party interest owners threatened to disrupt the transaction. Whether the transaction will close depends on satisfying the conditions described above, other conditions set forth in the purchase agreement, and the ability of the Company to satisfy the purchaser that its future ownership and development of the Project will not be subject to unreasonable interference.

ITEM 2.

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

Overview

Energytec, Inc. was formed under the laws of the state of Nevada in July 1999. Energytec was formed for the purpose of engaging in oil and gas producing activities through the acquisition of oil and gas properties that have previously been the object of exploration or producing activity, but which are no longer producing or operating due to abandonment or neglect.

We also own a gas pipeline of approximately 63 miles in Texas and a well service business operated through its subsidiary, Comanche Well Service Corporation. On April 22, 2006, the Company formed two new wholly owned subsidiaries, Comanche Rig Services Corporation and Comanche Supply Corporation. The primary function of Comanche Rig Services Corporation is to provide contract drilling services to third parties through the utilization of the drilling rigs owned by Comanche Well Service Corporation. Comanche Supply Corporation was established for the sale and distribution of enhanced oil recovery chemicals and materials related to well operation services.

Comanche Well Service Corporation became the operator of all the properties owned by Energytec on April 1, 2006, by posting a cash bond of $250,000 with the Texas Railroad Commission (TRRC).

Recent Developments

On March 18, 2006, Energytec’s Board of Directors removed Frank W Cole from office as the Chairman of the Board, Chief Executive Officer, and Chief Financial Officer, pursuant to reports of irregularities in financial reporting, lack of control over operations and assets at Energytec’s Talco facility in East Texas, concerns related to the sale of working interests in leases and common stock of Energytec in private placements, and possible violations of Energytec’s Code of Ethics. The results of an Audit Committee investigation and internal review process were reported in our annual filing on Form 10-K for the year ended December 31, 2005, filed with the Securities Exchange Commission on July 21, 2006. This report should be read in conjunction with PART I. ITEM 1. BUSINESS “RECENT DEVELOPMENTS,” PART I. ITEM 1.A. RISK FACTORS, AND PART II. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS included in the annual report.

Litigation and Potential Claims

As a result of the findings discussed above and subsequent events, Energytec has filed various complaints and is now the defendant in several actions.

Energytec, Inc., v. Frank W Cole, et al., U.S. District Court, Northern District of Texas, Case No. 3-06 CV-871-L (Consolidated with Case No. 3-06CV0933-G). This lawsuit filed by Energytec is against Frank W Cole, a former officer and director, Josephine Jackson, a former officer and employee, Phillip M. Proctor, a registered broker, and G. Norman Munro, Raymond J. Vula, John J. Petito, Melvin R. Seligsohn, Sam Miller and Corrine I. Wesloh, who are all unregistered brokers. In the complaint Energytec alleges defendants engaged in activities that violated the anti-fraud prohibitions set forth in Section 10(b) of the Securities Exchange Act of 1934 and applicable state securities laws, and perpetrated common law fraud. Energytec also claims that Frank W Cole and Josephine Jackson engaged in conduct that violated their respective fiduciary and other duties to Energytec and its stockholders, and disclosure rules, internal control requirements, and certification requirements under the Securities Exchange Act of 1934. In addition, Energytec claims the broker defendants received payment of commissions in violation of Section 15(a) of the Securities Exchange Act of 1934 and/or applicable state statutes, or did not disclose the commission arrangement to the brokerage firm with which they were affiliated and engaged in selling away, which is a violation of NASD regulations.

This case is a consolidation by order of the court issued in August 2006 of complaints filed in May 2006. In August 2006 the court also issued an order permitting Energytec to file an amended consolidated complaint to resolve motions previously filed by defendants to dismiss the claims against them for failure to state sufficient facts to support a cause of action. Since filing the amended consolidated compliant, certain defendants filed a motion asking the court to reconsider its order allowing the filing of the amended consolidated complaint, all but one of the defendants refiled motions to dismiss the claims against them for failure to state sufficient facts to support a cause of action, and one defendant answered denying the substantive allegations of the complaint. Energytec has responded to these motions, we expect the defendants will make a further reply, and we estimate that the court will rule on the motions by the middle of December 2006, if not sooner.

Frank W Cole and Josephine Jackson, v. Energytec, Inc., et al., District Court of Dallas County, Texas, Case No.06-06216. On or about June 29, 2006, Frank W Cole and Josephine Jackson filed the above-referenced lawsuit on behalf of themselves and the other Energytec shareholders alleging Energytec and its officers and directors acted improperly in removing them from office and have since acted improperly in the management of Energytec, misappropriated corporate assets, and breached their respective fiduciary duties to Energytec. In August 2006 John E. Wasson filed a petition to intervene in the case as an additional plaintiff. In July 2006, Energytec and the other defendants filed a motion to stay further proceedings in the state court case pending resolution of the proceedings in Federal court brought by Energytec as described above. At the end of August 2006, the Texas state court issued an order staying further proceedings in the state court case pending resolution of the proceedings in Federal court. In October 2006, Mr. Cole, Ms. Jackson and Mr. Wasson filed a petition for a writ of mandamus with the Fifth District Court of Appeals of the State of Texas seeking to have the order granting the stay vacated, which was subsequently denied by the appeals court.

Energytec, Inc. and Comanche Well Service Corp., v. Calvin Bass and Jerry Bass, District Court of Titus County, Texas, Case No. 32228. There have been no significant developments or changes in this litigation since the last disclosure on the matter in Energytec’s periodic reports.

John J. Petito, v. Eric A. Brewster, et al., U.S. District Court, Eastern District of New York, Case No. CV-06 2536, There have been no significant developments or changes in this litigation since the last disclosure on the matter in Energytec’s periodic reports.

Redwaterpet Oil & Gas Royal Family Oil Delectation LLC v. Energytec, Inc., District Court of Dallas County, Texas, Case No.DC 06-011021-A. On October 31, 2006, Energytec was served with the above-referenced complaint filed by a New York limited liability company of which John J. Petito is a managing member. Mr. Petito is involved in other legal proceedings with Energytec described above. The complaint alleges that in June 2005, Redwaterpet and Energytec entered into a purchase agreement under which Redwaterpet agreed to purchase for $8,000,000 a 100% working interest less a 35% net profits overriding royalty interest in certain oil and gas properties in Energytec’s Sulphur Bluff and Redwater properties in Texas. Redwaterpet claims Energytec breached the agreement by failing to complete assignment of the interests acquired, failing to complete drilling and development work, and failing to account to Redwaterpet for the operation of the properties. Redwaterpet seeks specific performance of the agreement with respect to assignment of the interests allegedly acquired and development of the properties, compensation for lost contractual profits, and an accounting for revenues and expenses for the properties. Energytec received the complaint but has not yet had any opportunity to evaluate what response it may make or its potential liability, if any.

Wyoming Thermal Recovery Project

On October 30, 2006, Energytec entered into a purchase and sale agreement for the sale of its Wyoming Thermal Recovery Project. According to the terms of that agreement, Energytec is to receive payment for its approximate 44% working interest position and a separate payment for all of its data and technical files assembled in support of the Project. Both payments would aggregate approximately $45 million, net of expenses, if all of the terms of the agreement are fulfilled. Further, the sale applies to the holders of the other 56% of the working interest as well as the holders of approximately 15% of overriding royalty interests. Energytec, royalty owners, and the other working interest owners will share ratably in the closing costs and fees associated with the sales transaction. The closing date was originally scheduled for November 15, 2006, subject to the holders of 80% of the working interests (including Energytec) and holders of 80% of the overriding royalty interests tendering their written acceptance of the sale and other conditions customary for transactions of this type. However, pursuant to a request from the purchaser we agreed to an extension of the closing until December 29, 2006, to address issues and concerns that arose when a small group of third party interest owners threatened to disrupt the transaction. Whether the transaction will close depends on satisfying the conditions described above, other conditions set forth in the purchase agreement, and the ability of the Company to satisfy the purchaser that its future ownership and development of the Project will not be subject to unreasonable interference.

Results of Operations

Revenue

For the three months ended September 30, 2006, oil and gas revenue has increased from $388,122, for the three months ended September 30, 2005, to $1,030,860, a 166% increase. Oil and gas revenue for the nine months ended September 30, 2006, has increased from $1,080,701 for the nine months ended September 30, 2005, to $3,580,058, an increase of 231%. This increase is primarily due to the acquisition of the Como Field which occurred in the fourth quarter of 2005. The Como Field contributed 41,374 bbls and 14,571 bbls of production, respectively, during the nine months and three months ended September 30, 2006. During the nine months and three months ended September 30, 2005, a number of wells were severed in the Trix-Liz field due to the oil spill which occurred during November of 2004. This resulted in a reduction in average

monthly production of approximately 1,467 barrels for the nine months ended September 30, 2005. Additionally, the average oil price over the first nine months of 2006 was approximately $3.15 per barrel higher than the comparable period in 2005. The following table shows the gross and net oil and gas production for each month in the nine-month period ended September 30, 2006.


	Oil (Bbl)		Gas (Mcf)
Month in 2006	Gross	Net	Gross	Net
January	19,619	8,056	23,294	4,403
February	18,626	6,167	34,359	5,318
March	25,086	8,417	28,811	4,759
April	16,618	8,400	22,633	4,748
May	15,779	7,960	23,032	4,560
June	12,777	6,740	23,657	4,309
July	13,555	6,213	22,883	4,841
August	19,229	6,298	26,648	4,543
September	12,913	5,717	23,876	4,256

As discussed in our quarterly filing with the Securities Exchange Commission for the period ended June 30, 2006, the production goals set forth in the Company’s annual report on Form 10-K filed July 21, 2006, are not on target. The third quarter forecasts were set at 973 BOPD and 2.071 MMCFPD. Average daily production for the third quarter was 455 BOPD and .637 MMCFPD. This equates to 47% of the oil production goal and 32 % of the gas production goal. The third quarter goals were based on a plan of drilling one new well in Redwater, performing two workovers in Redwater, performing eight workovers in the Como Field, put on an additional 30 wells on line in Talco and putting 10 more wells on line in Kilgore. Lack of capital funding and rig inefficiency as well as the allocation of rigs and manpower to resolve TRRC violations to prevent lease severance have contributed to our inability to meet the goals. Additionally, as we have evaluated the capabilities of the various wells, we have found their production potential to be substantially less than estimated and reported by previous management. At the end of the third quarter of 2006, the producing wells in the Talco field averaged only 3.3 BOPD. Our Redwater production was curtailed due to the abrupt cancellation of our contract with the oil haulers. The cancellation of the contract was initiated by the oil haulers due to their decision not to handle the condensate with high levels of H2S. Additionally, the Enbridge Bryans Mill Gas Plant experienced major shutdowns for maintenance and was unable to accept our gas until they completed their work. These circumstances resulted in severely limited or shut down production from Redwater for a combined total of 72 days of a possible 92 producing days throughout the third quarter. At the beginning of the fourth quarter, production showed an increase due to the effects of work that has been completed through the end of the third quarter and into the beginning of the fourth quarter. The following tables depict the actual production and the percentages of increase or decease during the first reporting period of November as compared to October 2006 and the status of wells and production by district.

ENERGYTEC, INC. WEEKLY OPERATIONS REPORT

Friday, November 03, 2006


	NOVEMBER PRODUCTION (11-01-06 to 11-03-06)						OCTOBER PRODUCTION
District	BOPD Avg.	BO for Period	% (+/-) vs Prev. Mo.	MCFPD Avg.	MCF for Period	% (+/-) vs Prev. Mo.	BOPD Oct. Avg	BO for Oct.	MCFPD Oct. Avg.	MCF for Oct.
Kilgore	79	238	-6	0	0	0	84	2,596	0	0
Quitman	216	649	5	0	0	0	205	6,345	0	0
Redwater	305	915	98	1,015	3,046	78	5	167	224	6,950
S. Texas	28	84	-25	0	0	0	35	1,094	0	0
Talco	139	416	35	0	0	0	91	2,810	0	0
Totals	767	2,302	45	1,015	3,046	78	420	13,012	224	6,950

Redwater producing at full capacity.

Talco production affected by severance of JE Worsham lease due to late H-5 filing. This prevents Bert Davis, Jeff Worsham and Rooney Long leases from producing due to commingling at tanks. 14 of 23 Trix-Liz dual wells previously shut in are now producing from single zone: 9 in “D” zone & 5 in “B” zone.

Quitman production affected by tubing leaks in the WF Bailey #3 and Ford Sims #3. Waiting on rig. Howle A1 (30 BOPD) has a casing leak. A workover procedure and AFE have been constructed. Waiting on resources to perform workover.

Kilgore production affected by need for well service on 3 wells. CWS Rig 8 finished well service on CC Still #20 and moved to CC Still #7. Have suffered flow line leaks at Foster lease and electrical problems on Milstead lease.

WELL COUNT & AVERAGE PRODUCTION PER WELL


District	Prod. Wells	Non-prod. Wells	Total Wells	BOPD Avg.	BOPD per WELL	MCFPD Avg.	MCFPD per Well
Kilgore	83	87	170	79	0.95	0	0.00
Quitman	20	21	41	216	10.80	0	0.00
Redwater	8	4	12	305	38.13	1015	84.58
S. Texas	36	103	139	28	0.78	0	0.00
Talco	26	123	148	139	5.35	0	0.00
Totals	173	338	510	767	4.43	1015	5.87

The fourth quarter forecasts presented in the Company’s annual filing on Form 10-K filed July 21, 2006, were set at 1,081 BOPD and 3.071 MMCFPD. Through the end of October 2006, average daily production was 405 BOPD and .117 MMCFPD. This equates to 38% of the oil production goal and 32% of the gas production goal. The Enbridge Plant was shutdown for an additional 19 days in October. Enbridge took gas for one week upon start-up but could not accept oil. Because our Redwater tanks were full, we were forced to flow at reduced rates until Enbridge could take and process the oil. Based upon actual production and circumstances as described above, we have revised the fourth quarter production goals to 550 BOPD and 770 MCFPD.

Additional equipment and the additional well service units were put into service on our properties beginning late in the second quarter of 2005. Well service revenue showed a significant increase over the prior year for the first quarter of 2006. However, well service revenue began showing a decline during the three months ended June 30, 2006. For the three months ended September 30, 2006, the revenue decreased to $477,019 from $895,149 for the same period of the prior year, a decrease of 47%. Due to the age of the equipment, only four well service units continue to be operational. During the third quarter of 2006, rig downtime for repairs and maintenance has approximated 35% of total rig hours. Well service activities have also slowed due to regulatory issues and capital needs as discussed elsewhere in this report. For the nine months ended September 30, 2006, well service revenue decreased $18,484 from $2,373,803 for the same period of the prior year, a 1% decrease, reflecting the leveling effect over the past twelve months. Well service expenses have also risen due to the addition of employees and the expense of maintaining the equipment. As mentioned above the well service units are older, rebuilt units which require more frequent maintenance. For the nine months ended September 30, 2006, well service expenses

increased by 65%, from $2,713,242 for the nine months ended September 30, 2005, to $4,489,895. Management has been monitoring costs associated with well services, as well as the portion of these costs that should be billed to other working interest owners. Although the year to date expenses have increased, the expense decreased by 17%, from $1,177,462 for the three months ended September 30, 2005, to $981,726 for the same period in 2006. During the first quarter of 2006 and for a portion of the second quarter of 2006, employees were involved in re-engineering and construction of a rig that was purchased in January of 2006. Payroll and repair expenses increased the overall well service expenses, but the rig was not contributing to the generation of revenue. For the three months ended September 30, 2006, we have a loss of $504,707 from well services provided. This is an improvement from the second quarter loss of $1,629,869. The year to date losses from well services totals approximately $2,100,000. These losses are primarily due to the utilization of well service units to correct regulatory issues and the addition of employees who were utilized to complete construction and necessary repairs on the rig. Additionally, all well services performed by Comanche Well Service are for the benefit of Energytec and our working interest owners. The hourly rates billed are below market rate for similar services. With rising fuel and labor costs, the well services billed to working interest owners are not sufficient to generate a profit from well services. Prior management did not effectively capture costs associated with interests owned by working interest owners, thereby absorbing costs that should have been billed to non-operating working interest partners. On January 1, 2006, we implemented an integrated oil and gas accounting system (OGSYS) that has allowed us to review the hourly rate for well services, make adjustments to the rate as necessary, and capture expenses that will be billed to working interest owners. In the third quarter of 2006, we began billing working interest owners a supervision fee to allocate indirect costs associated with supervisory employees that are involved in the maintenance or workover of wells. These indirect costs include salaries, payroll taxes, and other payroll related expenses of district managers, our vice president of operations, and any third-party consultants engaged for geological, regulatory, or operational support.

For the three months ended September 30, 2006, gas sales increased by 13%, to $569,169 from $505,310 from the same period in 2005. Gas sales have increased by 48% from $1,203,416 for the nine months ended September 30, 2005, to $1,782,012 for the nine months ending September 30, 2006. Gas purchases increased from $460,653 for the three months ended September 30, 2005 to $550,478 for the three months ended September 30, 2006. For the nine months ended September 30, 2006, gas purchases totaled $1,727,949, a 61% increase from $1,076,025 for the same period of the prior year. The net revenues for the three months and nine months ended September 30, 2006, were $18,691 and $54,063, respectively, as compared to $44,657 and $127,391 for the same periods in 2005. The decline in the net profit is due to an increase in treating fees from $0.30 per mcf to $0.50 per mcf.

Comanche Supply Corporation has provided rock and rock hauling services which generated net revenue totaling $33,811 for the nine months ended September 30, 2006. However, this work is seasonal and there is a great deal of competition in the area of our rock pit. Effective October 30, 2006, we made the decision to cease rock sales and rock hauling activity in this subsidiary. However, we believe that there is a potential to lease our rock crusher and rock hauling equipment to a third party engaged in environmental clean-up in the Titus County vicinity. We believe this will generate a greater profit to the Company during the winter months when construction and the need for rock is minimal.

Oil and gas expenses

For the nine months ended September 30, 2006, the lease operating expenses have increased from $949,509 at June 30, 2005, to $1,202,977. This is an increase of 27%. Likewise, lease operating expenses for the three months ended September 30, 2006, have increased by 32% to $347,897 from $263,682 for the same period of 2005. Although the lease operating expenses are higher than the comparable periods for the prior year, they have continued to decline each quarter of 2006 due to the fact that we are expenses are being captured and billed to all working interest owners in proportion to their ownership interests and due to the cost containment measures taken by current management. During the nine months ended September 30, 2006, the lifting costs per barrel averaged $9.41 for a total of $657,923 and $227,774, respectively, for the nine months and three months ended September 30, 2006. Lease operating expenses for the nine months and three months ended September 30, 2006, also include $ 528,209 and $104,254, respectively, of costs associated with non-producing wells. Lease operating expenses as compared to oil and gas revenues appear to be high due to the expenses on these non-producing wells, creating a high ratio of expense to revenue. As we continue to recomplete additional wells and bring them onto production, the costs as a percentage of the revenue should continue to decline. Additionally, as we plug wells in accordance with RRC requirements, the costs of maintaining non-producing wells will decline.

General and administrative

General and administrative expenses increased 70% from $637,759 for the three months ended September 30, 2005, to $1,086,701 for the same period in 2006. For the nine months ended September 30, 2006, general and administrative expenses totaled $3,053,467, a 44% increase over $2,114,524 for the same period of the prior year. We have incurred

expenses directly related to investigative services, consulting, and legal fees related to the events as described under “Recent Developments” of approximately $890,000 during the nine months ended September 30, 2006. Approximately $111,000 is related to the recognition of stock compensation expense under the stock grant awarded in 2005. The cumulative increase in general and administrative expenses for the nine months ended September 30, 2006, as compared to September 30, 2005, is $938,943. The Company would have realized a decrease in general and administrative expenses of approximately $160,000 during the first nine months of 2006 had it not been necessary to incur the expenses as described above.

Other income (expense)

During the three months and nine months ended September 30, 2005, Energytec recognized gains on the sale of working interests of $1,387,946 and $4,289,391, respectively. During the three and nine months ended September 30, 2005, the company also recognized gains on the sale of a drilling program totaling $205,269 and $1,929,416, respectively. There were no gains from sales of working interests for the nine months or three months ended September 30, 2006. The Company has elected to reserve recognition of any further gains on the drilling program until such time as all wells are completed, as discussed under Critical Accounting Policies and Estimates. During the quarter ended March 31, 2006, $1,001,000 was received in anticipation of additional working interest sales. However, pursuant to the actions and events as described under PART I. ITEM 1. BUSINESS “RECENT DEVELOPMENTS,” PART I. ITEM 1.A. RISK FACTORS, AND PART II. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS included in the annual report filed on Form 10-K for the year ended December 31, 2005, the Audit Committee of the Board of Directors discontinued all sales of working interests. The amounts received are reflected as “Other current liabilities” in the accompanying financial statements, and will be refunded to the investors in connection with a rescission plan to be determined.

Liquidity and Capital Resources

As discussed in our quarterly filings with the Securities Exchange Commission on Forms 10-Q for the periods ending March 31, 2006 and June 30, 2006, the availability of operating cash was severely impacted by the payment of $1,178,771 of commissions related to the 2005 sale of working interests and stock payments made to working interest owners during January and February of 2006, which exceeded actual revenues due to them by $1,853,979. The payment of commissions and advance payments were authorized by Frank W Cole along with the payment of $86,365, related to wells which were not owned by the Company and $230,000 for the purchase of a rig and parts to construct an additional well service unit. Cash was further impacted by the payment of past due vendor invoices totaling approximately $1,150,000, which were accrued as of December 31, 2005. The payment of commissions and excess revenue distributions combined with payments for past due invoices and necessary capital expenditures severely impacted the operating cash available. In an effort to generate cash, Frank W Cole sold additional interests in various working interest programs totaling $1,001,000. Pursuant to the Audit Committee’s resolution to discontinue all sales of working interest programs, the amounts received are reflected in current liabilities as “Other current liabilities” in the accompanying financial statements.

In order to meet continuing operational expenses and capital expenditures without further sales of working interests, the Company entered into a loan agreement with Gladewater National Bank for $4,000,000 on February 27, 2006. The loan bears interest at 1% above the Wall Street Prime Rate and matures February 27, 2007. The loan is an open end credit facility. The Company took an advance of $2,000,000 on February 27, 2006, with two additional advances of $1,000,000 each on March 16, 2006 and April 12, 2006. This loan is collateralized by the Company’s mineral interest in the Como Field, which was not affected by the reserve revisions. During the term of the loan, the bank will periodically re-evaluate the value of the properties pledged to secure the loan to determine compliance with the loan borrowing base which equals 80% of the present worth of the properties pledged, as calculated by the Bank, discounted 17.5%, or 80% of the average of the preceding six months’ net monthly income times 32 months, whichever is less. If the loan exceeds the borrowing base as calculated, the Company will have 30 days to pledge additional collateral or make a principal reduction on the loan. In connection with the loan, the Company can make no additional loans to officers of the Company, or from the date of the loan agreement, may not increase the salaries of its officer by more than 10% annually. Additionally, the Company may not form any new subsidiary or merge or invest in or consolidate with any other entity or sell, lease, assign, transfer, or otherwise dispose of all or substantially all of the Company’s assets pledged as collateral on the loan. This debt, totaling $4,000,000, is subject to interest at 1% above the Wall Street Prime Rate and is susceptible to fluctuations. Through October 27, 2006, the Wall Street Prime Rate has ranged from a low of 7.25% to a high of 8.25%. Monthly principal payments of $80,000 plus interest are due on the 27^th of each month beginning March 27, 2006. As monthly principal payments are made, the Company may draw an amount equivalent to the principal reduction. The Company drew $95,000 and $80,000, respectively, in July and August 2006, but no additional draws were taken in September or October 2006.Production payments related to the properties collateralizing the loan are deposited directly with Gladewater National Bank. Any excess funds, after the monthly principal and interest payments are available for the general use of the Company.

In order to maintain and in an effort to increase production, we have continued to incur capital expenditures through September 30, 2006 totaling approximately $4,100,000. The majority of the capital expenditures were incurred in an effort to bring wells back onto production and to correct issues pursuant to the TRRC regulations. These amounts are less than the budgeted amount which was based upon gross production figures of approximately 975 BOPD and 2 MMCFPD. Actual gross production at the end of the third quarter was approximately 455 BOPD and 637 MCFPD. Due to factors related to regulatory issues as discussed above and production levels, we did not drill any new wells or perform any workovers in the third quarter. During the third quarter we plugged and abandoned one well and performed normal recurring well services, as well as continued work on the 23 dually completed wells. We anticipate that capital expenditures for the fourth quarter of 2006 will be lower than originally budgeted as well

Capital Commitments The following table discloses aggregate information about our contractual obligations including notes payable and lease obligations, and the periods in which payments are due as of June 30, 2006:


	Total		Payments due by period
	Total		Less than 1 Year		1-3 Years		3-5 Years		After 5 Years
Long-term Debt	$	1,259,284	$	740,104	$	519,180	$	—		—
Debenture Bonds		125,000		—		—		125,000		—
Operating Lease Obligations		26,739		26,739		—		—		—
Asset Retirement Obligation		2,404,413		132,661		222,155		565,964		1,483,633
Deferred Tax Liability		345,253		19,370		36,800		33,120		255,963

Total	$	4,160,689	$	918,874	$	778,135	$	724,084	$	1,739,596

The financial statements of the Company have been prepared assuming that the Company will continue as a going concern. However, due to the circumstances and events described in “Recent Events” ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OEPRATIONS, and due to transactions, filings, and other matters that have transpired as a result of the action of the former CEO/CFO, with the participation of his assistant, the Company believes that it may have potential liability for rescission or damages to investors in the working interest programs and/or purchasers of Energytec common stock in private placements on the basis of potential claims that the Company, through the actions of the former CEO/CFO and his assistant, violated the registration requirements of the Securities Act of 1933 and applicable state statutes and/or violated the anti-fraud provisions of Federal and state securities laws and common law fraud. The Company cannot reasonably determine the potential liability and timing of payments at this time. In connection with one of the private placements the investors were given a contractual right to put the shares back to Energytec for a total amount of $11,388,923. As discussed in PART II, ITEM 5. OTHER INFORMATION, Energytec is investigating whether it has a basis for claiming the put options are void or voidable on the grounds that Mr. Cole lacked the power and authority to grant the put option, or whether under Nevada law Energytec is required to pay on exercise of the put options if the effect would be to render Energytec unable to pay its debts as they become due in the usual course of business. Should litigation arise under the circumstances described above, it would likely add significantly to the financial burden of the Company, not to mention the time and resources management may need to devote to litigation matters that will distract it from pursuing the business of Energytec. The Company is exploring its options with respect to an orderly disposition of selected properties and assets to fund a staged resolution of potential claims for rescission and damages beginning in 2007.

The Company does not currently have cash reserves sufficient to meet its capital and operational expenditure for the remainder of 2006 and to fund potential claims for rescission or damages against Energytec. In light of the Company’s current cash position, the reduction in revenue due to severed leases, and the uncertainties related to potential litigation and resulting liability, there is substantial doubt about the Company’s ability to continue as a going concern. Funds to meet the capital and operational expenditure budget and satisfy vendors are expected to be derived from operations, sale of identified surplus equipment, joint venture and partner financing, and debt lending or mezzanine financing (in support of drilling opportunities). Despite these alternatives, there can be no assurance that management’s efforts to adequately provide for the contingencies will be successful.

Regulatory Compliance

Pursuant to the issues as discussed in ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS “Recent Developments,” and with PART I. ITEM 1. BUSINESS “RECENT DEVELOPMENTS,” PART I. ITEM 1.A. RISK FACTORS, AND PART II. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS included in the annual report on Form 10-K for the year ended December 31, 2005, it was determined that 23 wells were dually completed in non-permitted separately recognized reservoirs in the Talco/Trix-Liz Field without the proper permitting and spacing required by the TRRC. No proved reserves can be assigned to any of the 23 wells dually completed in non-permitted separately recognized reservoirs in the Talco/Trix-Liz Field until such regulatory issues are resolved to the satisfaction of the RRC.

As discussed in our quarterly filing with the Securities Exchange Commission on Form 10-Q for the period ending June 30, 2006, securing permits for the 23 wells and the length of time required for the rig work have been complicated by the Company’s history of regulatory compliance confrontations with the RRC from 2005 and prior. As of November 3, 2006, nine of the 23 dually completed wells have been restored to production and in the Woodbine “D” zone only. Five wells have been restored to production in the “B” zone. Rig work has been completed and TRRC forms have been submitted to the TRRC for one well for production in the “D” zone and one well in the “B” zone on the Garbade lease. Work began on October 27, 2006, on the Garbade and Timmons leases to obtain permitting for the “A” and “B” zone wells as dual wells. However, all of the wells will not be returned to service due to the improper density and spacing violations.

As we have disclosed in previous filings there are many limiting factors affecting restoration of the wells to production as dual producers, including the lack of funds for procuring equipment, maintenance issues related to old well service units, and original engineering decisions made by previous management without regard to TRRC regulatory procedures.

We are continuing efforts to deal with significant limitations on the viability of the 23 wells due to the use of small casing sizes that limit the tubing sizes necessary for optimizing segregated production from each of the zones and to evaluate specific wells and zones to place on production in order to achieve optimum revenue potential.

Additional complications arise in the selection of which zones and which wells to produce. This is related to lack of accurate historical production and test data. Test separators and equipment have never been incorporated into the production facilities, resulting in less than precise methods of determining production values for each well or zone. Well head fluid sampling has been and remains the current method of establishing individual well or zone production. However, the sample method often conflicts with total lease production figures. One method available to accurately test each zone or well is to shut in the remaining wells or zones on that lease until testing is complete. However, the financial impact of this method is not acceptable.

ENERGYTEC, INC.

Friday, November 03, 2006

REGULATORY: Trix-Liz Field Dual Completion Wells Status

ORIGINAL ZONAL COMPLETIONS

PRESENT ZONAL COMPLETIONS

Lease/Well

J. Belcher 11

J. Belcher 12

J. Belcher 13

J. Belcher 14

J. Belcher 15

A. Garbade 13

A. Garbade 14

A. Garbade 16

A. Garbade 17

A. Garbade 18

A. Garbade 19

A. Garbade 20

A. Garbade 22

A. Garbade 25

A. Garbade 27

HBU 225

HBU 226

M. B. Timmons 21

M. B. Timmons 22

M. B. Timmons 23

M. B. Timmons 24

M. B. Timmons 26

M. B. Timmons 30

Note: 9 wells producing in “D” zone & 5 in “B” zone.

Work is in progress on Timmons #21 to restore dual completion to production in “A” and “B” zones. Efforts are in progress to further determine which wells in the HBU, Garbade and Timmons leases can be restored to production in the “A” & “B” zones. Wells in both zones are being evaluated in regards to spacing requirements and production potential in order to optimize production. Additionally, initial evaluation has begun on a procedure to consolidate the various Woodbine sands which are separate fields into one field through TRRC field rule changes that could potentially remedy existing spacing and density rules allowing use of all existing well bores. Belcher wells can be re-configured to produce as dual completions in the “A” & B” zones once dual tubing hangers and 1 1/2” tubing become available.

Critical Accounting Policies and Estimates

Energytec prepares its financial statements in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. In response to SEC Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” described below are certain of these policies that are likely to be of particular importance to the portrayal of Energytec’s financial position and results of operations and require the application of significant judgment by management. Energytec will analyze estimates, including those related to oil and gas revenues, reserves and properties, as well as goodwill and contingencies, and base its estimates on historical experience and various other assumptions that management believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. You should expect the following critical accounting policies will affect management’s more significant judgments and estimates used in the preparation of Energytec’s financial statements.

Revenue Recognition

Energytec recognizes revenue associated with the sales of crude oil and natural gas when title passes to the customer. Crude oil and natural gas is sold to approximately six purchasers located in Texas. The Company receives revenues directly from the purchaser. Revenues from the production of properties in which we have an interest with other producers are recognized on the basis of our net working interest or royalty interest. Revenues owned by working interest partners are recorded as accounts payable, revenues. Lease operating expenses and capital expenditures to be borne by the working interest partners are netted against their portion of revenues.

Revenues from the work-over and rehabilitation of oil and gas properties through the Company’s wholly owned subsidiary, Comanche Well Service Corporation, are recognized when the services have been performed. The Company also recognizes income from the transportation of natural gas through its pipeline. Revenue is recognized when title passes to the customer and is based upon the volume of natural gas passing through the pipeline. Gas sales are recognized based upon the volume of gas exiting the pipeline at a spot rate determined pursuant to a purchase contract with the customer. Gas purchases represent the gas purchased as it enters the pipeline at the spot rate as defined by the purchase contract less a fee of $0.55 per mcf.

During the second quarter of 2005, the Company entered into an agreement to drill seven wells in two of its fields for $8,000,000 under a turnkey agreement through completion of the wells. Commissions of $800,000 were paid to two individuals in connection with the agreement. The sales proceeds of $8,000,000 less the commissions of $800,000 were recorded as a liability pending the completion of the wells. The liability included $3,500,000 for the sale of well sites owned by the Company and the estimated cost of drilling and completion of the wells totaling $3,700,000. The drilling budget of $3,700,000 includes approximately $1,000,000 to cover potential overruns associated with increasing costs of materials and labor precipitated by rising oil prices. The Company has elected to reserve recognition of this amount until such time as all wells are completed.

Comanche Well Service provides the drilling services and bills for these services based upon average market day rates plus expenses. As wells are drilled, the liability is reduced by direct drilling costs plus a standard daily drilling rate of $3,000 per day. The gain on the sale of the well sites is recognized as wells are completed. No drilling revenues were recognized in the first quarter of 2006 because no further drilling was completed during that time. Certain direct costs associated with completion were incurred, reducing the liability. The accompanying financial statements reflect a remaining liability of $4,071,934 as of September 30, 2006, which is included in turnkey costs payable.

Oil and Gas Properties

Energytec uses the successful efforts method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells that find proved reserves, and costs to drill and equip development wells are capitalized. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed.

Unproved oil and gas properties that are individually significant are periodically assessed for impairment of value, and a loss is recognized at the time of impairment by providing an impairment allowance. Other unproved properties are amortized based on the Energytec’s experience of successful drilling and average holding period. Capitalized costs of producing oil and gas properties, after considering estimated residual salvage values, are depreciated and depleted by the unit of production method. Support equipment and other property and equipment are depreciated over their estimated useful lives.

On the sale or retirement of a complete or partial unit of a proved property, the cost and related accumulated depreciation, depletion, and amortization are eliminated from the property accounts, and the resultant gain or loss is recognized.

On the sale of an entire interest in an unproved property for cash or cash equivalent, gain or loss on the sale is recognized, taking into consideration the amount of any recorded impairment if the property had been assessed individually. If a partial interest in an unproved property is sold, the amount received is treated as a reduction of the cost of the interest retained.

Oil and Gas Reserves

The process of estimating quantities of oil and gas reserves is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the subjective decisions and variances in available data for various fields make these estimates generally less precise than other estimates included in the financial statement disclosures.

Energytec uses the unit-of-production method to depreciate and deplete the capitalized costs of our producing oil and gas properties. Changes in proved developed reserve quantities will cause corresponding changes in depletion expense in periods subsequent to the quantity revision.

Impairment of Long-Lived Assets

Energytec accounts for its long-lived assets, including oil and gas properties, under the provisions of SFAS No. 144. This provision requires the recognition of an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and measures an impairment loss as the difference between the carrying amount and the fair value of the asset.

As discussed in “Recent Developments,” in December 2005, Energytec engaged an independent engineering firm to conduct a study of its reserves as of December 31, 2005. Pursuant to the reserve study, it was determined that 23 wells were dually completed in non-permitted separately recognized reservoirs in the Talco/Trix-Liz Field without the proper permitting and spacing required by the Texas Railroad Commission (RRC). No proved reserves can be assigned to any of the 23 wells dually completed in non-permitted separately recognized reservoirs in the Talco/Trix-Liz Field until such regulatory issues are resolved to the satisfaction of the RRC. Additionally, commingling of production from permitted and non-permitted reservoirs resulted in the inability to assign reserves to either the permitted or non-permitted reservoirs. Both of these circumstances caused the reserves to be substantially understated as of December 31, 2005.

Although these circumstances resulted in the exclusion of reserves, management believes that the inability to assign proved reserves to the Talco/Trix-Liz Field is temporary and that the impairment allowance recorded at December 31, 2005, is fairly stated and that no further impairment is required as of September 30, 2006.

Although production may not be reestablished for all wells, Energytec expects to deliver to its independent engineer sufficient production data in order to assign proved reserves to a significant number of the 50 wells, along with data to establish additional undeveloped locations. Energytec believes that these activities will result in a significant increase to proved reserves at December 31, 2006. The Company is reluctant to estimate the total volume of proved reserves that may be added until it establishes sufficient actual production data from these wells.

Based upon the discovery of the irregularities contained in the reserve report for the year ended December 31, 2004, Energytec, along with its Audit Committee, has now established a policy that any reserve report contained in any regulatory filing must be completed by an independent engineering firm.

Accounting for Asset Retirement Obligations

Energytec accounts for the asset retirement obligations under the provisions of FASB No. 143, which requires the fair value of the liability for an asset retirement obligation be recognized in the period in which it is incurred. When the liability is initially recorded, the offset is capitalized by increasing the carrying amount of the long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. To settle the liability, the obligation is paid, and to the extent there is a difference between the liability and the amount of cash paid, a gain or loss upon settlement is recognized.

Federal Income Taxes

Energytec accounts for Federal income taxes under the provisions of SFAS No. 109, which requires the recognition of deferred tax assets and liabilities for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis. In addition, the recognition of future tax benefits, such as net operating loss carry forwards, are required to the extent that realization of such benefits are more likely than not.

Accounting for Stock-Based Compensation

SFAS No. 123, “Accounting for Stock-Based Compensation,” encourages entities to recognize compensation costs for stock-based employee compensation plans using the fair value method of accounting, as defined therein. In December 2004, the FASB issued SFAS 123R, “Share-Based Payments,” revising SFAS No. 123, “Accounting for Stock Based Compensation,” and superseding “Accounting for Stock Issued to Employees.” SFAS 123R establishes standards for the accounting of transactions in which an entity exchanges it equity instruments for goods or services, including obtaining employee services in share-based payment transactions. SFAS 123R applies to all awards granted after the effective date and to awards modified, purchased or canceled after that date. Adoption was effective as of June 15, 2005. Energytec adopted SFAS 123R in the first quarter of 2005. Management does not believe the adoption of this accounting pronouncement had a material impact on Energytec’s financial position or operating results.

Goodwill

Energytec will account for any goodwill it may recognize in the future in accordance with Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires an annual impairment assessment. A more frequent assessment is required if certain events occur that reasonably indicate an impairment may have occurred. The volatility of oil and gas prices may cause more frequent assessments. The impairment assessment requires Energytec to make estimates regarding the fair value of the reporting unit. The estimated fair value is based on numerous factors, including future net cash flows of Energytec’s estimates of proved reserves as well as the success of future exploration for and development of unproved reserves. These factors are each individually weighted to estimate the total fair value of the reporting unit. If the estimated fair value of the reporting unit exceeds its carrying amount, goodwill of the unit is considered not impaired. If the carrying amount exceeds the estimated fair value, then a measurement of the loss must be performed, with any deficiency recorded as an impairment.

Contingencies

A provision for contingencies is charged to expense when the loss is probable and the cost can be reasonably estimated. Determining when expenses should be recorded for these contingencies and the appropriate amounts for accrual is a complex estimation process that includes subjective judgment. In many cases, this judgment is based on interpretation of laws and regulations, which can be interpreted differently by regulators and/or courts of law. Energytec will closely monitor known and potential legal, environmental, and other contingencies and periodically determine when it should record losses for these items based on information available to it.

Recent Accounting Developments

On July 13, 2006, the FASB released FIN 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement 109.” FIN 48 requires companies to evaluate and disclose material uncertain tax positions it has taken with various taxing jurisdictions. We are currently reviewing FIN 48, but we do not expect that FIN 48 will have any material impact on our operating results, financial position, or future cash flows.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of the federal securities laws that relate to future events or Energytec’s future financial performance. All statements in this report that are not historical facts, including, but not limited to, statements related to:

•

Our future financial operating performance and results;

•

Drilling and workover plans and ability to secure manpower and equipment to effectuate plans;

•

Production volumes;

•

Market prices;

•

Our business strategy;

•

Sources of funds necessary to conduct operations, meet rescission obligations, and meet capital requirements;

•

Developments costs;

•

Number and location of producing wells and planned wells;

•

Ability to meet regulatory requirements to restore production; and

•

Our plans and forecasts.

The words “may,” “should,” “will,” “expect,” “could,” “anticipate,” “believe,” “estimate,” “plan,” “intend” and similar expressions have been used to identify certain of the forward-looking statements. Forward-looking statements are based on current expectations, estimates, and projections, and they are subject to a number of risks, uncertainties, and assumptions that could cause actual results to differ materially from those described in the forward-looking statements. Such forward-looking statements should, therefore, be considered in light of various important factors, including those set forth in this report. In particular, the matters discussed above under “Recent Developments” in ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS should be viewed as creating substantial uncertainty about Energytec and its prospects for the future. All statements in this report of expectations, estimates, and projections are subject to these uncertainties, the outcome of which cannot be predicted at this time and any one of which could render our forward-looking statements unlikely or impossible. Risks and uncertainties associated with forward-looking statements include, but are not limited to:

•

Fluctuations in prices of oil and natural gas;

•

Dependency on key personnel;

•

Demand for oil and natural gas;

•

Losses due to current, potential, or future litigation;

•

Future capital requirements and availability of financing;

•

Geological concentration of our reserves;

•

Risks associated with operations and drilling;

•

Receipt of amounts owed to us by working interest owners and purchasers of our production;

•

Actions of third party co-owners of interests in properties in which we also own an interest;

•

Uncertain results of pending or future litigation;

•

Governmental regulations and liability for potential environmental matters; and

•

General economic conditions.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange, interest rates, and commodity prices.

The Company is not currently involved in any hedge contracts or foreign contracts and therefore has no exposure to such risks.

In February 2006, the Company incurred debt totaling $4,000,000 that is subject to interest at 1% above the Wall Street Prime Rate and is susceptible to fluctuations. During 2005, the Wall Street Prime Rate ranged from a low of 5.35% to a high of 7.25%. Through November 9, 2006, the Wall Street Prime Rate has ranged from a low of 7.25% to a high of 8.25%.

Our major market risk exposure is in the pricing applicable to our oil production and natural gas sales. Realizing pricing is primarily driven by the prevailing domestic price for crude oil. Historically, prices received for oil and gas sales have been volatile and unpredictable. We expect pricing volatility to continue. Oil prices ranged from a low of $46.62 per barrel to a high of $72.73 per barrel during the first nine months of 2006 and from a low of $35.74 per barrel to a high of $64.40 per barrel during the year ended December 31, 2005. Gas prices during 2005 ranged from a low of $2.40 per mcf to a high of $6.57 per mcf. During the first nine months of 2006, gas prices have ranged from a low of $2.29 per mcf to a high of $4.08 per mcf. A significant decline in the prices of oil or natural gas could have a material adverse effect on our financial condition and results of operations.

Increase in revenues is dependent upon acquisition of additional properties and re-completions on existing wells. Energytec’s ability to close on acquisitions are subject to due diligence which includes the verification of clear titles on acquired leases and the ability to close in a timely manner. Title issues or other matters that delay closing could have a material adverse effect on the acquisition of properties, resulting in expenses incurred without the realization of any additional revenues. Energytec is subject to regulatory action from the Texas Railroad Commission and other agencies, including, but not limited to the Environmental Protection Agency and Texas Parks and Wildlife. Any non-compliance with these agencies could materially impact Energytec’s ability to secure the necessary permits to re-complete additional wells or to produce and sell oil and gas.

ITEM 4.

CONTROLS AND PROCEDURES

With the participation of management, Energytec’s chief executive officer and chief financial officer evaluated disclosure controls and procedures on September 30, 2006. Based on this evaluation, the chief executive officer and the chief financial officer concluded that the disclosure controls and procedures are effective in connection with Energytec’s filing of its quarterly report on Form 10-Q for the three months and six months ended September 30, 2006.

During the three-month period ended September 30, 2006 there have been no significant changes in Energytec’s internal controls or in other factors that could significantly affect these controls, including any significant deficiencies or material weaknesses of internal controls that would require corrective action.

PART II

ITEM 1.

LEGAL PROCEEDINGS

See the discussion of legal proceedings and potential claims under the caption “Recent Developments” in PART I, ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, set forth above.

ITEM 1A.

RISK FACTORS

The Private Securities Litigation Reform Act of 1985 provides a safe harbor for forward-looking statements made by Energytec, except where such statements are made in connection with an initial public offering. All statements, other than statements of historical fact, which address activities, actions, goals, prospects, or new developments that we expect or anticipate will or may occur in the future, including such things as development and maintenance of our oil and gas properties, prospects for financing or sales of assets to fund operations, and litigation or potential claims against Energytec are forward-looking statements. Forward-looking statements are based on current expectations, estimates, and projections as of the date of this report, and they are subject to a number of risks, uncertainties, and assumptions that could cause actual results to differ materially from those described in the forward-looking statements. Such forward-looking statements should, therefore, be considered in light of various important factors, including those set forth in this report. In particular, the matters discussed above under PART I, ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS should be viewed as creating substantial uncertainty about Energytec and its prospects for the future. Any one or a combination of factors could materially affect our operations and financial condition. Because of the factors discussed in this report and below, as well as other factors set forth under the “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005, actual results may differ from those in the forward-looking statements.

The consequences of former management’s conduct will continue to adversely affect Energytec’s business and results of operations in future periods.

Mr. Cole’s mismanagement of Energytec’ s operations, violations of state regulation of our oil and gas operations, payment of unauthorized commissions and other expenses, and overpayment of working interest net revenues in 2005 and the first quarter of 2006 prior to his removal significantly impacted results of operations, cash flow, and working capital and prevented Energytec from taking advantage of its resources and opportunities to rework its wells, maintain and increase production, and further develop the business. Energytec will continue to incur costs and use resources that could otherwise be used to rework wells and increase production to correct these problems in 2006, and perhaps into 2007. Consequently, the problems that current and future management have inherited from Mr. Cole’s tenure in control of Energytec will continue to be a drag on the development of Energytec’s business in future periods.

The loss of the sale of the Wyoming Thermal Recovery Project would have a substantial adverse affect on the financial condition of Energytec.

On October 30, 2006, Energytec entered into a purchase and sale agreement for the sale of its Wyoming Thermal Recovery Project. After costs but before the effect of Federal and state income taxes, Energytec estimates it would receive approximately $45 million. The closing date was originally scheduled for November 15, 2006, subject to the holders of 80% of the working interests (including Energytec) and holders of 80% of the overriding royalty interests tendering their written acceptance of the sale and other conditions customary for transactions of this type. However, pursuant to a request from the purchaser, we agreed to an extension of the closing until December 29, 2006, to address issues and concerns that arose when a small group of third party interest owners threatened to disrupt the transaction. Whether the transaction will close depends on satisfying the conditions described above, other conditions set forth in the purchase agreement, and the ability of Energytec to satisfy the purchaser that its future ownership and development of the Wyoming Project will not be subject to unreasonable interference. If this transaction does not close, it will have a material adverse affect on the financial condition of Energytec.

Resolution of the put options could have a substantial adverse affect on the financial condition of Energytec.

In connection with a private placement of the Energytec’s common stock, which ended December 22, 2005, Mr. Cole, without authorization or approval by the board of directors, granted to investors a contractual right to put the shares back to Energytec on November 15, 2006, at a price of $3.75 per share if the per share market price does not exceed $3.75 per share at the close of business on November 14, 2006. A total of 3,037,046 shares were sold in the private placement resulting in a potential liability related to the put options totaling $11,388,923. Energytec is investigating whether it has a basis for claiming the put options are void or voidable on the grounds that Mr. Cole lacked the power and authority to grant the put option, or whether under Nevada law Energytec is required to pay on exercise of the put options if the effect would be to render Energytec unable to pay its debts as they become due in the usual course of business. If Energytec is required to honor the put options and a substantial portion of the put options are exercised, it does not have funds available as of the date of this report to make payment. In these circumstances the obligations arising from exercise of the put options would have a material adverse effect on the financial condition of Energytec and could cause Energytec to seek the protection from creditors afforded by filing a petition for relief under the United States Bankruptcy Code, in which case exercises of the put options would likely be set aside as a preference and the holders of the put options relegated to the status of equity owners for purposes of priority of payment through the bankruptcy proceeding. Even if Energytec is able to avoid its obligation to make payment on exercises of the put options, the holders of the put options may pursue claims against Energytec that their investment was induced by material misstatements of fact related to the put options and seek rescission of their investment, which could also have a material adverse effect on the financial condition of Energytec.

ITEM 5.

OTHER INFORMATION

Put Option

Putting these questions aside, Energytec will not consider honoring any put option that is not properly submitted in accordance with the written addendum setting the terms of the option delivered to purchasers of Energytec common stock in the private placement. A small number of persons have instigated litigation against Energytec and have threatened other actions to harass Energytec. For this reason management believes that it must follow the terms of the option exactly as written.

The addendum specifically states that the “. . . Option must be exercised, if at all, on November 15, 2006 . . . .” (Emphasis added.) The addendum further states that,

Optionee may exercise the Option, in part or in whole, on November 15, 2006 by giving the Company written notice of exercise. The notice shall specify the number of Shares to be purchased by the Company at the Price. The Optionee shall also tender to the Company the certificate or certificates representing the number of Shares being put to the Company for purchase.

Based on the foregoing, the put right under the addendum can be exercised only by delivering to Energytec on November 15, 2006 (not before or after),

•

written notice of the election to exercise stating the number of shares to be purchased by Energytec; and,

•

the original stock certificate (not a copy) representing the common stock purchased from Energytec to which the put option applies and that is being purchased by Energytec pursuant to the notice of election.

As noted below, any ability to make payment on November 30, 2006, has been impaired by the extension of the sale and closing the Wyoming Project.

Purchase and Sale Agreement

ITEM 6.

EXHIBITS


Exhibit No.		Title of Document
31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

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


	Energytec, Inc.

Date: November 13, 2006	By:	/s/ Don Lambert
		Don Lambert President and Chief Executive Officer

Date: November 13, 2006	By:	/s/ Dorothea Krempein
		Dorothea Krempein Chief Financial Officer

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ENERGYTEC INC 10-Q