UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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, 2010

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

For the transition period from ________ to ________

Commission File Number: 0-32593

Wentworth Energy, Inc.

(Name of small business issuer in its charter)

800 N. Church Street, Suite #C, Palestine, Texas 75801

(Address of principal executive offices)

(903) 723-0395

(Issuer’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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.  Yes  X . No      .

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes      . No      .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined 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: 215,878,827shares of common stock as of September 30, 2010.

Table of Contents

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PART I.    FINANCIAL INFORMATION

Item 1.  Financial Statements

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Wentworth Energy, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

September 30, 2010

1. Nature of Operations and Basis of Presentation

Wentworth Energy, Inc. (“Wentworth” or the “Company”) is an exploration and production company engaged in oil and gas exploration and production primarily in the East Texas area. The Company’s strategy is to lease all of its property in exchange for royalty interests and working interest participation in shallow zones.

The accompanying unaudited interim consolidated financial statements of Wentworth Energy, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the SEC and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in Wentworth Energy’s Annual Report on Form 10-K for the year ended December 31, 2009 filed on April 15, 2010. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the year ended December 31, 2009, as reported in the Form 10-K have been omitted.

Recently Issued Accounting Pronouncements

In January 2010, the FASB issued revised authoritative guidance that requires more robust disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2 and 3. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009 (which is January 1, 2010 for the Company) except for the disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years (which is January 1, 2011 for the Company). The revised guidance was adopted as of January 1, 2010. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

No other accounting standards or interpretations issued recently are expected to a have a material impact on our consolidated financial position, operations or cash flows.

2. Going Concern

The accompanying consolidated financial statements have been prepared on the basis of accounting principles applicable to a going concern. Accordingly, they do not give effect to adjustments that would be necessary should the Company be unable to continue as a going concern, and therefore be required to realize its assets and retire its liabilities in other than the normal course of business and at amounts different from those in the accompanying financial statements. However, the Company has incurred significant, recurring losses from operations, has a working capital deficiency, and is in default of the terms of its senior secured convertible notes and convertible debentures. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

The Company’s ability to continue as a going concern is dependent upon achieving profitable operations, receiving deferrals of the interest payments due and a waiver of its defaults of the amended debt agreements from its senior secured convertible note holders and convertible debenture holder, and injection of additional capital. The outcome of these matters cannot be predicted at this time. Management of the Company is actively seeking potential partners who possess the necessary resources to assist the Company in developing its remaining properties in order to secure additional funds through lease bonuses and overriding royalty interests.

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3. Embedded Derivative Contract Liabilities

As of September 30, 2010, the Company had the following embedded derivative contract liabilities outstanding:

Each reporting period, the above derivative liabilities are fair valued with the non-cash gain or loss recorded in the period as a gain or loss on derivatives. The above derivative instruments are not designated as hedging instruments.

The valuation of the Company’s embedded derivatives and warrant derivatives are determined primarily using the Black-Scholes option pricing model. To determine the fair value of the derivatives, the Company evaluates assumptions regarding the probability of certain future events. No dividends were assumed due to the nature of the Company’s current business strategy. The fair values of the derivatives as of September 30, 2010 were estimated using the Black-Sholes model with the following assumption: $0.0035 quoted stock price; $0.001 to $8.00 exercise price; 171.46% to 175.08% volatility; .72 to 4.09 years estimated life; zero dividends and a 0.27 to 1.27% discount rate.

4. Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy is used which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are described as follows:

Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 – Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 – Unobservable inputs reflect the Company’s judgments about the assumptions market participants would use in pricing the asset of liability since limited market data exists. These inputs are developed based on the best information available, using internal and external data.

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The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of September 30, 2010.

5. Debt

For the nine months ended September 30, 2010, convertible debentures amounting to $193,259 were converted into 128,494,692 common shares.

6. Related Party Transactions

The Company paid management and consulting fees to its Directors, persons related to Directors or entities controlled by Directors. The total expense for these fees during the nine months ended September 30, 2010 was $63,000. As of September 30, 2010, the outstanding balance owed related to these fees was $60,000.

Also, as of September 30, 2010, the Company had an account receivable of $13,050 due from an entity owned by a former President and director of the Company. The Company determined that it was overpaying overriding royalties to Roboco Energy, Inc., a corporation owned by Mike Studdard, the Company’s former President and former director, and the Barnes family. As a result, the Company recorded an account receivable for the overpayment. This overpayment will be deducted from future royalties.

7. Warrants and Stock-Based Compensation

There were no warrants issued, exercised or that expired during the nine months ended September 30, 2010. Warrants outstanding at September 30, 2010 totaling 73,169,125, have a weighted average remaining life of 3.92 years and have an intrinsic value of $128,752.

The Company utilizes stock options to compensate key employees, directors, officers and consultants. There were no options granted, exercised, forfeited or that expired during the nine months ended September 30, 2010. Total stock based compensation expense was $0 and $4,222 for the nine months ended September 30, 2010 and September 30, 2009 respectively. There was no unrecognized stock-based compensation as of September 30, 2010. Options outstanding as of September 30, 2010 totaling 15,096,000, have a weighted average remaining life of 1.61 years and have an intrinsic value of zero.

8. Asset Retirement Obligation

The following table summarizes the changes in the Company’s asset retirement obligation during the periods ended:

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9. Commitments and contingencies

Lawsuits

On December 19, 2008, the Company commenced a lawsuit against our former subsidiary, Barnico Drilling, Inc., our former Vice President, Georges Barnes, and CamTex Energy, Inc. (of which George Barnes is an officer), in the District Court of Anderson County, Texas.  The lawsuit relates to the Company’s attempt to repossess certain items from George Barnes and CamTex Energy, Inc. in accordance with a court ruling on September 9, 2008.  George Barnes had refused to turn over these items claiming that the items were not owned by Barnico but were actually owned by George Barnes and his family.  This case was heard in the District Court of Anderson County, Texas on March 12, 2009 and Mr. Barnes was ordered to immediately relinquish to Wentworth possession of the items.  Mr. Barnes was also held in contempt of court for his failure to relinquish possession of the items and Wentworth was awarded its attorney fees and costs incurred in preparing the motion.  

On August 27, 2009, the Company filed an amended petition to its original lawsuit in an attempt to recover approximately $25,000 the Company believes is owed to it by George Barnes for the use of Barnico drilling rigs for a period of time between February 2008 and May 2009 and approximately $11,000 for overrides improperly paid to George Barnes and certain of his family.  In its amended petition, the Company has also alleged fraud relating to the misrepresentation of the quality of the Barnico drilling rigs and equipment in the March 2006 Stock Purchase Agreement under which the Company initially acquired its stock in Barnico.

The Company has also filed a claim against a third party, and against George Barnes individually, relating to payments made by that third party to Barnico in 2009, despite that third party’s receipt of notice of the Company’s security interest in Barnico’s accounts receivable.

The Company has also filed suit against Barnes and related parties on claims arising out of or related to Barnes’ duties and obligations as a former officer and director, and for cancellation of certain royalty interest deeds to Barnes and related parties. Barnes and related parties has filed counterclaims against the Company. Management, after consultation with counsel, believes that the likelihood for liability, if any, for these counterclaims is remote, and should liability be incurred, the counterclaims will not have a material adverse effect on the Company

The Company is a party to legal actions that arise in the ordinary course of its business.  Based in part on consultation with legal counsel, management believes that (i) the liability, if any, under these claims will not have a material adverse effect on the Company, and (ii) the likelihood that the liability, if any, under these claims is material is remote.

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

The following discussion should be read in conjunction with Item 6 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, and the Notes to the Financial Statements contained in this report. Our financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q contain additional information that should be referred to when reviewing this material. Certain statements in this discussion may be forward-looking. These forward-looking statements involve risks and uncertainties, which could cause actual results to differ from those expressed in this report.

Cautionary statement regarding forward-looking statements

Various statements in this report, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. The forward-looking statements may include projections and estimates concerning the timing and success of specific projects and our future reserves, production, revenues, income and capital spending. When we use the words “will,” “believe,” “intend,” “expect,” “may,” “should,” “anticipate,” “could,” “estimate,” “plan,” “predict,” “project” or their negatives, other similar expressions or the statements that include those words, it usually is a forward-looking statement.

The forward-looking statements contained in this report are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. We caution all readers that the forward-looking statements contained in this report are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors detailed below and discussed in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on April 15, 2010. All forward-looking statements speak only as of the date of this report. We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. These cautionary statements qualify all forward-looking statements attributable to us, or persons acting on our behalf. The risks, contingencies and uncertainties relate to, among other matters, the following:

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our business strategy,

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estimated quantities of gas and oil reserves,

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uncertainty of commodity prices in oil and gas,

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our financial position,

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our cash flow and liquidity,

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replacing our gas and oil reserves,

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our ability or inability to retain and attract key personnel,

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uncertainty regarding our future operating results,

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our ability or inability to obtain additional financing necessary to fund our operations and capital expenditures and to meet our other obligations,

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competition in the oil and gas industry,

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the effects of government regulation, permitting and other legal requirements,

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plans, objectives, expectations and intentions contained in this report that are not historical, and other factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2009 and filed with the SEC on April 15, 2010.

Results of Operations

Overview

We experienced net losses of $2.9 million and $1.8 million for the three-months ended September 30, 2010 and 2009 respectively. The increase in the net loss of $1.1 million was due to the change in the unrealized gain (loss) on derivative contracts change from a gain of $.3 million for the three-months ended September 30, 2009 to a loss of $.9 million for the three-months ended September 30, 2010.

We also experienced net losses of $6.1 million and $7.1 million for the nine-months ended September 30, 2010 and 2009 respectively. The decrease in the net loss of $1.0 million was due principally to a decrease in the net loss from discontinued operations ($1.5 million), a decrease in loss from operations ($0.4 million) offset by a decrease in the unrealized gain on derivatives ($.9 million).

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Three Months Ended September 30, 2010, Compared to Three Months Ended September 30, 2009

Revenues

Revenue from oil and gas sales was $110 thousand for the three months ended September 30, 2010 compared to $95 thousand for the three months ended September 30, 2009. The decrease in production revenue was primarily due to a decrease in production volumes due to the natural decline in the wells partially offset by higher prices.

Operating Expenses

Our operating costs totaled $278 thousand for the three months ended September 30, 2010, compared to $326 thousand for the three months ended September 30, 2009. The $48 thousand decrease in expenses was due primarily to a decrease in lease operating expense ($13 thousand) and general and administrative expense ($40 thousand), offset by an increase in depletion and depreciation ($5 thousand).

General and Administrative

Total general and administrative costs were $200 thousand for the three months ended September 30, 2010, versus $240 thousand for the three months ended September 30, 2009, a net decrease of $40 thousand. The $40 thousand decrease was due to lower legal and accounting fees because of lower activity.

Finance and Interest Costs

Finance and interest costs were $1.8 million for the three months ended September 30, 2010, compared to $1.9 million for the three months ended September 30, 2009. Finance and interest costs relate primarily to interest accrued on our senior secured convertible notes and our convertible debentures.  Interest decreased due to the partial conversion of the note to equity.

Other (Income) Expense

We had $2.7 million of other expenses for the three months ended September 30, 2010, versus $1.6 million for the three months ended September 30, 2009. In addition to the interest and finance costs discussed above, unrealized gains related to the change in the fair value of the derivative contract liability went from a $.3 million gain for the three months ended September 30, 2009 to a loss of $0.9 million for the three months ended September 30, 2010. The derivative liabilities relate to the fair value of the beneficial conversion feature of our convertible debentures and senior secured convertible notes issued in 2006, and the fair value of the related warrants. Under guidance from ASC 815, the Company is required to report the liability at fair value and record the fluctuation in the fair value to current operations.

Nine Months Ended September 30, 2010, Compared to Nine Months Ended September 30, 2009

Revenues

Revenue from oil and gas sales was $365 thousand for the nine months ended September 30, 2010 compared to $420 thousand for the nine months ended September 30, 2009. The decrease in production revenue was primarily due to a decrease in production volumes due to the natural decline in the wells offset by slightly higher prices.

Operating Expenses

Our operating costs totaled $780 thousand for the nine months ended September 30, 2010, compared to $1,265 thousand for the nine months ended September 30, 2009. The $480 thousand decrease in expenses was primarily due to the decrease of $396 thousand in general and administrative expenses.

General and Administrative

Total general and administrative costs were $550 thousand for the nine months ended September 30, 2010, versus $947 thousand for the nine months ended September 30, 2009, a net decrease of $397 thousand. The $397 thousand decrease was due to lower legal and accounting fees because of lower activity.

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Finance and Interest Costs

Finance and interest costs were $5.62 million for the nine months ended September 30, 2010, compared to $5.63 million for the nine months ended September 30, 2009. Finance and interest costs relate primarily to interest accrued on our senior secured convertible notes and our convertible debentures. Interest and finance costs decreased because part of the convertible debentures payable has been converted to equity.

Other (Income) Expense

We had $5.7 million other expenses for the nine months ended September 30, 2010, versus $4.7 million for the nine months ended September 30, 2009. In addition to the interest and finance costs discussed above, unrealized gains related to the change in the fair value of the derivative contract liability went from $0.8 million for the nine months ended September 30, 2009 to $0.1 million for the nine months ended September 30, 2010. The derivative liabilities relate to the fair value of the beneficial conversion feature of our convertible debentures and senior secured convertible notes issued in 2006, and the fair value of the related warrants. Under guidance from ASC 815, the Company is required to report the liability at fair value and record the fluctuation in the fair value to current operations.

Loss from Discontinued Operations

The loss from discontinued operations went from $1.5 million for the nine months ended September 30, 2009 to zero for the nine months ended September 30, 2010. The loss in 2009 relates to the sale of drilling equipment which we repossessed from CamTex Energy in March 2009.

Related Party Transactions

The Company paid management and consulting fees to its Directors, persons related to Directors or entities controlled by Directors. The total expense for these fees during the nine months ended September 30, 2010 was $63,000. As of September 30, 2010, the outstanding balance owed related to these fees was $60,000.

Off Balance Sheet Arrangements

None

Liquidity and Capital Resources

We have incurred significant losses from operations and we are in default on the terms of our senior secured convertible notes and convertible debentures as of October 1, 2008. These factors have raised substantial doubt about the Company’s ability to continue as a going concern. Our financial position is critically dependent upon the following: (1) successful discovery and economical recovery of adequate hydrocarbons on our properties; (2) access to additional equity and/or other forms of funding; (3) finding a joint venture partner to farm-in and develop our properties; and (4) obtaining a forbearance and deferral of interest and principal payments from the holders of our senior secured convertible notes and convertible debentures. There can be no assurance that we will be successful in any of these matters. As the Company has no debt or equity funding commitments, we will need to rely upon best efforts financings. There can be no assurance that the Company will be successful in raising the required capital. The failure to raise sufficient capital through future debt or equity financings or otherwise may force us to curtail operations, sell assets, or it may result in the failure of our business.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the Company is collected and communicated to management to allow timely decisions regarding required disclosures. The Chief Executive Officer and the Chief Financial Officer have concluded, based on their evaluation as of September 30, 2010 that, as a result of the following material weaknesses in internal control over financial reporting as described further in the Company’s Annual Report on Form 10-K filed with the SEC on April 15, 2010, disclosure controls and procedures were not effective in providing reasonable assurance that material information is made known to them by others within the Company:

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a) We do not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of generally accepted accounting principles commensurate with our complexity and our financial accounting and reporting requirements. We have limited experience in the areas of financial reporting and disclosure controls and procedures. As a result, there is a lack of monitoring of the financial reporting process and there is a reasonable possibility that material misstatements of the consolidated financial statements, including disclosures, will not be prevented or detected on a timely basis; and b) Due to our small size, we do not have a proper segregation of duties in certain areas of our financial reporting process. The areas where we have a lack of segregation of duties include cash receipts and disbursements, approval of purchases and approval of accounts payable invoices for payment. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely basis.

Changes in internal control over financial reporting

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We have, however, modified our internal control over financial reporting during our most recent year by adding additional advisors to address deficiencies in the financial closing, review and analysis process, which has improved our internal control over financial reporting. On January 15, 2010 we hired a new Chief Financial Officer to further strengthen our internal controls.

PART II.  OTHER INFORMATION

Item 1. Legal Proceedings

The Company is a party to various material proceedings, which are described in the Company’s Annual Report on Form 10-K filed for the year ended December 31, 2009 under the caption “Item 3. Legal Proceedings”.

As described in the Company’s Annual Report on Form 10-K filed for the year ended December 31, 2009, in August 27, 2009, the Company filed a claim against a third party relating to payments made by that third party to Barnico Drilling, Inc. in 2009 despite receiving notice of the Company’s security interest in Barnico’s accounts receivable.  This claim has been amended to include George Barnes as an individual defendant.  

The Company has also filed suit against Barnes and related parties on claims arising out of or related to Barnes’ duties and obligations as a former officer and director, and for cancellation of certain royalty interest deeds to Barnes and related parties.  Barnes and related parties have filed counterclaims against the Company.  Management, after consultation with counsel, believes that the likelihood of liability, if any, for these counterclaims is remove, and should liability be incurred, the counterclaims will not have a material adverse effect on the Company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table describes all securities we issued during the period covered by this report without registering the securities under the Securities Act.

(A)   With respect to sales designated by “Sec. 4(2),” these shares were issued pursuant to the exemption from registration contained in to Section 4(2) of the Securities Act of 1933 as privately negotiated, isolated, non-recurring transactions not involving any public offer or solicitation. Each purchaser represented that such purchaser’s intention to acquire the shares for investment only and not with a view toward distribution. We requested our stock transfer agent to affix appropriate legends to the stock certificate issued to each purchaser and the transfer agent affixed the appropriate legends. Each purchaser was given adequate access to sufficient information about us to make an informed investment decision. None of the securities were sold through an underwriter and accordingly, there were no underwriting discounts or commissions involved.

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Item 3. Defaults upon Senior Securities

The Company is in default of the terms of its senior secured convertible notes and convertible debentures. The default was effective on October 1, 2008 due to our inability to make interest payments on the senior secured convertible notes that were due October 1, 2008, January 1, 2009, April 1, 2009, July 1, 2009 and October 1, 2009. This resulted in a cross-default under the terms of our convertible debentures. The principal amount of the senior secured convertible notes and convertible debentures is $53.8 million and $1.0 million, respectively, as of September 30, 2010. Accrued interest on these amounts totaled approximately $17.8 million as of September 30, 2010. Upon an event of default, the note holders and debenture holders may require the Company to redeem all or a portion of the notes and debentures.

Item 4. (Removed and Reserved)

Item 5. Other Information

On July 26, 2010 Michael Studdard resigned as member of the Company’s board of directors. Mr. Studdard’s resignation was not the result of any disagreement with the Company on any matter relating to operations, policies or practices. Also on July 26, 2010, Roboco Energy, an entity owned by Mr. Studdard and others, returned to the Company its 3.00% overriding royalty interests in the Company’s mineral properties in Anderson and Freestone Counties.

Item 6.  Exhibits

The following exhibits are attached hereto or are incorporated by reference:

* Filed herewith

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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.

WENTWORTH ENERGY, INC.

Date: November 16, 2010

/s/ DAVID W. STEWARD                           

David W. Steward, duly authorized officer

and Principal Executive Officer

Date: November 16, 2010

/s/ ALLEN MCGEE                                    

Allen McGee, Principal Financial Officer

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