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

FORWARD LOOKING INFORMATION

Looking forward into the balance of fiscal 2012, crude oil prices have decreased by $6.60 per barrel.

During the first quarter of fiscal 2012, the Company drilled a development well
- the Santa Fe #20 - in the Carneros Creek Field in Kern County, California. The well penetrated the intended zones and after completion operations was stimulated with a gel-fracking operation that concluded in April. After an initial production of fluids from the well, an unexplained blockage occurred, and efforts are ongoing to determine the cause and implement a procedure to correct the situation.

The Company hopes to drill two additional wells during 2012, subject to the availability of contract drilling rigs. We also will continue to evaluate external opportunities that could range from joint ventures to asset acquisitions.

Management continues to seek and evaluate opportunities within the energy sector to enhance the value of the Company. Pyramid's growth during the balance of 2012 will be highly dependant on the level of success the Company has in its operations and capital investments, including the outcome of wells that have not yet been drilled. The Company's capital investment program may be modified during the year due to exploration and development successes or failures, market conditions and other variables. The production and sales of oil and gas involves many complex processes that are subject to numerous uncertainties, including reservoir risk, mechanical failures, human error and market conditions.

The Company has positioned itself, over the past several years, to withstand various types of economic uncertainties, with a program of consolidating operations on certain producing properties and concentrating on properties that provide the major revenue sources. The drilling of a new well and several limited work-overs of certain wells have allowed the Company to maintain its crude oil reserves for the last three years. The Company expects to maintain its reserve base in 2012 by drilling new wells and routine maintenance of its existing wells.

The Company may be subject to future costs necessary for compliance with the new implementation of air and water environmental quality requirements of the various state and federal governmental agencies. The requirements and costs are unknown at this time, but management believes that costs could be significant in some cases. As the scope of the requirements become more clearly defined, management may be better equipped to determine the true costs to the Company.

The Company continues to absorb the costs for various state and local fees and permits under new environmental programs, the sum of which were not material during 2011. The Company retains outside consultants to assist the Company in maintaining compliance with these regulations. The Company is actively pursuing an ongoing policy of upgrading and restoring older properties to comply with current and proposed environmental regulations. The costs of upgrading and restoring older properties to comply with environmental regulations have not been determined. Management believes that these costs will not have a material adverse effect upon its financial position or results of operations.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

Portions of this Quarterly Report, including Management's Discussion and Analysis, contain forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results and performance in future periods to be materially different from any future results or performance suggested in forward-looking statements in this release. Such forward-looking statements speak only as of the date of this report and the Company expressly disclaims any obligation to update or revise any forward-looking statements found herein to reflect any changes in Company expectations or results or any change in events. Factors that could cause results to differ materially include, but are not limited to: the timing and extent of changes in commodity prices of oil, gas and electricity, environmental risk, drilling and operational costs, uncertainties about estimates of reserves and government regulations.

ANALYSIS OF SIGNIFICANT CHANGES IN RESULTS OF OPERATIONS

RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2012 COMPARED TO THE QUARTER ENDED MARCH 31, 2011

REVENUES

The increase in oil and gas sales of $42,760 is due to higher average sales prices for the first quarter of 2012. The average sales price of the Company's oil and gas for the first quarter of 2012 increased by approximately $14.70 per equivalent barrel when compared to the same period of 2011. This was offset by lower sales volumes of 1,400 barrels for the first three months of 2012.

OPERATING EXPENSES

Operating expenses increased by $16,285 for the first quarter of 2012. The cost to produce an equivalent barrel of crude oil during the first quarter of 2012 was approximately $35.12 per barrel, an increase of approximately $4.83 per barrel when compared with production costs for the first quarter of 2011. The increase in lease operating expenses is caused by many factors. These include higher costs for contract operations, production equipment repairs and maintenance, equipment fuel and professional services. This was offset by lower costs for outside services, insurance and the quarterly adjustment for inventory change.

Contract operations increased by $17,158, due primarily to the Wyoming joint venture. The Wyoming joint venture operator is conducting a major renovation project on the joint venture properties. Production equipment repair and maintenance costs increased by $15,966 due to higher costs for outside repair services on one of its well servicing rigs. Equipment fuel costs increased by $10,856 due to an increase in the volume of fuel purchased and higher average costs for gasoline and diesel used by the Company's vehicles and production equipment. Professional services increased by $8,388 due to a review of the Company's Pike #1-H well that was conducted by a third-party petroleum engineering firm.

Outside services decreased by $8,174 due to lower demand for third-party repair and maintenance services. Insurance expense decreased by $8,151 due to lower premiums for health insurance of approximately $4,300 and lower liability insurance premiums. The remaining net favorable variance of $12,580 is attributable to many different cost categories, none of them significant in amount.

Inventory change decreased operating expenses by $16,553 for the first quarter of 2012 and decreased operating expenses by $9,375 for the first quarter of 2011. As a result, operating expenses decreased by $7,178 for the first quarter of 2012, when compared with the same period of 2011. Inventory change at March 31, 2012 of $16,553 is due primarily to higher average per barrel inventory valuations combined with slightly higher inventory volumes at March 31, 2012. Inventory change at March 31, 2011 of $9,375 is due primarily to higher average per barrel inventory valuations.

GENERAL AND ADMINISTRATIVE

General and administrative expenses decreased by $13,704 for the first quarter of 2012 when compared with the same period for 2011. Accounting services decreased by $9,472 due primarily to lower costs for third-party accounting services and lower costs for tax consulting services. Legal services decreased by $7,852.

PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION

The provision for depletion, depreciation and amortization decreased by $4,372 for the first quarter of 2012, when compared with the same period for 2011. The decrease is due to a decrease in depletion of $2,430 and a decrease in depreciation of $1,942.

VALUATION ALLOWANCES

On March 21, 2011, the Company participated in the drilling of a joint venture well in Menard County, Texas. Log analysis of this well indicated that the well would not be commercially viable, and was plugged and abandoned. The Company owns a 30% interest in the joint venture. The Company recorded a valuation allowance of $48,533 against the costs incurred during the first quarter of 2011 for the drilling of this well. There was no valuation allowance recorded in the first quarter of 2012.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents decreased by $22,320 for the three months ended March 31, 2012. During the three months ended March 31, 2012, operating activities provided cash of $616,379. Cash was used for capital spending of $613,692 and principal payments on long-term debt of $16,074. See the accompanying Statements of Cash Flows for additional detailed information. The Company had available a line of credit of $500,000 and short-term investments of $3,209,297 at March 31, 2012 that provided additional liquidity during the first three months of 2012.

IMPACT OF CHANGING PRICES

The Company's revenue is affected by crude oil prices paid by the major oil companies. Average crude oil prices for the first three months of 2012 increased by approximately $14.70 per equivalent barrel when compared with the same period of 2011. The Company cannot predict the future course of crude oil prices.