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**UNITED STATES********SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**x****     ****ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended June 30, 2009**

 

**o****        ****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from              to              **

 

**Commission File Number 001-32942**

 

**EVOLUTION PETROLEUM CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Nevada**                                                      | ** ** | **41-1781991**                     |
|-----------------------------------------------------------------|------------|------------------------------------|
| (State  or other jurisdiction of incorporation or organization) |       | (IRS  Employer Identification No.) |

 

**2500 CityWest Blvd., Suite 1300, Houston, Texas 77042**

(Address of principal executive offices and zip code)

 

**(713) 935-0122**

(Registrant’s telephone number, including area code)

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.  Yes:  ̈ No: x

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.  Yes:  ̈ No: x

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes:  x No: o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes: o No: o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. x

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company. Seethe definition of “large accelerated filer”, “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer  o |   | Accelerated filer  o         |
|--------------------------------------|--------|----------------------------------------|
|                                 |   |                                   |
| Non-accelerated filer  o   |   | Smaller reporting company  x |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act.).  Yes: o No: x

 

Theaggregate market value of the voting and non-voting common equity held bynon-affiliates on December 31, 2008, the last business day of theregistrant’s most recently completed second fiscal quarter, based on theclosing price on that date of $1.20 on the NYSE Amex was $15,748,620.

 

Thenumber of shares outstanding of the registrant’s common stock, par value$0.001, as of September 23, 2009, was 26,993,138.

 

 

 

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**EVOLUTIONPETROLEUM CORPORATION AND SUBSIDIARIES**

**2009ANNUAL REPORT ON FORM 10-K**

**TABLE OF CONTENTS**

 
| ** **        | ** **                                                                                                          | **Page**   |
|-------------------|---------------------------------------------------------------------------------------------------------------------|------------|
| **PART I**   | ** **                                                                                                          | ** ** |
|              |                                                                                                                |       |
| Item 1.           | Business                                                                                                            | 5          |
|              |                                                                                                                |       |
| Item 1A.          | Risk Factors                                                                                                        | 11         |
|              |                                                                                                                |       |
| Item 1B.          | Unresolved Staff  Comments                                                                                          | 19         |
|              |                                                                                                                |       |
| Item 2.           | Properties                                                                                                          | 19         |
|              |                                                                                                                |       |
| Item 3.           | Legal  Proceedings                                                                                                  | 22         |
|              |                                                                                                                |       |
| Item 4.           | Submission of  Matters to a Vote of Security Holders                                                                | 22         |
|              |                                                                                                                |       |
| **PART II**  | ** **                                                                                                          | **22**     |
|              |                                                                                                                |       |
| Item 5.           | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 22         |
|              |                                                                                                                |       |
| Item 6.           | Selected Financial  Data                                                                                            | 24         |
|              |                                                                                                                |       |
| Item 7.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 26         |
|              |                                                                                                                |       |
| Item 7A.          | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 34         |
|              |                                                                                                                |       |
| Item 8.           | Financial Statements  and Supplementary Data                                                                        | 35         |
|              |                                                                                                                |       |
| Item 9.           | Changes In and  Disagreements with Accountants on Accounting and Financial Disclosure                               | 58         |
|              |                                                                                                                |       |
| Item 9A.          | Controls and  Procedures                                                                                            | 58         |
|              |                                                                                                                |       |
| Item 9B.          | Other Information                                                                                                   | 59         |
|              |                                                                                                                |       |
| **PART III** |                                                                                                                | **59**     |
|              |                                                                                                                |       |
| Item 10.          | Directors,  Executive Officers and Corporate Governance                                                             | 59         |
|              |                                                                                                                |       |
| Item 11.          | Executive  Compensation                                                                                             | 59         |
|              |                                                                                                                |       |
| Item 12.          | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 59         |
|              |                                                                                                                |       |
| Item 13.          | Certain  Relationships and Related Transactions, and Director Independence                                          | 59         |
|              |                                                                                                                |       |
| Item 14.          | Principal  Accounting Fees and Services                                                                             | 59         |
|              |                                                                                                                |       |
| **PART IV**  |                                                                                                                | **60**     |
|              |                                                                                                                |       |
| Item 15.          | Exhibits and  Financial Statement Schedules                                                                         | 60         |

 

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*This Form 10-K and theinformation referenced herein contain forward-looking statements within themeaning of the Private Securities Litigations Reform Act of 1995, Section 27Aof the Securities Act of 1933 and Section 21E of the Securities Exchange Actof 1934. The words “plan,” “expect,” “project,” “estimate,” “assume,” “believe,”“anticipate,” “intend,” “budget,” “forecast,” “predict” and other similarexpressions are intended to identify forward-looking statements. Thesestatements appear in a number of places and include statements regarding ourplans, beliefs or current expectations, including the plans, beliefs andexpectations of our officers and directors.* *When considering anyforward-looking statement, you should keep in mind the risk factors that couldcause our actual results to differ materially from those contained in anyforward-looking statement. Important factors that could cause actual results todiffer materially from those in the forward-looking statements herein includethe timing and extent of changes in commodity prices for oil and natural gas,operating risks and other risk factors as described in our 2008 Annual Reporton Form 10-K for the year ended June 30, 2008 as filed with theSecurities and Exchange Commission. Furthermore, the assumptions that supportour forward-looking statements are based upon information that is currentlyavailable and is subject to change. We specifically disclaim all responsibilityto publicly update any information contained in a forward-looking statement orany forward-looking statement in its entirety and therefore disclaim anyresulting liability for potentially related damages. All forward-lookingstatements attributable to Evolution Petroleum Corporation are expresslyqualified in their entirety by this cautionary statement.*

 

*We use the terms, “EPM,” “Company,”“we,” “us” and “our” to refer to Evolution Petroleum Corporation.*

 

**GLOSSARYOF SELECTED PETROLEUM TERMS**

 

The followingabbreviations and definitions are terms commonly used in the crude oil andnatural gas industry and throughout this prospectus:

 

“BBL.” A standard measureof volume for crude oil and liquid petroleum products; one barrel equals 42U.S. gallons.

 

“BCF.” Billion Cubic Feetof natural gas at standard temperature and pressure.

 

“BOE.” Barrels of oilequivalent. BOE is calculated by converting 6 MCF of natural gas to 1 BBL ofoil.

 

“BTU” or “British ThermalUnit.” The standard unit of measure of energy equal to the amount of heatrequired to raise the temperature of one pound of water 1 degree Fahrenheit.One Bbl of crude is typically 5.8 MMBTU, and one standard MCF is typically 1MMBTU.

 

“CO2.” Carbon dioxide, a gas that can be found innaturally occurring reservoirs, typically associated with ancient volcanoes,and also is a major byproduct from manufacturing and power production, alsoutilized in enhanced oil recovery through injection into an oil reservoir.

 

“EOR.” Enhanced OilRecovery projects involve injection of heat, miscible or immiscible gas, orchemicals into oil reservoirs, typically following full primary and secondarywaterflood recovery efforts, in order to gain incremental recovery of oil fromthe reservoir.

 

“Field.” An areaconsisting of a single reservoir or multiple reservoirs all grouped on orrelated to the same individual geologic structural feature and/or stratigraphicfeature.

 

“Farmout.”Sale or transfer of all or part of the operating rights from the workinginterest owner (the assignor or farmout party), to an assignee (the farminparty) who assumes all or some of the burden of development, in return for aninterest in the property. The assignor may retain an overriding royalty or anyother type of interest. For Federal tax purposes, a farmout may be structuredas a sale or lease, depending on the specific rights and carved out interestsretained by the assignor.

 

“Gross Acres or GrossWells.” The total acres or number of wells participated in, regardless of theamount of working interest owned.

 

“Horizontal Drilling”Involves drilling horizontally out from an existing vertical well bore, therebypotentially increasing the area and reach of the well bore that is in contactwith the reservoir.

 

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“Hydraulic Fracturing”Involves pumping a fluid with or without particulates into a formation at highpressure, thereby creating fractures in the rock and leaving the particulatesin the fractures to ensure that the fractures remain open, thereby potentiallyincreasing the ability of the reservoir to produce oil or gas.

 

“LOE.” Means leaseoperating expense(s), a current period expense incurred to operate a well.

 

“MBOE.” One thousandbarrels of oil equivalent.

 

“MCF.” One thousand cubicfeet of natural gas at standard conditions, being approximately sea levelpressure and 60 degrees Fahrenheit temperature. Standard pressure in the stateof Louisiana is deemed to be 15.025 psi by regulation, but varies in otherstates.

 

“MMBTU.” One millionBritish thermal units.

 

“MMCF.” One million cubicfeet of natural gas at standard temperature and pressure.

 

“Net Acres or Net Wells.”The sum of the fractional working interests owned in gross acres or grosswells.

 

“NGL.” Natural gasliquids, being the combination of ethane, propane, butane and natural gasolinesthat can be removed from natural gas through processing, typically throughrefrigeration plants that utilize low temperatures, or through J-T plants thatutilize compression, temperature reduction and expansion to a lower pressure.

 

“NYMEX.” New YorkMercantile Exchange.

 

“Operator.”  An oiland gas joint venture participant that manages the joint venture, pays venturecosts and bills the venture’s non-operators for their share of venture costs.The operator is also responsible to market all oil and gas production, exceptfor those non-operators who take their production in-kind.

 

“Overriding Royalty.” Aroyalty interest that is created out of the operating or working interest.Unlike a royalty interest, an overriding royalty interest terminates with theoperating interest from which it was created or carved out of. See “royaltyinterest”.

 

“Permeability.” Themeasure of ease with which a fluid can move through a reservoir.

 

“Porosity.” (of sand orsandstone). The relative volume of the pore space (or open area) compared tothe total bulk volume of the reservoir.

 

“Proved DevelopedReserves.” Proved Reserves that can be expected to be recovered throughexisting wells with existing equipment and operating methods. Additional oiland gas expected to be obtained through the application of fluid injection orother improved recovery techniques for supplementing the natural forces andmechanisms of primary recovery should be included as “proved developed reserves”only after testing by pilot project or after the operation of an installedprogram has confirmed through production responses that increased recovery willbe achieved.

 

“Proved DevelopedNonproducing Reserves (“PDNP”).” Proved Reserves that have been developed andno material amount of capital expenditures are required to bring on production,but production has not yet been initiated due to timing, markets, or lack ofthird party completed connection to a gas sales pipeline.

 

“Proved DevelopedProducing Reserves (“PDP”).” Proved Reserves that have been developed andproduction has been initiated.

 

“Proved Reserves.”Estimated quantities of crude oil, natural gas, and natural gas liquids whichgeological and engineering data demonstrate with reasonable certainty to berecoverable in future years from known reservoirs under existing economic andoperating conditions, i.e., prices and costs as of the date the estimate ismade. Prices include consideration of changes in existing prices provided onlyby contractual arrangements, but not on escalations based upon futureconditions.

 

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“Proved UndevelopedReserves (“PUD”).” Reserves that are expected to be recovered from new wells onundrilled acreage or from existing wells where a relatively major expenditureis required for recompletion. Reserves on undrilled acreage are limited tothose drilling units offsetting productive units that are reasonably certain ofproduction when drilled.

 

Proved reserves for otherundrilled units can be claimed only where it can be demonstrated with certaintythat there is continuity of production from the existing productive formation.Proved undeveloped reserves may not include estimates attributable to anyacreage for which an application of fluid injection or other improved recoverytechnique is contemplated, unless such techniques have been proved effective byactual tests in the area and in the same reservoir.

 

“PSI,” or pounds per square inch, a measure ofpressure. Pressure is typically measured as “psig”, or the pressure in excessof standard atmospheric pressure.

 

“Present Value.” Whenused with respect to oil and gas reserves, present value means the estimatedfuture net revenues computed by applying current prices of oil and gas reserves(with consideration of price changes only to the extent provided by contractualarrangements) to estimated future production of proved oil and gas reserves asof the date of the latest balance sheet presented, less estimated futureexpenditures (based on current costs to be incurred in developing and producingthe proved reserves) computed using a discount factor and assuming continuationof existing economic conditions.

 

“Productive Well.” A wellthat is producing oil or gas or that is capable of production.

 

“PV-10.” Means thepresent value, discounted at 10% per annum, of future net revenues (estimatedfuture gross revenues less estimated future costs of production, development,and asset retirement costs) associated with proved reserves and is notnecessarily the same as market value. PV-10 does not include estimated future income taxes.

 

“Royalty” or “RoyaltyInterest.” The mineral owner’s share of oil or gas production (typicallybetween 1/8 and 1/4), free of costs, but subject to severance taxes unless thelessor is a government. In certain circumstances, the royalty owner bears aproportionate share of the costs of making the natural gas saleable, such asprocessing, compression and gathering. A royalty interest that is coterminouswith an operating or working interest is an “overriding royalty” interest.

 

“Shut-in Well.” A wellthat is not on production, but has not yet been plugged and abandoned. Wellsmay be shut-in in anticipation of future utility as a producing well, pluggingand abandonment or other use.

 

“Standardized Measure.”The standardized measure is an estimate of future net cash flows associatedwith proved reserves, discounted at 10% per annum.  Future net cash flows is calculated byreducing future net revenues by estimated future income tax expenses anddiscounting at 10% per annum.  The standardizedmeasure and PV-10 are calculated in the same exact fashion, except thatthe standardized measure includes future estimated income taxes discounted at10% per annum.  The determination ofdiscounted future net cash flows under the standardized measure is inaccordance with the regulations of the SEC and the Financial AccountingStandards Board.

 

“Working Interest.” Theinterest in the oil and gas in place which is burdened with the cost ofdevelopment and operation of the property. Also called the operating interest.

 

“Workover.” A remedialoperation on a completed well to restore, maintain or improve the well’sproduction.

 

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**Item1.  Business**

 

**General**

 

The terms “we,” “us,” “our,”“our Company” and “EPM” refer to Evolution Petroleum Corporation, a Nevadacorporation formerly known as Natural Gas Systems, Inc. (Nevada, “NGS”),and, unless the context indicates otherwise, also includes our wholly-ownedsubsidiaries.  Natural Gas Systems, Inc.(Delaware, “Old NGS”), a private Delaware corporation formed in September 2003was subsequently merged into NGS.

 

Our petroleum operationsbegan in September of 2003. We acquire established crude oil and naturalgas resources and exploit them through the application of conventional andspecialized technology, with the objective of increasing production, ultimaterecoveries, or both.

 

Our team is broadlyexperienced in oil and gas operations, development, acquisitions and financing.We follow a strategy of outsourcing most of our property accounting, humanresources, administrative and non-core functions.

 

Our principal executiveoffices are located at 2500 City West Blvd, Suite 1300, Houston, Texas77042, and our telephone number is (713) 935-0122. We maintain a website atwww.evolutionpetroleum.com, but information contained on our website does notconstitute part of this document.

 

Our stock is traded onthe NYSE Amex under the ticker symbol “EPM”. Prior to July 17, 2006, our stock was quoted on the OTC BulletinBoard under the symbol “NGSY.OB”.  Priorto May 26, 2004, our stock was quoted on the OTC Bulletin Board under thesymbol “RLYI.OB”.

 

At June 30, 2009, wehad eleven full-time employees, not including contract personnel and outsourcedservice providers.

 

**CorporateHistory of Reverse Merger**

 

Reality Interactive, Inc.(“Reality”), a Nevada corporation that previously traded on the OTC BulletinBoard under the symbol RLYI.OB and the predecessor of Evolution PetroleumCorporation, was incorporated on May 24, 1994, for the purpose ofdeveloping technology-based knowledge solutions for the industrialmarketplace.  On April 30, 1999,Reality ceased business operations, sold substantially all of its assets andterminated all of its employees. Subsequent to ceasing operations, Reality explored other potentialbusiness opportunities to acquire or merge with another entity while continuingto file reports with the Securities and Exchange Commission (“SEC”).

 

On May 26, 2004, OldNGS merged into a wholly owned subsidiary of Reality.  Reality was thereafter renamed Natural GasSystems, Inc. (“NGS”) and adopted a June 30 fiscal year end.  As part of the merger, the officers anddirectors of Reality resigned, the officers and directors of Old NGS became theofficers and directors of NGS, and the crude oil and natural gas business ofOld NGS became that of NGS.  Concurrentlywith the listing of NGS shares on the NYSE Amex (formerly American StockExchange) during July 2006, NGS was renamed Evolution Petroleum Corporationto avoid confusion with similar names traded on the NYSE Amex and to betterreflect our business model.

 

All regulatory filingsand other historical information prior to May 26, 2004 that applied toReality continue to apply to EPM after the merger.

 

**BusinessStrategy**

 

We are a petroleum company engaged primarily in theacquisition, exploitation and development of properties for the production ofcrude oil and natural gas. We acquire known, underdeveloped oil and natural gasresources and exploit them through the application of capital and technology toincrease production, ultimate recoveries, or both.

 

Our strategy is intended to generate scalabledevelopment opportunities at normally pressured depths, exhibiting relativelylow completion risk, generally longer and more predictable production lives,less expenditures on infrastructure and lower operational risks.

 

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Within this overall strategy, we pursue three specificinitiatives:

 
|   | I      |   | Enhanced oil recovery (“EOR”), using miscible and  immiscible gas flooding;                                                                  |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                   |
|   | II     |   | Conventional redevelopment of bypassed primary  resources within mature oil and natural gas fields utilizing modern  technology and our expertise; and |
|   |   |   |                                                                                                                                                   |
|   | III    |   | Unconventional gas resource development, using  modern stimulation and completion technologies.                                                        |

 

Our strategy is intendedto generate scalable development opportunities at normally pressured depths,exhibiting relatively low completion risk, generally more predictableproduction lives, less expenditures on infrastructure and lower operationalrisks. We believe that the benefits of this approach include:

 

·                  Reduced exposure to the risk of whetherresources are present;

 

·                  Reduced capital expenditures per net BOEfor infrastructure, such as roads, water handling facilities and pipelines;

 

·                  Large inventory of developmentopportunities, which provides a more predictable future stream of drillingactivity and production, as well as potentially reducing risks from short-termoil and natural gas price volatility;

 

·                  Reduced operational risks and costs associated with lower pressures andlower temperatures; and

 

·                  Control of operations, development timingand technology selection.

 

Our long term strategyand primary focus continue to be the increase in share value through theidentification and exploitation of our petroleum resources, and converting theminto proved reserves through our expertise and technology.

 

Near term, our focus ison (i) selective low cost development activities to optimize currentproduction and upgrade reserve categories, (ii) emphasizing long termshare value over near term earnings during the current period of low naturalgas prices, and (iii) using internally generated funds and our workingcapital to accomplish these objectives.

 

***Enhanced Oil Recovery (“EOR”) Property***

 

Our EOR Initiativetargets the use of miscible and immiscible gas flooding to achieve economicredevelopment and production of tertiary crude oil resources.  Field candidates are likely to have alreadycompleted primary and secondary recovery operations, generally through waterflooding.

 

DelhiField

 

The Delhi Holt Bryant Unitin the Delhi Field in Louisiana is currently our most significant asset.

 

·                  The Delhi Holt Bryant Unit is currently beingredeveloped with an EOR project utilizing CO2 technology by a subsidiary of DenburyResources Inc. as Operator;

 

·                  On May 5, 2009, the Operator reported that the 78mile Delta Pipeline from Tinsley Field to the Delhi Field had been completedand tested; and

 

·                  On August 4, 2009, the Operator publiclyannounced that CO2 injection is expected to commence by thefourth quarter of calendar 2009, with initial oil production response expectedby mid-calendar 2010.

 

We believe that the DelhiHolt Bryant Unit is a strong candidate for a CO2-EORproject due to its favorable rock characteristics, large unproven reservesremaining in place, low cost of drilling due to a relatively shallow depth and

 

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relatively close locationto naturally occurring CO2 reserves approximately 100 miles east of theDelhi Field.  We base our belief on (i) ourinternal analyses of CO2 pilot tests successfully completed in theDelhi Holt Bryant Unit by a prior field operator, (ii) our analysis offavorable analogous comparisons to successful full scale projects in the sameor similar geological formation, (iii) a competitive offering process,wherein we solicited multiple major participants with CO2-EOR expertise,funding and operating abilities, leading to confidential competitive offersmade to us in writing, (iv) our qualitative assessment that thecompetitive offers were based on the CO2-EORpotential of the Unit and not on the relatively minor associated provedreserves existing at that time, and (v) the buyer’s willingness to commita portion of its proved CO2 reserves and a $100 million minimum futureinvestment, subject to penalties for non-performance, in a CO2 project in theUnit.

 

According to publishedreports and field records, the Delhi Field was discovered in the mid-1940’s andwas extensively developed by various operators including the Sun Oil and MurphyOil companies through the drilling and completion of approximately 450 wells,most within the first few years after discovery.  According to DeGolyer & MacNaughton,the independent reservoir engineering firm engaged by us to review the project,the Delhi Field has produced approximately 192 million barrels of crude oil andsubstantial amounts of natural gas to date. Much of the natural gas productionwas processed to remove natural gas liquids and re-injected for pressuremaintenance. Beginning in the late 1950’s, the field was unitized to conduct apressure maintenance project through the injection of water into the producingreservoir in down dip injection wells (unitization is the process of combiningmultiple leases into a single ownership entity in order to simplify operationsand equitably distribute royalties when common operations are conducted overmultiple leases). Drilling operations resulted in primarily 40-acre spacingacross the unit’s 13,636 acres. A few wells were drilled below the targetedTuscaloosa and Paluxy formations. The water injection pressure maintenanceoperations did not utilize a more traditional and effective five spot floodpattern water flood that generally results in a more complete reservoir sweepand oil recovery.

 

At the time we began ouroil and natural gas operations in late September 2003, we purchasedessentially all of the working interests and an 80% net revenue interest in theDelhi Field (from the surface to the top of the Massive Anhydride formation,but excepting the Mengel Unit), for approximately $2.8 million, including theassumption of a plugging and abandonment reclamation bond.  All but 43 wells in Richland, Franklin andMadison Parishes, Louisiana had been plugged and abandoned and productionaveraged approximately 18 BOPD with no natural gas being sold due to a lack ofnatural gas processing and transportation facilities.  The best producing well was immediately lostduring a periodic sand wash work-over when water from a lower reservoir brokethrough along the casing exterior and into the producing reservoir.

 

In October of 2003,we applied an unproven lateral re-entry technology that resulted in no increasein production.  In December 2003, weinitiated a conventional development program based on re-completion of wells toother reservoirs and restoring non-producing wells to producing status.  During 2004, we refurbished a gas injectionline, converting it to a gas gathering and sales line, and placed a gasprocessing plant in the field to begin natural gas production in July of2004.  During 2005, we began a five welldevelopment drilling program aimed at reaching mostly proved undevelopedreserves left in primary “attic” positions. The culmination of these activities caused production to increase from18 BOPD to a monthly average rate of 145 BOEPD during our peak production monthin late 2005.

 

Concurrent with theseactivities, we completed internal studies indicating that the reservoirs in theDelhi Holt Bryant Unit, the dominant oil producing reservoirs, had substantialremaining recoverable oil in place. Based on positive CO2 pilots conducted by Sun Oil in 1985, andfavorable rock characteristics shown in multiple cores taken throughout theDelhi Field, we began discussions in late 2004 with potential industry partnersskilled in CO2-EOR recovery methods,.

 

During this time we alsobegan to acquire royalty and overriding royalty interests that ultimatelyaggregated 7.4%.

 

With positive industryreception, and following extended negotiations with three candidates asprospective partners, we accelerated our redevelopment plan in June 2006by selling a major portion of our Delhi Field interests, in the form of a Farmout,to Denbury Onshore LLC, a subsidiary of the Operator for all of our workinginterests in the Delhi Holt Bryant Unit and its proved reserves and 75% of ourworking interests in certain other depths of the Delhi Field (the “DelhiFarmout”).  Important aspects of thistransaction include:

 

·                  We received approximately $50 million in cash(pre-tax) to redeploy to other projects and repay all of our then outstandingdebt.

 

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·                  We retained significant participating intereststhrough a reversionary working interest of 25% (20% revenue interest net tous).  We expect the value of theseinterests (along with the separately acquired royalty and overriding royaltyinterests aggregating 7.4%) will substantially exceed the $50 million cashcomponent of the Delhi Farmout, subject to future oil prices, operatingexpenses, anticipated EOR performance and project completion by the Operator.

 

·                  The Operator committed to install a CO2-EOR project in the Holt Bryant Unit and expend aminimum additional $100 million on the project over the first 6-1/2 years,subject to penalty payments to us for shortfalls in such expenditures (as of June 2009,the Operator had reported qualifying expenditures substantially in excess ofits $100 million minimum capital expenditure obligation).  All capital expenditures related to theproject are borne by the Operator prior to payout.

 

·                  The Operator is the dominant CO2-EOR operator on the Gulf Coast, currently operating alarge number of  CO2-EOR projects and owns naturally occurring CO2 reserves thatwe believe to be sufficient to meet the needs of the Delhi project and whichhave been dedicated to the Delhi project.

 

·                  Our reversionary working interest in the CO2-EOR project is based on a defined $200 millionthreshold, subject only to expansion of the project through acquisitions, andour reversionary working interest occurs when cumulative project revenues lessdirect operating costs in the field reach the threshold.

 

·                  We further retained a 25% working interest (20% netrevenue interest) in certain other depths outside of the Holt Bryant Unitwithin the Delhi Field, and believe that additional development potential mayexist in the shallower depths.

 

In accordance with SECrules, our independent reservoir engineer may not consider the assignment ofproved reserve status for our EOR resources at Delhi until either (i) firstEOR production response occurs, projected by the Operator to occur by mid-yearcalendar 2010, or (ii) our adoption of the SEC’s “Modernization” rules thatare scheduled to become effective on January 1, 2010, which would allowconsideration of current technology and other supporting factors before firstEOR production response.

 

***Conventional Redevelopment Property***

 

Our ConventionalRedevelopment Initiative targets the economic development or redevelopment ofprimary petroleum resources previously bypassed by industry in mature,historically productive formations, generally due to inadequate technology orcommodity prices.  This includes development and commercialization ofspecialized technology for recovering incremental reserves of oil and gas.

 

Following the closing ofour Delhi Farmout in June 2006, we began the process of identifying newConventional Redevelopment projects.  Inselecting our candidates:

 

·                  We leveraged our staff’s extensive experience, gainedover many years while employed at UPRC, Anadarko Petroleum Corporation andColumbia Gas Systems in the pioneering of horizontal drilling practices adaptedto further develop and produce the Austin Chalk and Georgetown formations inthe Giddings Field in central Texas;

 

·                  We sought projects that could provide substantialearly revenues, production and net cash flows prior to future expectedproduction from the Delhi Field; and

 

·                  We sought exposure to both crude oil and natural gasopportunities.

 

GiddingsField

 

We began leasingactivities in the Giddings Field in December 2006 and acquired 20,899 and19,069 gross and net acres, respectively, of which 4,299 net acres aredeveloped as of June 30, 2009.  Inlate calendar 2007, we initiated a redevelopment drilling program in theGiddings Field targeting the Austin Chalk and Georgetown formations.  As of June 30, 2009, we have placed tenwells into production, including seven wells that were re-entered andre-drilled, one new well that was drilled and two wells that were restored toproduction through a workover.  Our totalproved reserves from our properties in the Giddings

 

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Field are 3,012,445 BOEas of June 30, 2009, down 25% since June 30, 2008, due to a 70%decline in natural gas and a 50% decline in crude oil prices during fiscal2009.  Despite these declines, our totalinvestment of approximately $26 million to date has generated substantial cashflows from 167,136 BOE of production, and we retain a PV-10 of over $35 millionplus additional unproved acreage that we believe has significant potential.

 

NeptuneProject

 

During fiscal 2009, wecompleted the leasing of 1,503 net acres in our Neptune oil project in SouthTexas.  We believe that previous drillingand production in this field by another operator have established provedreserves and additional potential on infill spacing.  We also may apply our specialized oil/watercompletion technology to further enhance recovery.  As of June 30, 2009, we recognized fourinfill (or downspaced) well locations, with 47,595 Bbls of proved undevelopedreserves from approximately 40 net acres of our holdings.  We have identified up to 79 prospectiveinfill drilling locations in the balance of our leasehold.

 

TullosField

 

On March 3, 2008, wecompleted the sale of our properties in the Tullos Field, located in LaSalleand Winn Parishes in Louisiana, for gross cash proceeds of approximately $4.6million.

 

Producing about 100 grossand 79 net barrels of oil production per day from over 150 producing wells atthe time of our divestiture, the Tullos Field required a disproportionateamount of staff effort and vendor services, thereby adversely affecting ourability to develop other projects utilizing our expertise and working capital,particularly in the Giddings Field. The field produced large volumes ofwater associated with the oil production after being downsized to only two acrespacing. Furthermore, we believe that the potential upside in the Tullos Fieldwas substantially less than that offered in our other projects, where the cashproceeds from the sale of our properties in the Tullos Field could be expectedto yield a much higher return.  Last, we had completed the testing of ouroil-on-water completion technology utilizing the one well we drilled in theTullos Field and determined that the potential of that technology could be bestrealized in other fields with greater potential (see Neptune Project).

 

***Unconventional Natural Gas Resource Property***

 

Our Unconventional NaturalGas Resource Initiative targets the use of modern stimulation and completiontechnologies for the economic development and production of tight gasformations.

 

Woodford Shale Projectsin Oklahoma

 

Following the closing ofour Delhi Farmout in June 2006, we began the process of identifyingunconventional natural gas resource projects. We chose two projects in the shallow portion of the Woodford Shale trendin Oklahoma.  In choosing these two:

 

·                  We are concentrating on projects with relatively lowunit development costs that could economically compete with other major gasfields in the region;

 

·                  We are leveraging our staff’s expertise in bothvertical and horizontal drilling and completion of tight gas formations, aprerequisite to successfully exploiting and developing these resources;

 

·                  We are focusing on well known gas shale formations;

 

·                  We have considered that these projects require largeamounts of capital over long periods of time, thereby providing reinvestmentopportunities to absorb the substantial cash flows we expect from our otherprojects, particularly Delhi; and

 

·                  We are adding natural gas exposure to balance oursubstantial crude oil exposure.

 

We began actively acquiring leases in these twoprojects in May 2007.  At June 30,2009, we had acquired approximately 24,120 and 17,617 gross and net acres,respectively, across the two projects.

 

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During the fourth quarter of our 2009 fiscal year, weinitiated a program of drilling three wells and re-entering three wellsutilizing air drilling in order to test two distinct gas bearing shale formationsand one oil sand reservoir.  We took onefull core in the Woodford Shale, the full results of which are pending.  Low pressure acid fractures resulted incommercial gas production in both gas shale formations and the company hasinitiated a long term production test of both gas shale formations following apending treatment with a larger hydraulic fracturing with sand proppant.

 

**M****arkets and Customers**

 

We market our productionto third parties in a manner consistent with industry practices.

 

In the U.S. market wherewe operate, crude oil and natural gas liquids are readily transportable andmarketable.  Since March 2005 andinto 2008, we sold all of our operated crude oil production to Plains MarketingLP, a crude oil purchaser, at competitive field prices.  In January of 2008, we also beganselling crude oil to Teppco Crude Oil, LLC, a crude oil gathering,transportation, storage and marketing company. Our agreements with both Plains Marketing LP and Teppco Crude Oil, LLCare under a normal (thirty day “evergreen”) sales contracts.  Subsequent to June 30, 2009, we amendedour contracts to sell essentially all of our crude oil to Teppco Crude Oil,LLC.  We believe that other crude oilpurchasers are readily available.

 

We sell our natural gasand natural gas liquids from our properties in the Giddings Field, under theterms of normal evergreen sales contracts at competitive prices with DCPMidstream, LP,  ETC Texas Pipeline, LTD.,and Copano Field Services/Upper Gulf Coast, L.P.  Gas sold to DCP and ETC is processed forremoval of natural gas liquids, and we receive the proceeds from the sale ofthe NGL product less a fee and certain operating expenses. The price of naturalgas sold to Copano is adjusted upward for the high BTU content.  We have no other business relationships withour crude oil, natural gas or natural gas liquids purchasers.

 

The following table setsforth purchasers of our oil and natural gas that accounted for more than 10% oftotal revenues for 2009, 2008, and 2007.

 
| ** **                | ** ** | **Year Ended June 30,** | ** ** |
|---------------------------|------------|------------------------------|------------|
| **Customer**              | ** ** | **2009**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|                      |       |                         |       |   |   |   |   |
| Plains  Marketing L.P.    |       | 40                           | %          | 67 | % | 98 | % |
| ETC  Texas Pipeline, LTD. |       | 36                           | %          | 26 | % | — |   |
| DCP  Midstream, LP        |       | 16                           | %          | — |   | — |   |

 

**Market Conditions**

 

Marketing of crude oil,natural gas, and natural gas liquids is influenced by many factors that arebeyond our control, the exact effect of which is difficult to predict. Thesefactors include changes in supply and demand, market prices, governmentregulation and actions of major foreign producers.

 

Over the past 25 years,crude oil price fluctuations have been extremely volatile, with crude oilprices varying from less than $10, to in excess of $140 per barrel. Worldwidefactors such as geopolitical, macroeconomic, supply and demand, refiningcapacity, petrochemical production and derivatives trading, among others,influence prices for crude oil.  Localfactors also influence prices for crude oil and include quality differences,regulation and transportation issues unique to certain producing regions andreservoirs.

 

Also over the past 25 years,domestic natural gas prices have been extremely volatile, ranging from $1 to$15 per MMBTU. The spot market for natural gas, changes in supply and demand,derivatives trading, pipeline availability, BTU content of the natural gas andweather patterns, among others, cause natural gas prices to be subject tosignificant fluctuations.  Due to thepractical difficulties in transporting natural gas, local and regional factorstend to influence product prices more for natural gas than for crude oil.

 

**Competition**

 

The oil and natural gasindustry is highly competitive for prospects, acreage and capital.  Our competitors include major

 

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integrated crude oil andnatural gas companies and numerous independent crude oil and natural gascompanies, individuals and drilling and income programs. Many of ourcompetitors are large, well-established companies with substantially largeroperating staffs and greater capital resources than us. Competitors arenational, regional or local in scope and compete on the basis of financialresources, technical prowess or local knowledge. The principal competitivefactors in our industry are expertise in given geographical and geologicalareas and the abilities to efficiently conduct operations, achievetechnological advantages, identify and acquire economically producible reservesand obtain affordable capital.

 

**GovernmentRegulation**

 

Crude oil and natural gasdrilling and production operations are regulated by various federal, state andlocal agencies. These agencies issue binding rules and regulations thatcarry penalties, often substantial, for failure to comply.  These regulations and rules requiremonthly, semiannual and annual reports on production amounts and water disposalamounts, and govern most aspects of operations, drilling and abandonment, aswell as crude oil spills.  We anticipatethe aggregate burden of federal, state and local regulation will continue andpotentially increase.  We also believethat our present operations materially comply with applicable regulations.  To date, such regulations have not had amaterial effect on our operations, or the costs thereof, other than asdescribed further in “Item 3. Legal Proceedings”.  We do not believe that capital expendituresrelated to environmental control facilities or other regulatory matters will bematerial in the near term.  We cannotpredict what subsequent legislation or regulations may be enacted or whateffect it will have on our operations or business.

 

**Insurance**

 

We maintain insurance onour properties and operations for risks and in amounts customary in theindustry.  Such insurance includesgeneral liability, excess liability, control of well, operators extra expense,casualty and directors & officer’s liability coverage.  Not all losses are insured, and we retaincertain risks of loss through deductibles, limits and self-retentions.  We do not carry lost profits coverage, andour aviation liability insurance coverage is limited to $1 million.

 

**Item1A. Risk Factors**

 

Risksrelated to the Company

 

**Operatingresults from oil and natural gas production may decline.**

 

In the near term, ourproduction is totally dependent on only ten wellbores at our GiddingsField.  The targeted reservoirs in theGiddings Field typically experience flush initial production, followed by steepharmonic decline rates that steadily flatten to much shallower declinerates.  While the newly drilled producingwells in the Giddings Field substantially increased our net production abovehistoric levels, without further development activities in the Giddings Field,Delhi or our other properties, or without acquisitions of producing properties,our net production of oil and natural gas will decline significantly over time,which could have a material adverse affect on our financial condition.

 

**Thetypes of resources we focus on have substantial operational risks.**

 

Our business plan focuseson the acquisition and development of known resources in partially depletedreservoirs, naturally fractured or low permeability reservoirs, or relativelyshallow reservoirs. Shallower reservoirs usually have lower pressure, whichtranslates into fewer natural gas volumes in place; low permeability reservoirsrequire more wells and substantial stimulation for development of commercialproduction; naturally fractured reservoirs require penetration of sufficientundepleted fractures to establish commercial production; and depletedreservoirs require successful application of newer technology to unlockincremental reserves.

 

Our CO2-EOR project in the Delhi Field, operated by DenburyResources Inc., requires significant amounts of CO2 reserves, the source of which may become unavailableor be curtailed.  The Operator controlsthe operations and CO2 for the project, and as a result, we have alimited ability to control or influence the development and ultimate success ofthe project.  In order to deliversufficient quantities of CO2 from the Operator’s reserves from its JacksonDome Field in Mississippi, a pipeline has been constructed to the DelhiField.  However, substantial capitalremains to be invested to fully develop the EOR project and meet all pipeline regulatoryrequirements. The Operator’s failure to manage these and other technical,strategic and logistical risks may render ultimate enhanced recoveries from theplanned CO2-EOR project, if any, to fall short ofour expectations in volume and or timing.

 

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The existing well boreswe are re-entering in the Giddings Field may have been originally drilled asfar back as the 1980’s.  As such, theycontain older casing that could be more subject to failure, or the well files,if available, may be incomplete or incorrect. Such problems can result in the complete loss of a well or a much higherdrilling and completion cost.  Our provedundeveloped locations in the Giddings Field are direct offsets to current orpreviously producing wells, and there may be unusually long fractures that willconnect our well to another producing or depleted well, thus reducing thepotential recovery, increasing our drilling costs, or delaying production dueto recovery of drilling fluid lost during drilling into the depleted fractures.

 

Our projects generallyrequire that we acquire new leases in and around established fields or otherknown resources, and drill and complete wells, some of which may be horizontal,as well as negotiate the purchase of existing well bores and productionequipment or install our proprietary artificial lift technology that has yet tobe proven in the field.  Leases may notbe available and required oil field services may not be obtainable on thedesired schedule or at the expected costs. While the projected drilling results may be considered to be low tomoderate in risk, there is no assurance as to what productive results may be obtained,if any.

 

**Ourlimited operating history and newness of our production makes it difficult topredict future results and increases the risk of an investment in our company.**

 

We commenced our crudeoil and natural gas operations in late 2003 and have a limited operatinghistory, particularly in our currently producing fields.  All of our current production is the resultof recent drilling activities, thus our future production retains substantialvariability.  Therefore, we face all therisks common to companies in their early stage of development, includinguncertainty of funding sources, high initial expenditure levels and uncertainrevenue streams, an unproven business model, and difficulties in managinggrowth.  Our prospects must be consideredin light of the risks, expenses, delays and difficulties frequently encounteredin establishing a new business. Any forward-looking statements in this reportdo not reflect any possible effects on us from the outcome of these types ofuncertainty.  Prior to the Delhi Farmout,we had incurred significant losses since the inception of our oil and naturalgas operations and we have since resumed incurring losses, except for thequarter ended June 30, 2008, in which we recognized positive operatingincome.  We cannot assure futureprofitability or success.  While membersof our management team have previously carried out or been involved withacquisition and production activities in the crude oil and natural gas industrywhile employed by us and other companies, we cannot assure you that ourintended acquisition targets and development plans will lead to the successfuldevelopment of crude oil and natural gas production or additional revenue.

 

**We maybe unable to continue licensing from third parties the technologies that we usein our business operations.**

 

As is customary in thecrude oil and natural gas industry, we utilize a variety of widely availabletechnologies in the crude oil and natural gas development and drillingprocess.  We do not have any patents orcopyrights for the technology we currently utilize, but a patent application ispending on one technology. We license or purchase services from the holders ofsuch technology, or outsource the technology integral to our business fromthird parties.  Our commercial successwill depend in part on these sources of technology and assumes that suchsources will not infringe on the proprietary rights of others. We cannot becertain whether any third-party patents will require us to utilize or developalternative technology or to alter our business plan, obtain additionallicenses, or cease activities that infringe on third-parties’ intellectualproperty rights. Our inability to acquire any third-party licenses, or tointegrate the related third-party products into our business plan, could resultin delays in development unless and until equivalent products can beidentified, licensed, and integrated. Existing or future licenses may notcontinue to be available to us on commercially reasonable terms or at all.Litigation, which could result in substantial cost to us, may be necessary toenforce any patents licensed to us or to determine the scope and validity ofthird-party obligations.

 

**Our proprietary technology maynot be awarded patent protection and may not result in a commercial service orproduct.**

 

We have developed andfield tested certain artificial lift technology that we hope to commercializeand from which we expect to generate material value. Our success incommercializing the technology will depend upon additional positive fieldtests, acceptance by industry and our ability to defend the technology fromcompetitors through confidentiality and/or patent protection.  Although our patent is pending, there is noassurance that a patent will be awarded or that we will have the ability toexercise patent defense against competitors.

 

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**Regulatoryand accounting requirements may require substantial reductions in reportingproven reserves.**

 

We review on a periodicbasis the carrying value of our crude oil and natural gas properties under theapplicable rules of the various regulatory agencies, including the SEC.Under the full-cost method of accounting that we use, the carrying value ofproved reserves of crude oil and natural gas properties may not exceed thepresent value of estimated future net after-tax cash flows from provedreserves, discounted at 10%. Application of this “ceiling” test generallyrequires pricing future revenues at the un-escalated prices in effect as of theend of our fiscal quarter and requires a write down of the carrying value foraccounting purposes if the ceiling is exceeded, even if prices declined foronly a short period of time. We may in the future be required to write down thecarrying value of our crude oil and natural gas properties when crude oil andnatural gas prices are depressed or unusually volatile. Whether we will berequired to take such a charge will depend in part on the prices for crude oiland natural gas at the end of any fiscal period and the effect of reserveadditions or revisions and capital expenditures during such period. If a writedown is required, it would result in a charge to our earnings but would notimpact our cash flow from operating activities.

 

**Our profitability is highlydependent on the prices of crude oil, natural gas, and natural gas liquids,which have historically been very volatile.**

 

Our estimated provedreserves, revenues, profitability, operating cash flow and future rate ofgrowth are highly dependent on the prices of crude oil, natural gas and NGLs,which are affected by numerous factors beyond our control.  Historically, these prices have been veryvolatile and are likely to remain volatile in the future.  A significant and extended downward trend incommodity prices would have a material adverse effect on our revenues,profitability and cash flow, and could result in a reduction in the carryingvalue of our oil and natural gas properties and the amounts of our estimatedproved oil and natural gas reserves.  Tothe extent that we have not hedged our production with derivative contracts orfixed-price contracts, any significant and extended decline in oil and naturalgas prices may adversely affect our financial position.

 

**We maybe unable to acquire and develop the additional oil and natural gas reservesthat are required in order to sustain our business operations.**

 

In general, the volumesof production from crude oil and natural gas properties decline as reserves aredepleted with the rate of decline depending on reservoir characteristics.Except to the extent we acquire properties containing proved reserves orconduct successful development activities, or both, our proved reserves willdecline. Our future crude oil and natural gas production is, therefore, highlydependent upon our level of success in finding or acquiring additionalreserves. Due to the Delhi Farmout, the sale of our properties in the Tullos Fieldand the decline characteristics of our Giddings wells, our near-term futuregrowth and financial condition are dependent on our ability to developadditional oil and natural gas reserves.

 

**We aresubject to substantial operating risks that may adversely affect our results ofoperations.**

 

The crude oil and naturalgas business involves numerous operating hazards such as well blowouts,mechanical failures, explosions, uncontrollable flows of crude oil, natural gasor well fluids, fires, formations with abnormal pressures, hurricanes,flooding, pollution, releases of toxic gas and other environmental hazards andrisks. We could suffer substantial losses as a result of any of these events.While we carry general liability, control of well, and operator’s extra expensecoverage typical in our industry, we are not fully insured against all risksincident to our business.

 

We may not be theoperator of some of our wells in the future. As a result, our operating risksfor those wells and our ability to influence the operations for these wellswill be less subject to our control. Operators of these wells may act in waysthat are not in our best interests. If this occurs, the development of, andproduction of crude oil and natural gas from, some wells may not occur whichwould have an adverse affect on our results of operations.

 

**The lossof key personnel could adversely affect us.**

 

We depend to a largeextent on the services of certain key management personnel, including ourexecutive officers, the loss of any of whom could have a material adverseaffect on our operations.  In particular,our future success is dependent upon Robert S. Herlin, our President and ChiefExecutive Officer, Sterling H. McDonald, our Chief Financial Officer, and DarylV. Mazzanti, our Vice-President of Operations, for sourcing, evaluating andclosing deals, capital raising, and oversight of development andoperations.  Presently, the Company isnot a beneficiary of any key man insurance.

 

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**The lossof any of our skilled technical personnel could adversely affect our business.**

 

We depend to a largeextent on the services of skilled technical personnel to lease, drill,complete, operate and maintain our crude oil and natural gas fields. We do nothave the resources to perform all of these services and therefore we outsourcemany of our requirements. Additionally, as our production increases, so does ourneed for such services. Generally, we do not have long-term agreements with ourdrilling and maintenance service providers. Accordingly, there is a risk thatany of our service providers could discontinue servicing our crude oil andnatural gas fields for any reason. Although we believe that we could establishalternative sources for most of our operational and maintenance needs, anydelay in locating, establishing relationships, and training our sources couldresult in production shortages and maintenance problems, with a resulting lossof revenue to us. We also rely on third-party carriers for the transportationand distribution of our production, the loss of any of which could have amaterial adverse affect on our operations.

 

**We mayhave difficulty managing future growth and the related demands on our resourcesand may have difficulty in achieving future growth.**

 

Although we hope toexperience growth through acquisitions and development activity, any suchgrowth may place a significant strain on our financial, technical, operationaland administrative resources. Our ability to grow will depend upon a number offactors, including:

 

·                  our ability to identify and acquire newdevelopment or acquisition projects;

·                  our ability to develop existingproperties;

·                  our ability to continue to retain andattract skilled personnel;

·                  the results of our development programand acquisition efforts;

·                  the success of our technologies;

·                  hydrocarbon prices;

·                  drilling, completion and equipmentprices;

·                  our ability to successfully integrate newproperties; and

·                  our access to capital.

 

We can not assure youthat we will be able to successfully grow or manage any such growth.

 

**We facestrong competition from larger oil and gas companies.**

 

Our competitors includemajor integrated crude oil and natural gas companies and numerous independentcrude oil and natural gas companies, individuals and drilling and incomeprograms. Many of our competitors are large, well-established companies withsubstantially larger operating staffs and greater capital resources than wehave. We may not be able to successfully conduct our operations, evaluate andselect suitable properties and consummate transactions in this highlycompetitive environment. Specifically, these larger competitors may be able topay more for development projects and productive crude oil and natural gasproperties and may be able to define, evaluate, bid for and purchase a greaternumber of properties and prospects than our financial or human resourcespermit. In addition, such companies may be able to expend greater resources onhiring contract service providers, obtaining oilfield equipment and acquiringthe existing and changing technologies that we believe are and will beincreasingly important to attaining success in our industry.

 

**Thecrude oil and natural gas reserves included in this report are only estimatesand may prove to be inaccurate.**

 

There are numerousuncertainties inherent in estimating crude oil and natural gas reserves andtheir estimated values. The reserves discussed in this report are onlyestimates that may prove to be inaccurate because of these uncertainties.Reservoir engineering is a subjective and inexact process of estimatingunderground accumulations of crude oil and natural gas that cannot be measuredin an exact manner. Estimates of economically recoverable crude oil and naturalgas reserves depend upon a number of variable factors, such as historicalproduction from the area compared with production from other producing areasand assumptions concerning effects of regulations by governmental agencies,future crude oil and natural gas prices, future operating costs, severance andexcise taxes, development costs and work-over and remedial costs. Some or allof these assumptions may in fact vary considerably from actual results. Forthese reasons, estimates of the economically recoverable quantities of crudeoil and natural gas attributable to any particular group of properties,classifications of such

 

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reserves based on risk ofrecovery, and estimates of the future net cash flows expected there fromprepared by different engineers or by the same engineers but at differenttimes, may vary substantially. Accordingly, reserve estimates may be subject todownward or upward adjustment. Actual production, revenue and expenditures withrespect to our reserves will likely vary from estimates, and such variances maybe material. The information regarding discounted future net cash flowsincluded in this report should not be considered as the current market value ofthe estimated crude oil and natural gas reserves attributable to ourproperties. As required by the SEC, the estimated discounted future net cashflows from proved reserves are based on prices and costs as of the date of theestimate, while actual future prices and costs may be materially higher orlower. Actual future net cash flows also will be affected by factors such asthe amount and timing of actual production, supply and demand for crude oil andnatural gas, increases or decreases in consumption, and changes in governmentalregulations or taxation. In addition, the 10% discount factor, which is requiredby the SEC to be used in calculating discounted future net cash flows forreporting purposes, is not necessarily the most appropriate discount factorbased on interest rates in effect from time to time and risks associated withus or the crude oil and natural gas industry in general.

 

**Wecannot market the crude oil and natural gas that we produce without theassistance of third parties.**

 

The marketability of thecrude oil and natural gas that we produce depends upon the proximity of ourreserves to, and the capacity of, facilities and third-party services,including crude oil and natural gas gathering systems, pipelines, trucking orterminal facilities, and processing facilities. The unavailability or lack ofcapacity of such services and facilities could result in the shut-in ofproducing wells or the delay or discontinuance of development plans forproperties. A shut-in or delay or discontinuance could adversely affect ourfinancial condition. In addition, federal and state regulation of crude oil andnatural gas production and transportation could affect our ability to produceand market our crude oil and natural gas on a profitable basis.

 

RisksRelating to the Oil and Gas Industry

 

**Crudeoil and natural gas development, re-completion of wells from one reservoir toanother reservoir, restoring wells to production and drilling and completingnew wells are speculative activities and involve numerous risks and substantialand uncertain costs.**

 

Our growth will bematerially dependent upon the success of our future development program.  Drilling for crude oil and natural gas andre-working existing wells involve numerous risks, including the risk that nocommercially productive crude oil or natural gas reservoirs will beencountered.  The cost of drilling, completingand operating wells is substantial and uncertain, and drilling operations maybe curtailed, delayed or cancelled as a result of a variety of factors beyondour control, including:

 

·                  unexpected drilling conditions;

·                  pressure fluctuations or irregularitiesin formations;

·                  equipment failures or accidents;

·                  inability to obtain leases on economicterms, where applicable;

·                  adverse weather conditions;

·                  compliance with governmental requirements;and

·                  shortages or delays in the availabilityof drilling rigs or crews and the delivery of equipment.

 

Drilling or re-working isa highly speculative activity.  Even whenfully and correctly utilized, modern well completion techniques such as HydraulicFracturing and Horizontal Drilling do not guarantee that we will find crude oiland/or natural gas in our wells.  Ourfuture drilling activities may not be successful and, if unsuccessful, suchfailure would have an adverse affect on our future results of operations andfinancial condition.  We cannot assureyou that our overall drilling success rate or our drilling success rate foractivities within a particular geographic area will not decline.  We may identify and develop prospects througha number of methods, some of which do not include Horizontal Drilling orHydraulic Fracturing, and some of which may be unproven.  The drilling and results for these prospectsmay be particularly uncertain.  Ourdrilling schedule and costs may vary from our capital budget.  The final determination with respect to thedrilling of any scheduled or budgeted prospects will be dependent on a numberof factors, including, but not limited to:

 

·                  the results of previous developmentefforts and the acquisition, review and analysis of data;

 

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·                  the availability of sufficient capital resources to usand the other participants, if any, for the drilling of the prospects;

·                  the approval of the prospects by otherparticipants, if any, after additional data has been compiled;

·                  economic and industry conditions at thetime of drilling, including prevailing and anticipated prices for crude oil andnatural gas and the availability of drilling rigs and crews;

·                  our financial resources and results;

·                  the availability of leases and permits onreasonable terms for the prospects; and

·                  the success of our drilling technology.

 

We cannot assure you thatthese projects can be successfully developed or that the wells discussed will,if drilled, encounter reservoirs of commercially productive crude oil ornatural gas.  There are numerousuncertainties in estimating quantities of proved reserves, including manyfactors beyond our control.

 

**Crudeoil and natural gas prices are highly volatile in general and low prices willnegatively affect our financial results.**

 

Our revenues, operatingresults, profitability, cash flow, future rate of growth and ability to borrowfunds or obtain additional capital, as well as the carrying value of ourproperties, are substantially dependent upon prevailing prices of crude oil andnatural gas.  Lower crude oil and naturalgas prices also may reduce the amount of crude oil and natural gas that we canproduce economically.  Historically, themarkets for crude oil and natural gas have been very volatile, and such marketsare likely to continue to be volatile in the future.  Prices for crude oil and natural gas aresubject to wide fluctuation in response to relatively minor changes in thesupply of and demand for crude oil and natural gas, market uncertainty and a varietyof additional factors that are beyond our control, including:

 

·                  worldwide and domestic supplies of crudeoil and natural gas;

·                  the level of consumer product demand;

·                  weather conditions;

·                  domestic and foreign governmentalregulations;

·                  the price and availability of alternativefuels;

·                  political instability or armed conflictin oil-producing regions;

·                  the price and level of foreign imports;and

·                  overall domestic and global economicconditions.

 

It is extremely difficultto predict future crude oil and natural gas price movements with anycertainty.  Declines in crude oil andnatural gas prices may materially adversely affect our financial condition,liquidity, ability to finance planned capital expenditures and results ofoperations.  Further, crude oil andnatural gas prices do not move in tandem. Because approximately 31% of our reserves at July 1, 2009 are crudeoil reserves and 34% are natural gas liquids reserves, we are heavily impactedby movements in crude oil prices, which also influence natural gas liquidsprices.

 

**Oil fieldservice and materials’ prices may increase, and the availability of suchservices may be inadequate to meet our needs.**

 

Our business plan toredevelop mature crude oil and natural gas resources requires third partyoilfield service vendors and various materials such as steel tubulars, which wedo not control.  Long lead times and spotshortages may prevent us from, or delay us in, maintaining or increasing theproduction volumes we expect.  Inaddition, if costs for such services and materials increase, it may rendercertain or all of our projects uneconomic, as compared to the earlier prices wemay have assumed when deciding to redevelop newly purchased or existingproperties.  Further adverse economicoutcomes may result from the long lead times often necessary to execute andcomplete our redevelop plans.

 

**Governmentregulation and liability for environmental matters may adversely affect ourbusiness and results of operations.**

 

Crude oil and natural gasoperations are subject to extensive federal, state and local governmentregulations, which may be

 

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changed from time totime. Matters subject to regulation include discharge permits for drillingoperations, drilling bonds, reports concerning operations, the spacing ofwells, unitization and pooling of properties and taxation. From time to time,regulatory agencies have imposed price controls and limitations on productionby restricting the rate of flow of crude oil and natural gas wells below actualproduction capacity in order to conserve supplies of crude oil and natural gas.There are federal, state and local laws and regulations primarily relating toprotection of human health and the environment applicable to the development,production, handling, storage, transportation and disposal of crude oil andnatural gas, by-products thereof and other substances and materials produced orused in connection with crude oil and natural gas operations. In addition, wemay inherit liability for environmental damages, whether actual or not, causedby previous owners of property we purchase or lease or nearby properties. As aresult, we may incur substantial liabilities to third parties or governmentalentities. We are also subject to changing and extensive tax laws, the effectsof which cannot be predicted. The implementation of new, or the modification ofexisting, laws or regulations could have a material adverse affect on us.

 

**CertainU.S. federal income tax deductions currently available with respect to oil andnatural gas exploration and development may be eliminated as a result of futurelegislation.**

 

President Obama’sProposed Fiscal Year 2010 Budget includes proposed legislation that would, ifenacted into law, make significant changes to United States tax laws, includingthe elimination of certain key U.S. federal income tax incentives currentlyavailable to oil and natural gas exploration and production companies. These changesinclude, but are not limited to, (i) the repeal of the percentagedepletion allowance for oil and natural gas properties, (ii) theelimination of current deductions for intangible drilling and developmentcosts, (iii) the elimination of the deduction for certain domesticproduction activities, and (iv) an extension of the amortization periodfor certain geological and geophysical expenditures. It is unclear whether anysuch changes will be enacted or how soon any such changes could becomeeffective. The passage of any legislation as a result of these proposals or anyother similar changes in U.S. federal income tax laws could eliminate certaintax deductions that are currently available with respect to oil and natural gasexploration and development, and any such change could negatively affect ourfinancial condition and results of operations.

 

**We couldbe adversely affected by continued recession in the United States or globaleconomy.**

 

Thecurrent recessionary economic environment has resulted in lower demand for oiland natural gas, resulting in a decline of commodity prices.  If the current recessionary environmentcontinues, reduced demand for petroleum products and lower realized prices,particularly for natural gas, may continue and result in continued or increasedoperating losses.  These factors couldnegatively impact our operations and may limit our growth.

 

RisksAssociated with Our Stock

 

**Ourstock prices has been and may continue to be very volatile.**

 

Our common stock isthinly traded and the market price has been, and is likely to continue to be,highly volatile. For example, during the year prior to June 30, 2009, ourstock price as traded on the NYSE Amex ranged from $1.00 to $6.05.  The variance in our stock price makes itextremely difficult to forecast with any certainty the stock price at which aninvestor may be able to buy or sell shares of our common stock.  The market price for our common stock couldbe subject to wide fluctuations as a result of factors that are out of ourcontrol, such as:

 

·                  actual or anticipated variations in ourresults of operations;

·                  naked short selling of our common stockand stock price manipulation;

·                  changes or fluctuations in the commodityprices of crude oil and natural gas;

·                  general conditions and trends in thecrude oil and natural gas industry; and

·                  general economic, political and marketconditions.

 

**Ourexecutive officers, directors and affiliates may be able to control theelection of our directors and all other matters submitted to our stockholdersfor approval.**

 

Our executive officersand directors, in the aggregate, beneficially own approximately 5.9 millionshares or approximately 21% of our outstanding common stock.  Our former Chairman, and current director ofthe Board, Mr. Laird Q. Cagan, is a Managing Director of Cagan McAfeeCapital Partners, LLC (“CMCP”).  Mr. EricMcAfee, also a Managing Director of

 

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CMCP, currently owns orcontrols, directly or indirectly, approximately 4.7 million shares, orapproximately 18% of our outstanding common stock, but is neither an officer,employee nor a member of our board of directors.  Collectively, the two managing directors ofCMCP currently own or control, directly or indirectly, approximately 5.0million shares, or approximately 18% of our outstanding common stock.  Institutional affiliates, including JVLAdvisors LLC and Peninsula Capital Management, LP, collectively ownapproximately 6.4 million shares or approximately 24% of our outstanding commonstock.  As a result, these holders, couldexercise effective control over matters submitted to our stockholders forapproval (including the election and removal of directors and any merger,consolidation or sale of all or substantially all of our assets). Thisconcentration of ownership may have the effect of delaying, deferring orpreventing a change in control of our company, impede a merger, consolidation,takeover or other business combination involving our company or discourage apotential acquirer from making a tender offer or otherwise attempting to obtaincontrol of our company, which in turn could have an adverse effect on themarket price of our common stock.

 

**Themarket for our common stock is limited and may not provide adequate liquidity.**

 

Our common stock iscurrently thinly traded on the NYSE Amex. In the year prior to June 30,2009, the actual trading volume in our common stock ranged from zero tradedshares of common stock to a high of 523,581 shares of common stock traded, withonly 55 days exceeding a trading volume of 50,000 shares. On most days, thistrading volume means there is limited liquidity in our shares of common stock.Selling our shares is more difficult because smaller quantities of shares arebought and sold and news media coverage about us is limited. These factorsresult in a limited trading market for our common stock and therefore holdersof our stock may be unable to sell shares purchased, should they desire to doso.

 

**Ifsecurities or industry analyst do not publish research reports about ourbusiness, or if they downgrade our stock, the price of our common stock coulddecline.**

 

Small, relatively unknowncompanies can achieve visibility in the trading market through research andreports that industry or securities analysts publish.  However, to our knowledge, only threeindependent analysts cover our company. The lack of published reports by independent securities analysts couldlimit the interest in our common stock and negatively affect our stockprice.  We do not have any control overthe research and reports these analysts publish or whether they will bepublished at all. If any analyst who does cover us downgrades our stock, ourstock price could decline.  If anyanalyst ceases coverage of our company or fails to regularly publish reports onus, we could lose visibility in the financial markets, which in turn couldcause our stock price to decline.

 

**Theissuance of additional common stock and preferred stock would dilute existingstockholders.**

 

We are authorized toissue up to 100,000,000 shares of common stock. To the extent of such authorization, our board of directors has theability, without seeking stockholder approval, to issue additional shares ofcommon stock in the future for such consideration as our board may considersufficient.  The issuance of additionalcommon stock in the future would reduce the proportionate ownership and votingpower of the common stock now outstanding. We are also authorized to issue up to 5,000,000 shares of preferredstock, the rights and preferences of which may be designated in series by ourboard of directors.  Such designation ofnew series of preferred stock may be made without stockholder approval, andcould create additional securities which would have dividend and liquidationpreferences over the common stock now outstanding. Preferred stockholders couldadversely affect the rights of holders of common stock by:

 

·                  exercising voting, redemption andconversion rights to the detriment of the holders of common stock;

·                  receiving preferences over the holders ofcommon stock regarding our surplus funds in the event of our dissolution,liquidation or the payment of dividends to Preferred stockholders;

·                  delaying, deferring or preventing achange in control of our company; and

·                  discouraging bids for our common stock.

 

**We donot plan to pay any cash dividends on our common stock.**

 

We have not paid anydividends on our common stock to date and do not anticipate that we will bepaying dividends in the foreseeable future. Any payment of cash dividends on our common stock in the future will bedependent upon the amount of funds legally available, our earnings, if any, ourfinancial condition, our anticipated capital requirements and other factorsthat our board of directors may think are relevant.  However, we currently intend for theforeseeable future to follow a policy of retaining all of our earnings, if any,to finance the development and expansion of our business and, therefore, do notexpect to pay any dividends on our common stock in the foreseeable future.

 

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**Item1B.  Unresolved Staff Comments**

 

None.

 

**Item2.  Properties**

 

**Company Location**

 

Our corporateheadquarters are located at 2500 CityWest Boulevard, Suite 1300, Houston,Texas.  We entered into subleaseagreement, effective on March 1, 2007, to rent approximately 8,400 squarefeet of Class “A” office space in the Westchase District area in WestHouston.  The current monthly base rentis $11,507 with the base rent escalating to a monthly base rate of $13,251 in August 2011.The sublease expires by its term on July 1, 2016.  Prior to March 1, 2007, we occupied aleased headquarters containing 2,259 square feet in an office building locatedon the west side of Houston, Texas.  In April 2007,this lease expired.

 

**EstimatedProved Oil and Natural Gas Reserves and Future Revenues**

 

We engaged W. D. VonGonten & Co. (“Von Gonten”) to prepare an independent report of ourproved reserves as of July 1, 2009 (the “Reserve Report”). Von Gonten alsopreviously prepared independent reports for all of our proved reserves at July 1,2008, July 1, 2007, July 1, 2006, July 1, 2005, July 1,2004 and January 1, 2004.  Crude oiland natural gas reserves and the estimates of the present value of future netrevenues were determined based on current prices and costs.

 

There are numerousuncertainties inherent in estimating quantities of proved reserves andestimates of reserves quantities an values must be viewed as being subject tosignificant change as more data about the properties becomes available.

 

Denominated in equivalent barrels using a six Mcf ofgas and 42 gallons of natural gas liquids to one barrel of oil conversionratio, we recognized proved reserves of 3,060,040 and 4,018,233 at July 1,2009 and 2008, respectively.  Of ourproved reserves, natural gas represented 35%, natural gas liquids represented34%, and crude oil represented 31% as of July 1, 2009, as compared tonatural gas of 43%, natural gas liquids of 33% and crude oil of 24% of totalproved reserves at July 1, 2008.

 

The decrease in proved reserves was primarily due todecline in natural gas prices, partially offset by proved reserve additionsrelated to the leasing, redevelopment and drilling activities in our propertiesin the Giddings Field and our Neptune oil project in South Texas.

 

The following table setsforth our estimated proved reserves as of July 1, 2009.  See Note 17 to the consolidated financialstatements, where additional reserve information is provided.  The NYMEX spot prices used to calculateestimated revenues were $69.89 per barrel of crude oil and $3.885 per MMbtu ofnatural gas as of June 30, 2009. The price of natural gas liquids utilized was based on the historicalprice received versus the NYMEX basis oil price.  Pricing differentials were applied to all properties,on an individual property basis, in order to reflect prices actually receivedat the wellhead.  Quality adjustmentshave been applied based on actual BTU factors for each well and a shrinkagefactor has been applied based on production volumes versus actual salesvolumes.

 

**July 1,2009**

 
| ** **                                               | ** ** | **Proved Developed** | ** ** | **Proved Developed** | ** ** | **Proved**      | ** ** | **Total Proved** | ** ** |
|----------------------------------------------------------|------------|----------------------|------------|----------------------|------------|-----------------|------------|------------------|------------|
| ** **                                               | ** ** | **Producing**        | ** ** | **Non-producing**    | ** ** | **Undeveloped** | ** ** | **Reserves**     | ** ** |
|                                                     |       |                 |       |                 |       |            |       |             |       |
| Crude  Oil (Bbls)                                        |       | 104,731              |       | —               |       | 841,217         |       | 945,948          |       |
| NGLs  (Bbls)                                             |       | 141,372              |       | —               |       | 912,922         |       | 1,054,294        |       |
| Natural  gas (Mcf)                                       |       | 1,106,028            |       | —               |       | 5,252,760       |       | 6,358,788        |       |
| Total  (BOE)                                             |       | 430,441              |       | —               |       | 2,629,599       |       | 3,060,040        |       |
|                                                     |       |                 |       |                 |       |            |       |             |       |
| Estimated  future net revenues                           |       | $                    | 9,714,324  |                 | —     |            | $          | 48,480,128       |       | $ | 58,194,452 |   |
| Estimated  future net revenues discounted at 10% (PV-10) |       | $                    | 7,640,456  |                 | —     |            | $          | 28,185,766       |       | $ | 35,826,222 |   |

 

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The following table setsforth our estimated proved reserves as of July 1, 2008.  See Note 17 to the consolidated financialstatements, where additional reserve information is provided.  The unadjusted NYMEX spot prices used tocalculate estimated future net revenues were $140.00 per barrel of crude oiland $13.095 per MMBTU of natural gas as of June 30, 2008.  The price of natural gas liquids utilized wasbased on the historical price received versus the NYMEX basis oil price.  Pricing differentials were applied to allproperties, on an individual property basis, in order to reflect pricesactually received at the wellhead. Quality adjustments have been applied based on actual BTU factors foreach well and a shrinkage factor has been applied based on production volumesversus actual sales volumes.

 

**July 1,2008**

 
| ** **                                               | ** ** | **Proved Developed** | ** ** | **Proved Developed** | ** ** | **Proved**      | ** ** | **Total Proved** | ** **  |
|----------------------------------------------------------|------------|----------------------|------------|----------------------|------------|-----------------|------------|------------------|-------------|
| ** **                                               | ** ** | **Producing**        | ** ** | **Non-producing**    | ** ** | **Undeveloped** | ** ** | **Reserves**     | ** **  |
|                                                     |       |                 |       |                 |       |            |       |             |        |
| Crude  Oil (Bbls)                                        |       | 96,167               |       | —               |       | 855,874         |       | 952,041          |        |
| NGLs  (Bbls)                                             |       | 98,416               |       | 11,300               |       | 1,200,744       |       | 1,310,460        |        |
| Natural  gas (Mcf)                                       |       | 485,701              |       | 75,300               |       | 9,973,390       |       | 10,534,391       |        |
| Total  (BOE)                                             |       | 275,533              |       | 23,850               |       | 3,718,850       |       | 4,018,233        |        |
|                                                     |       |                 |       |                 |       |            |       |             |        |
| Estimated  future net revenues                           |       | $                    | 23,317,256 |                 | $          | 1,504,919       |       | $                | 241,476,331 |   | $ | 266,298,506 |   |
| Estimated  future net revenues discounted at 10% (PV-10) |       | $                    | 17,423,119 |                 | $          | 1,372,766       |       | $                | 141,457,021 |   | $ | 160,252,906 |   |

 

Estimated future netrevenues discounted at 10% or PV-10 is a financial measure that is notrecognized by accounting principles generally accepted in the United States ofAmerica (“GAAP”).  We believe that thepresentation of the non-GAAP financial measure of PV-10 provides usefulinformation to investors because it is widely used by analysts and investors inevaluating oil and natural gas companies. We believe that PV-10 is relevant and useful for evaluating the relativemonetary significance of oil and natural gas properties. Further, analysts andinvestors may utilize the measure as a basis for comparison of the relativesize and value of our reserves to other companies’ reserves.  We also use this pre-tax measure when assessingthe potential return on investment related to oil and natural gas propertiesand in evaluating acquisition opportunities. Because there are many unique factors that can impact an individualcompany when estimating the amount of future income taxes to be paid, webelieve the use of a pre-tax measure is valuable for evaluating ourCompany.  PV-10 is not a measure offinancial or operating performance under GAAP, nor is it intended to representthe current market value of our estimated oil and natural gas reserves. PV-10should not be considered in isolation or as a substitute for the StandardizedMeasure of discounted future net cash flows as defined under GAAP.

 

The following table provides a reconciliation of PV-10to the Standardized Measure of discounted future net cash flows as shown inNote 17 of the consolidated financial statements.

 
| ** **                                                     | ** ** | **For the Years Ended June 30** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                     | ** ** | **2009**                             | ** ** | **2008** | ** ** |
|                                                           |       |                                 |       |   |   |
| Estimated future  net revenues                                 |       | $                                    | 58,194,452 |   | $ | 266,298,506 |   |
| 10% annual  discount for estimated timing of future cash flows |       | (22,368,230                          | )          | (106,045,600 | ) |
| Estimated future  net revenues discounted at 10% (PV-10)       |       | 35,826,222                           |       | 160,252,906 |   |
| Estimated future  income tax expenses discounted at 10%        |       | (12,276,431                          | )          | (63,180,265 | ) |
| Standardized  Measure of discounted future net cash flows      |       | $                                    | 23,549,791 |   | $ | 97,072,641 |   |

 

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**SalesVolumes, Average Sales Prices and Average Production Costs**

 

The following table showsthe Company’s sales volumes and average sales prices received for crude oil,natural gas liquids, and natural gas for the periods indicated:

 
| ** **                  | ** ** | **Year Ended**         | ** ** | **Year Ended**              | ** ** | **Year Ended**              | ** ** |
|-----------------------------|------------|------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                  | ** ** | **June 30, 2009** | ** ** | **June 30, 2008** | ** ** | **June 30, 2007** | ** ** |
| **Product**                 | ** ** | **Volume**             | ** ** | **Price**                   | ** ** | **Volume**                  | ** ** | **Price** | ** ** | **Volume** | ** ** | **Price** | ** ** |
|                        |       |                   |       |                        |       |                        |       |   |   |   |   |   |   |
| Crude  oil (Bbls)           |       | 36,026                 |       | $                           | 76.26      |                        | 29,466     |   | $ | 99.03 |   | 28,800 |   | $ | 64.82 |   |
|                        |       |                   |       |                        |       |                        |       |   |   |   |   |   |   |
| Natural  gas liquids (Bbls) |       | 44,125                 |       | $                           | 36.83      |                        | 10,639     |   | $ | 63.02 |   | — |   | — |   |
|                        |       |                   |       |                        |       |                        |       |   |   |   |   |   |   |
| Natural  gas (Mcf)          |       | 323,301                |       | $                           | 5.33       |                        | 69,051     |   | $ | 9.67 |   | — |   | — |   |
|                             |            |                        |            |                             |            |                             |            |  |  |  |  |  |  |  |  |  |

 

Average production costs,including production taxes, per unit of production (using a six to oneconversion ratio of Mcf’s to barrels) were approximately $11, $25 and $49 perBOE for the years ended June 30, 2009, 2008 and 2007, respectively.

 

The increases in volumeswere attributable to the development of our properties in the Giddings Field,which accounted for almost 100 percent of our production during the year ended June 30,2009.  Our production in the Giddings Fieldbegan late in the third fiscal quarter of the year ended June 30,2008.  Our properties in the TullosField, which were sold on March 3, 2008, accounted for 35% of total salesvolumes for the year ended June 30, 2008, and almost 100 percent of our productionfor the year ended June 30, 2007.

 

**ProductiveWells and Developed Acreage**

 

Our developed acreage at June 30,2009 totaled 4,299 net acres in the Giddings Field, consisting of a 100%working interest in ten producing wells.

 

Our developed acreage at June 30,2008 totaled 3,469 net acres, all of which is in the Giddings Field, consistingof a 100% working interest in seven producing wells.  Proved undeveloped acreage includedtwenty-seven proved drilling locations.

 

At June 30, 2007, weowned working interests in 260 net and gross wells consisting of 158 crude oilwells, 23 salt water disposal wells and 93 shut-in wells with uncertain futureutility, all located in the Tullos Field in Louisiana.  Our properties in the Tullos Field were soldon March 3, 2008.

 

**UndevelopedAcreage**

 

Proved undevelopedacreage includes twenty-one proved drilling locations in the Giddings Field andfour newly added proved drilling locations in our Neptune oil project in SouthTexas.

 

The reduction of sixproved locations from the 27 proved locations as of the end of fiscal 2008includes two wells drilled and placed on production, two locations that wereconsolidated into one, and five locations that became uneconomic due to muchlower natural gas wellhead prices at year end 2009. The reductions werepartially offset by the addition of two proved locations. Additional drillinglocations are associated with our acreage, but require further leasing, stepout drilling, and/or an increase in commodity prices before being consideredfor inclusion in our proved reserves.

 

As of June 30, 2009,we held approximately 55,952 gross and 37,340 net undeveloped acres in the GulfCoast and Mid-Continent regions of the United States, as follows:

 
| **Field/Area**                      | ** ** | **Gross Acreage** | ** ** | **Net Acreage** | ** ** |
|-------------------------------------|------------|------------------------|------------|----------------------|------------|
| Giddings  Field, Texas              |       | 16,600                 |       | 14,811               |       |
| Woodford,  Oklahoma                 |       | 24,120                 |       | 17,617               |       |
| Neptune  (Lopez Field), South Texas |       | 1,596                  |       | 1,503                |       |
| Delhi  Field, Louisiana *           |       | 13,636                 |       | 3,409                |       |
| Total                               |       | 55,952                 |       | 37,340               |       |

 

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* Includes from thesurface of the Earth to the top of the Massive Anhydride, less and except theDelhi Holt Bryant CO2 and Mengel Units. With respect to the DelhiHolt Bryant Unit, currently scheduled for CO2-EORoperations within this same acreage, we currently own royalty and overridingroyalty interests aggregating approximately 7.4%.  Separately, we own a 25% working interest(20% net revenue interest) that will revert to us, as, if and when payoutoccurs, as defined. We are not the operator of the Delhi CO2-EOR project.

 

For more completeinformation regarding current year activities, including crude oil and naturalgas production, refer to “Management’s Discussion and Analysis of FinancialCondition and Results of Operations.”

 

**Item 3. Legal Proceedings**

 

None.

 

**Item4.****Submissionof Matters to a Vote of Security Holders**

 

No matters were submitted to a vote of our securityholders, through solicitation of proxies or otherwise, during the fourthquarter ended June 30, 2009.

 

**PART II**

 

**Item5.****Marketfor Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities**

 

**CommonStock**

 

Our common stock iscurrently traded on the NYSE Amex under the ticker symbol “EPM”.

 

We initiated trading ofour common stock on the OTC Bulletin Board in May 2004, under the symbol “NGSY”.  On July 17, 2006 we qualified fortrading on the American Stock Exchange. The American Stock Exchange was acquired by the NYSE Euronext (NYX) in2008 and is now known as NYSE Amex.  Thefollowing table shows, for each quarter of fiscal year 2009 and 2008, the highand low sales prices for EPM as reported by the NYSE Amex.

 

**NYSEAmex**

 
| **2009:**                                    | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------------------------------|------------|----------|------------|---------|------------|
| Fourth  quarter ended June 30, 2009     |       | $        | 3.13       |    | $          | 1.85 |   |
| Third  quarter ended March 31, 2009     |       | $        | 1.99       |    | $          | 1.17 |   |
| Second  quarter ended December 31, 2008 |       | $        | 3.06       |    | $          | 1.00 |   |
| First  quarter ended September 30, 2008 |       | $        | 6.05       |    | $          | 2.60 |   |

 
| **2008:**                                    | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------------------------------|------------|----------|------------|---------|------------|
| Fourth  quarter ended June 30, 2008     |       | $        | 7.15       |    | $          | 4.08 |   |
| Third  quarter ended March 31, 2008     |       | $        | 5.85       |    | $          | 3.40 |   |
| Second  quarter ended December 31, 2007 |       | $        | 5.60       |    | $          | 2.90 |   |
| First  quarter ended September 30, 2007 |       | $        | 3.24       |    | $          | 2.12 |   |

 

**Holders**

 

As of June 30, 2009,there were 26,530,317 shares of common stock issued and outstanding, held byapproximately 2,386 holders of record.

 

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**Dividends**

 

We have never declared orpaid any cash dividends with respect to our common stock. We anticipate that wewill retain future earnings for use in the operation and expansion of ourbusiness and do not anticipate paying cash dividends on the common stock in theforeseeable future. Any future determination with regard to the payment ofdividends will be at the discretion of the board of directors and will bedependent upon our future earnings, financial condition, applicable dividendrestrictions and capital requirements and other factors deemed relevant by theboard of directors.

 

**SecuritiesAuthorized For Issuance Under Equity Compensation Plans**

 
| ** **                                                  | ** ** | **Number of**      | ** ** | ** **                 | ** ** | **Number of securities** | ** ** |
|-------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|------------------------------------|------------|
| ** **                                                  | ** ** | **securities to**  | ** ** | **Weighted-average**       | ** ** | **remaining**                      | ** ** |
| ** **                                                  | ** ** | **be issued**      | ** ** | **exercise**               | ** ** | **available for future** | ** ** |
| ** **                                                  | ** ** | **upon exercise**  | ** ** | **price of**          | ** ** | **issuance under**            | ** ** |
| ** **                                                  | ** ** | **of outstanding** | ** ** | **outstanding**            | ** ** | **equity compensation**       | ** ** |
| ** **                                                  | ** ** | **options,**            | ** ** | **options, warrants** | ** ** | **plans (excluding**          | ** ** |
| ** **                                                  | ** ** | **warrants and**   | ** ** | **and**                    | ** ** | **securities reflected**      | ** ** |
| ** **                                                  | ** ** | **rights**              | ** ** | **rights**                 | ** ** | **in column (a))**       | ** ** |
| **Plan category**                                      | ** ** | **(a)**                 | ** ** | **(b)**                    | ** ** | **(c)**                            | ** ** |
|                                                        |       |                    |       |                       |       |                               |       |
| Equity  compensation plans approved by security holders     |       | 4,448,320               | (1)        | $                          | 1.90       |                               | 1,006,461  |   |
|                                                        |       |                    |       |                       |       |                               |       |
| Equity  compensation plans not approved by security holders |       | 1,385,558               | (2)        | $                          | 1.53       |                               | —     |   |
| Total                                                       |       | 5,833,878               |       | $                          | 1.81       |                               | 1,006,461  |   |

 

----

(1) On May 26,2004, we, as Reality Interactive, Inc., executed an Agreement and Plan ofMerger with Natural Gas Systems, Inc., a Delaware corporation (the “Merger”).  In connection with the Merger, we assumed theobligations of 600,000 stock options under our acquired subsidiary’s 2003 StockOption Plan.  As of June 30, 2009,500,000 shares remain issuable upon exercise of stock options under the 2003Stock Option Plan and no further options shall be issued there-under.  As of June 30, 2009, there were3,948,320 shares of common stock issuable upon exercise of outstanding stockoptions and 545,219 shares of common stock issued directly under the 2004 StockPlan, leaving 1,006,461 shares of common stock available for issuance.

 

(2) In addition toassuming certain obligations listed in footnote 1 above, in connection with theMerger, we also assumed outstanding warrants to purchase shares of common stockissued in connection with arranging the merger and in connection with capital raising.  Total warrants outstanding as of June 30,2009 related to these activities were 348,058 with a weighted average exerciseprice of $1.46.  Also included were1,037,500 warrants with a weighted average exercise price of $1.56 issued inconnection with employment and or compensation arrangements, including awarrant to purchase 287,500 shares of common stock in connection with Mr. Herlin’semployment agreement with the Company, a warrant to purchase 200,000 shares inconnection with Mr. Mazzanti’s employment agreement with the Company, awarrant to purchase 400,000 shares of common stock in connection with Mr. Herlin’sannual performance incentives, including warrants in lieu of cash bonus, and awarrant to purchase 150,000 shares of common stock in connection with SterlingMcDonald’s annual performance incentives, including warrants in lieu of cashbonus.

 

**RecentSales of Unregistered Securities**

 

None.

 

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**Item 6.Selected Financial Data**

 

The selected consolidated financial data, set forthbelow should be read in conjunction with Item 7 “Management’s Discussion and Analysisof Financial Condition and Results of Operations” and with the consolidatedfinancial statements and notes to those consolidated financial statementsincluded elsewhere in this report.

 
| ** **                                                                                     | ** ** | **Year Ended June 30** | ** **       |
|------------------------------------------------------------------------------------------------|------------|-----------------------------|------------------|
| ** **                                                                                     | ** ** | **2009**                    | ** **       | **2008** | ** ** | **2007** | ** ** | **2006********(as restated)** | ** ** | **2005** | ** ** |
| **Income Statement Data**                                                                      |       |                        |             |   |   |   |   |   |   |   |   |
| Revenues                                                                                       |       | $                           |  6,095,183  |   | $ |  4,256,128 |   | $ |  1,866,878 |   | $ |  2,861,414 |   | $ |  1,635,187 |   |
| Lease operating expense                                                                        |       | $                           |  1,281,989  |   | $ |  1,255,787 |   | $ |  1,352,907 |   | $ |  1,698,044 |   | $ |  853,052 |   |
| Production taxes                                                                               |       | $                           |  158,794    |   | $ |  90,252 |   | $ |  62,426 |   | $ |  86,562 |   | $ |  68,386 |   |
| Depreciation, depletion, and amortization                                                      |       | $                           |  2,461,162  |   | $ |  903,214 |   | $ |  291,150 |   | $ |  407,467 |   | $ |  260,124 |   |
| Accretion expense                                                                              |       | $                           |  37,601     |   | $ |  20,196 |   | $ |  17,319 |   | $ |  27,716 |   | $ |  21,824 |   |
| General and administrative expense (“G&A”)  (excluding stock-based compensation) |       | $                           |  3,490,466  |   | $ |  3,705,751 |   | $ |  2,878,107 |   | $ |  2,279,518 |   | $ |  1,513,663 |   |
| G&A: Stock-based compensation                                                              |       | $                           |  2,405,900  |   | $ |  1,791,486 |   | $ |  1,613,493 |   | $ |  546,567 |   | $ |  707,117 |   |
| Gain from sale of oil and natural gas properties                                               |       | $                           |  —     |   | $ |  — |   | $ |  — |   | $ |  45,325,468 |   | $ |  — |   |
| Income (loss) from operations                                                                  |       | $                           |  (3,740,729 | ) | $ |  (3,510,558 | ) | $ |  (4,348,524 | ) | $ |  43,141,008 |   | $ |  (1,788,979 | ) |
| Other income (expense), net                                                                    |       | $                           |  122,272    |   | $ |  854,130 |   | $ |  1,899,460 |   | $ |  (2,434,867 | ) | $ |  (375,592 | ) |
| Income tax provision (benefit)                                                                 |       | $                           |  (1,016,864 | ) | $ |  (1,085,454 | ) | $ |  (638,853 | ) | $ |  15,007,775 |   | $ |  — |   |
| Net income (loss)                                                                              |       | $                           |  (2,601,593 | ) | $ |  (1,570,974 | ) | $ |  (1,810,211 | ) | $ |  25,698,366 |   | $ |  (2,164,571 | ) |
| Earnings (loss) per common share - Basic                                                       |       | $                           |  (0.10      | ) | $ |  (0.06 | ) | $ |  (0.07 | ) | $ |  1.03 |   | $ |  (0.09 | ) |
| Earnings (loss) per common share - Diluted                                                     |       | $                           |  (0.10      | ) | $ |  (0.06 | ) | $ |  (0.07 | ) | $ |  1.01 |   | $ |  (0.09 | ) |
| **Cash Flows Data**                                                                            |       |                        |             |   |   |   |   |   |   |   |   |
| Operating Activities:                                                                          |       |                        |             |   |   |   |   |   |   |   |   |
| Before changes in operating assets and liabilities                                             |       | $                           |  3,070,310  |   | $ |  3,740,878 |   | $ |  (11,865,115 | ) | $ |  (3,893,417 | ) | $ |  (1,096,624 | ) |
| Changes in operating assets and liabilities                                                    |       | 2,884,468                   |             | (4,597,678 | ) | (2,626,933 | ) | 3,156,213 |   | 19,089 |   |
| *Cash provided by (used in)  operating activities*                                             |       | 5,954,778                   |             | (856,800 | ) | (14,492,048 | ) | (737,204 | ) | (1,077,535 | ) |
| Investing Activities:                                                                          |       |                        |             |   |   |   |   |   |   |   |   |
| Development of oil and natural gas properties                                                  |       | (8,063,465                  | )                | (11,187,291 | ) | (417,964 | ) | (2,611,369 | ) | (503,394 |   |
| Acquisition of oil and natural gas properties                                                  |       | (2,603,098                  | )                | (8,789,501 | ) | (1,918,757 | ) | (1,448,239 | ) | (1,554,149 | ) |
| Proceeds from sale of oil and natural gas  properties                                          |       | —                      |             | 4,452,450 |   | 155,378 |   | 49,993,134 |   | — |   |
| Purchases of certificates of deposit                                                           |       | (1,757,312                  | )                | — |   | — |   | — |   | — |   |
| Cash in qualified intermediary account for  “like-kind” exchanges                    |       | —                      |             | — |   | 34,662,368 |   | (34,662,368 | ) | — |   |
| Other                                                                                          |       | (33,350                     | )                | (93,596 | ) | (120,050 | ) | 551,467 |   | (721,080 | ) |
| *Cash provided by (used in)  investing activities*                                             |       | (12,457,225                 | )                | (15,617,938 | ) | 32,360,975 |   | 11,822,625 |   | (2,778,623 | ) |
| Financing Activities:                                                                          |       |                        |             |   |   |   |   |   |   |   |   |
| Purchase of treasury stock                                                                     |       | (882,022                    | )                | — |   | — |   | — |   | — |   |
| Payments on notes payable                                                                      |       | —                      |             | — |   | — |   | (5,634,654 | ) | (1,725,167 | ) |
| Proceeds from notes payable                                                                    |       | —                      |             | — |   | — |   | 1,003,563 |   | 3,526,754 |   |
| Equity transactions                                                                            |       | 130                         |             | 76 |   | (15,532 | ) | 890,529 |   | 4,235,428 |   |
| Other                                                                                          |       | 3,823                       |             | — |   | — |   | — |   | — |   |
| *Cash provided by (used in)  financing activities*                                             |       | (878,069                    | )                | 76 |   | (15,532 | ) | (3,740,562 | ) | 6,037,015 |   |
| Increase (decrease) in cash and cash equivalents                                               |       | $                           |  (7,380,516 | ) | $ |  (16,474,662 | ) | $ |  17,853,395 |   | $ |  7,344,859 |   | $ |  2,180,857 |   |
| ** **                                                                                     | ** ** | ** **                  | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                     | ** ** | **June 30, 2009**      | ** **       | **June 30, 2008** | ** ** | **June 30, 2007** | ** ** | **June 30, 2006********(as restated)** | ** ** | **June 30, 2005** | ** ** |
| **Balance Sheet Data**                                                                         |       |                        |             |   |   |   |   |   |   |   |   |
| Total current assets                                                                           |       | $                           | 8,873,786        |   | $ | 17,801,070 |   | $ |  28,921,518 |   | $ |  10,321,359 |   | $ |  3,212,558 |   |
| Total assets                                                                                   |       | $                           | 37,828,823       |   | $ | 40,365,848 |   | $ |  34,905,992 |   | $ |  48,957,958 |   | $ |  9,465,224 |   |
| Total current liabilities                                                                      |       | $                           | 1,237,904        |   | $ | 4,171,048 |   | $ |  1,596,558 |   | $ |  3,476,727 |   | $ |  613,326 |   |
| Total liabilities                                                                              |       | $                           | 6,072,229        |   | $ | 7,362,114 |   | $ |  2,122,846 |   | $ |  15,962,562 |   | $ |  3,953,124 |   |
| Temporary equity (351,335 shares of common stock outstanding  at June 30, 2006)           |       | $                           |  —     |   | $ |  — |   | $ |  — |   | $ |  790,500 |   | $ |  — |   |
| Stockholders’ equity                                                                      |       | $                           | 31,756,594       |   | $ | 33,003,734 |   | $ |  32,783,146 |   | $ |  32,204,896 |   | $ |  5,512,100 |   |
| Common stock outstanding                                                                       |       | 26,530,317                  |             | 26,870,439 |   | 26,776,234 |   | 26,300,670 |   | 24,774,606 |   |

 

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| ** **                                                        | ** ** | **Quarter Ended**             | ** **       |
|-------------------------------------------------------------------|------------|-------------------------------|------------------|
| ** **                                                        | ** ** | **June 30,********2009** | ** **       | **March 31,********2009** | ** ** | **December 31,********2008** | ** ** | **September 30,********2008** | ** ** | **June 30,********2008** | ** ** |
| Revenues                                                          |       |                          |             |   |   |   |   |   |   |   |   |
| Crude oil                                                         |       | $                             |  409,546    |   | $ |  351,684 |   | $ |  407,194 |   | $ |  1,579,070 |   | $ |  1,253,478 |   |
| Natural gas liquids (“NGLs”)                            |       | 283,434                       |             | 350,891 |   | 235,293 |   | 755,445 |   | 558,736 |   |
| Natural gas                                                       |       | 290,971                       |             | 461,889 |   | 389,295 |   | 580,471 |   | 544,290 |   |
| Total operating revenues                                          |       | 983,951                       |             | 1,164,464 |   | 1,031,782 |   | 2,914,986 |   | 2,356,504 |   |
| Operating Expense                                                 |       |                          |             |   |   |   |   |   |   |   |   |
| Lease operating expense (“LOE”)                         |       | 376,969                       |             | 255,710 |   | 313,406 |   | 335,904 |   | 284,099 |   |
| Production taxes                                                  |       | 21,272                        |             | 29,750 |   | 21,776 |   | 85,996 |   | 44,021 |   |
| Depreciation, depletion, and amortization  (“DD&A”) |       | 552,153                       |             | 759,836 |   | 504,291 |   | 644,882 |   | 530,569 |   |
| Accretion expense                                                 |       | 13,149                        |             | 12,591 |   | 6,124 |   | 5,737 |   | 3,540 |   |
| G&A(excludingstock-basedcompensation)(1)                      |       | 413,132                       |             | 1,058,117 |   | 1,078,102 |   | 941,115 |   | 954,771 |   |
| G&A: Stock-based compensation (2)                             |       | 760,365                       |             | 537,285 |   | 584,525 |   | 523,725 |   | 480,043 |   |
| Total operating expense                                           |       | 2,137,040                     |             | 2,653,289 |   | 2,508,224 |   | 2,537,359 |   | 2,297,043 |   |
| Operating income (loss)                                           |       | (1,153,089                    | )                | (1,488,825 | ) | (1,476,442 | ) | 377,627 |   | 59,461 |   |
| Interest income, net                                              |       | 22,820                        |             | 8,024 |   | 17,782 |   | 73,646 |   | 81,295 |   |
| Net income (loss) before income taxes                             |       | $                             |  (1,130,269 | ) | $ |  (1,480,801 | ) | $ |  (1,458,660 | ) | $ |  451,273 |   | $ |  140,756 |   |
|                                                              |       |                          |             |   |   |   |   |   |   |   |   |
| Sales volumes per day                                             |       |                          |             |   |   |   |   |   |   |   |   |
| Oil (Bbls)                                                        |       | 78.9                          |             | 97.90 |   | 77.2 |   | 139.5 |   | 105.4 |   |
| NGL (Bbls)                                                        |       | 113.1                         |             | 165.8 |   | 83.5 |   | 120.3 |   | 95.0 |   |
| Natural gas (Mcf)                                                 |       | 934.1                         |             | 1232.7 |   | 706.2 |   | 664.6 |   | 584.0 |   |
| Total (BOE)                                                       |       | 347.7                         |             | 469.2 |   | 278.4 |   | 370.5 |   | 297.7 |   |
|                                                              |       |                          |             |   |   |   |   |   |   |   |   |
| Average sales price                                               |       |                          |             |   |   |   |   |   |   |   |   |
| Oil per Bbl                                                       |       | $                             |  57.02      |   | $ |  39.47 |   | $ |  57.37 |   | $ |  123.03 |   | $ |  130.71 |   |
| NGL per Bbl                                                       |       | 27.55                         |             | 23.25 |   | 30.63 |   | 68.29 |   | 64.63 |   |
| Natural gas per Mcf                                               |       | 3.42                          |             | 4.12 |   | 5.99 |   | 9.49 |   | 10.24 |   |
| Total per BOE                                                     |       | 31.10                         |             | 27.27 |   | 40.29 |   | 85.51 |   | 86.98 |   |
| Per BOE                                                           |       |                          |             |   |   |   |   |   |   |   |   |
| LOE and production taxes                                          |       | 12.59                         |             | 6.69 |   | 13.09 |   | 12.38 |   | 12.11 |   |
| DD&A                                                          |       | 17.45                         |             | 17.80 |   | 19.69 |   | 18.92 |   | 19.58 |   |
| Accretion expense                                                 |       | 0.42                          |             | 0.29 |   | 0.24 |   | 0.17 |   | 0.13 |   |
| G&A(excludingstock-basedcompensation)(1)                      |       | 13.06                         |             | 24.78 |   | 42.10 |   | 27.61 |   | 35.24 |   |
| G&A: Stock-based compensation (2)                             |       | 24.03                         |             | 12.58 |   | 22.83 |   | 15.36 |   | 17.72 |   |
| Total operating expense                                           |       | 67.55                         |             | 62.14 |   | 97.94 |   | 74.43 |   | 84.78 |   |
| Operating (loss) income                                           |       | $                             |  (36.45     | ) | $ |  (34.87 | ) | $ |  (57.65 | ) | $ |  (11.08 | ) | $ |  2.20 |   |
| Net income (loss) before income taxes                             |       | $                             |  (35.72     | ) | $ |  (34.68 | ) | $ |  (56.96 | ) | $ |  (13.24 | ) | $ |  5.20 |   |

 

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(1)          G&A for the quarter endedJune 30, 2009, includes the reversal of accrued bonuses of $509,891($16.12 per BOE of production), due to the decision to issue common stock toemployees in lieu of a cash bonus.

 

(2)          G&A: Stock-basedcompensation for the quarter ended June 30, 2009, includes acharge of $370,440 ($11.71 per BOE of production), related to the payment of2009 bonuses through the issuance of common stock.

 

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**Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

**Executive Overview**

 

*General*

 

We are a petroleum company engaged primarily in theacquisition, exploitation and development of properties for the production ofcrude oil and natural gas. We acquire known, underdeveloped oil and natural gasresources and exploit them through the application of capital and technology toincrease production, ultimate recoveries, or both.

 

Our strategy is intended to generate scalabledevelopment opportunities at normally pressured depths, exhibiting relativelylow completion risk, generally longer and more predictable production lives,less expenditures on infrastructure and lower operational risks.

 

Within this overall strategy, we pursue three specificinitiatives:

 
|   | I      |   | Enhanced oil recovery (“EOR”), using miscible and  immiscible gas flooding;                                                                  |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                   |
|   | II     |   | Conventional redevelopment of bypassed primary  resources within mature oil and natural gas fields utilizing modern  technology and our expertise; and |
|   |   |   |                                                                                                                                                   |
|   | III    |   | Unconventional gas resource development, using  modern stimulation and completion technologies.                                                        |

 

Our most significant asset is within our EORInitiative in the 13,636 acre Delhi Field, located in northeast Louisiana.  Our non-operated interests consist of 7.4% inoverriding and mineral royalty interests and a 25% after pay-out reversionaryworking interest in the Delhi Field Holt Bryant Unit, along with a 25% workinginterest in certain other depths in the Delhi Field resulting from the Farmoutwe completed on June 12, 2006 with Denbury Onshore LLC, a subsidiary ofDenbury Resources Inc. (the “Operator”) (the “Delhi Farmout”).  The Holt Bryant Unit is currently beingredeveloped by the Operator, using CO2 enhanced oil recovery technology and adedicated portion of the Operator’s proved CO2 reserves in the Jackson Dome, locatedapproximately 100 miles east of Delhi. According to the Operator in a public filing dated August 4, 2009,injection of CO2 isexpected to commence by the fourth quarter of calendar 2009, with initial oilproduction response expected by mid-year calendar 2010.

 

Since our closing of the Delhi Farmout, we havefocused on developing projects in our other initiatives, particularly throughconventional redevelopment of bypassed resources in the Giddings Field usinghorizontal drilling methods, the leasing of unconventional gas shale projectsin the shallower portion of the Woodford Shale Trend in Oklahoma and theleasing of Neptune, an oil infill drilling project in South Texas.

 

We are funding our ongoing development from ourworking capital resources and from net cash flows from our properties in theGiddings Field; our cash flows from the Delhi Project also will be used to fundfull development of our projects and other new projects.  We also may utilize project financing in thefuture.

 

Our long term strategyand primary focus continue to be on increasing share value through theidentification and acquisition of resources and conversion of those resourcesinto proved reserves through our expertise and technology.

 

*Highlights for our fiscal year 2009*

 

***Projects***

 

·                 **The CO****2**** Pipeline to the Delhi Field has beencompleted.**  On May 5, 2009, the operator reportedthat the 78 mile Delta Pipeline from Tinsley Field to the Delhi Field has beencompleted and tested, allowing CO2 injection to proceed by calendar year end, followingfull regulatory approval.  As of June 30,2009, the Operator has reported that $256.2 million of capital expenditures have been made on the CO2-EOR project, excluding capitalized interest and the $50 million paid to us.

 

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**·****               ****We re-entered and drilled newlaterals in two wells at Giddings*.***The Hilton Yegua #1 and the Pearson #1were completed and placed on production during January 2009.  The average initial 8 day rate for the twowells was 450 gross BOED each, and they were averaging 120 gross BOED eachduring August of 2009.  We own a100% working interest and approximately 79% revenue interest in the two wells.

 

·                 **We successfully field tested ourproprietary lift technology at Giddings. **The firstwell we re-entered and drilled horizontally in Giddings, the Donella #1, wasalso our poorest producer due to previous depletion of the zone by an offsetwell.  After several months ofproduction, the well became incapable of commercial production on rodpump.  During June 2009, were-entered the Donella to install and test our proprietary artificial lifttechnology.  Commercial production wassuccessfully re-established and has steadily improved over its first two monthsof production.

 

·                 **We initiated and completedleasing of our Neptune oil project in South Texas and made preparations fordrilling. **We completed the leasing of approximately1,500 net acres, establishing proved reserves on four locations and identifyinganother 100 potential infill drilling locations.  Historical production in this field by aprevious operator demonstrated that substantial commercial reserves can begenerated through drilling on infill spacing. We expect to apply in the future the oil/water completion technologyhere that we previously developed and tested in the Tullos Field in Louisianawith the potential of increasing the profitability and commerciality of theinfill wells.

 

·                 **We began proof of concept drilling in our shallow Woodford Gas ShaleProject.**  We initiated the drilling of three test wellsand re-entry of four test wells, all vertical tests with light acid hydraulicfracturing, on our acreage in Wagoner County in Oklahoma.  Our objective is to prove that shallowvertical wells in our lease area can be economically competitive with otherregional gas plays.  We are awaiting coreresults and more extensive production tests to establish the production curvesnecessary for full development in calendar 2010.

 

***Operations***

 

·                 **Sales volumes increased 160% infiscal 2009 versus fiscal 2008.* ***Our increase in sales volumes for the year were solelyattributable to our production in the Giddings Field.  Our properties in the Tullos Field, whichwere sold on March 3, 2008, accounted for approximately 35% of total salesvolumes for our fiscal year ended June 30, 2008.

 

·                 **We exited fiscal 2009 at acombined rate of approximately 364 net BOE per day**. Production during the year was enhanced by the drilling and completionof two re-entries, installing gas lift on two wells, installing our proprietaryartificial lift technology on one well and adding a new well to productionthrough a workover and acid treatment.

 

·                 **We lowered our field incomebreak-even point by 31% over fiscal 2008 and 51% over fiscal 2007.** During the year ended June 30, 2009, lifting costs (lease operatingexpense and production taxes, on a combined per unit of sales basis) were$10.69 and our depletion rate was $18.07 per BOE, equaling a field incomebreak-even point of $28.76 per BOE.  Thiscompares to lifting costs of $25.39 and a depletion rate of $16.44 per BOE,equaling a field income break-even point of $41.83 per BOE we experiencedduring fiscal 2008 and lifting costs of $49.14 and a depletion rate of $9.68per BOE, equaling a field income break-even point of $58.82 per BOE weexperienced during fiscal 2007.  Duringthe quarter ended September 30, 2007, where primarily all our productionwas from our properties in the Tullos Field, lifting costs and depletion averaged$46.61 and $15.70 per Bbl of crude oil, respectively.

 

·                 **The product prices we received declined 45% in fiscal 2009 versusfiscal 2008. **During the year ended June 30, 2009,the average price we received was $45.47 per BOE, as compared to $82.46 per BOEduring the year ended June 30, 2008, and $31.10 per BOE during the threemonths ended June 30, 2009 versus $86.98 for the three months ended June 30,2008. However, most of the capital expenditures, including the drilling of thetwo re-entry wells in Giddings, occurred before most of the substantialreductions in oil field service prices that followed the decline in commodityprices.

 

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***Finances***

 

·                 **We ended the year with $7.6 million of working capital, compared to$13.6 million at June 30, 2008. **At June 30, 2009, working capitalincluded $6.0 million of cash and cash equivalents and short-term certificatesof deposit, and $2.1 million of recoverable income taxes arising from currentyear tax losses being carried back to a prior tax year.*** ***Early in fiscal 2009, wereduced our $19 million capital budget to under $10 million.  We finished fiscal 2009 incurring $8.6million (not including $0.5 million related to amounts capitalized due to assetretirement obligations) in capital expenditures for oil and natural gasleasehold and development costs.

 

·                 **We repurchased 788,200 shares of our common stock at an average priceof $1.10 per share, plus $0.02 per share transaction costs**. We believe that our potential underlying asset value per share issubstantially greater than the price we paid for the shares.  At this time, we currently have no plan torepurchase more common shares.

 

·                 **We protected our short-terminvestments during difficult credit market conditions.** We continued to avoid higher risk credit instruments, relying insteadupon lower yielding short-term U.S. Treasury money market funds.  During the second quarter of fiscal 2009, weredeployed some of our cash and cash equivalents into certificates of depositthat matured within a year and that are fully insured by the FDIC.

 

·                 **Despite substantially lower oil andgas prices that resulted in a loss of 1MMBOE of PUD reserves,  we did not have to impair the net book valueof our assets. **Fiscal year end****NYMEX spot prices for crude oil declined50% and natural gas declined 70% year over year, from $140.00 to $69.89 andfrom $13.095 to $3.885, respectively. During fiscal 2009, our provedreserves decreased 24% from 4.02 MMBOE to 3.06 MMBOE, due primarily to thedecline in the price of natural gas, partially offset by reserve additionsthroughleasing and development activities in the Giddings Field and in our Neptune oilproject in South Texas.  Despite thedecline in commodity prices and their affect on our proved reserves as of June 30,2009, our “ceiling” as calculated in our June 30, 2009 ceiling testremains approximately $11.4 million greater than the net book value of our oiland natural gas properties, net of related deferred income taxes.

 

·                 **Non-cash stock-basedcompensation expense of $2.4 million comprised over forty percent of totalgeneral and administrative expenses during the fiscal year ended June 30,2009. **Non-cash stock-basedcompensation expense remains an important part of our total compensation program to help motivate andretain high performing employees and consultants, in addition to conserving ourcash resources.

 

·                 **We settled the Thomas, et allawsuit at Delhi.**

 

·                 **We remained debt free.** All of our expenditures were funded solely by workingcapital and we ended the year with no funded debt.  We continue to have no short or long termliabilities other than payables, deferred income taxes and asset retirementobligations incurred in the ordinary course of business.

 

*Looking forward into 2010*

 

We will focus on:

 

***Selectivelow cost testing and development of our portfolio properties.***

 

·                 **Upgrade our shallow multi-pay shale gas reserves.** We plan to continue testing wells in two gas shale reservoirs in WagonerCounty, OK in order to establish predictable peak rates and declinecurves.  Later in the fiscal year, marketconditions permitting, we plan to re-enter a well in our mid-depth project inHaskell County, OK to begin testing two gas shale reservoirs expected between4,000’ and 5,000’ depth.

 

·                 **Pursue commercial joint ventures utilizing our proprietary artificiallift technology.**  Based on tests results in our Donella #1, webelieve this technology could re-establish production in many wells throughoutthe Giddings Field, and potentially other fields developed with horizontalwells.  We intend to approach producersto pool our technology and expertise with the intent of gaining an interest innew production re-established with our technology.

 

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**·****               ****Establish production at Neptune**. We have initiated development in our 100% owned Neptune oil project inSouth Texas that will include drilling two infill producers and one injectionwell, thus potentially upgrading additional proved reserves while adding oilproduction.

 

·                 **Conduct workovers in Giddings to generate net production to cover ouroverhead.**  We expect to carry out several workovers oncertain wells, including one currently nonproducing well we inherited in ourleasing, to partially offset normal production declines and generate sufficientcash flows to offset corporate cash overhead.

 

·                 **Solicit joint venture(s) to drill Giddings PUD locations.** If natural gas prices recover and oil prices remain stable during fiscalyear 2010, we may begin drilling in the Giddings Field or enter into a jointventure to conduct drilling of our PUD locations.

 

***Continued progress in our DelhiEOR project****.*

 

·                 **Delhi operator plans to initiate CO****2**** injection by calendar 2009 year end.**

 

·                 **Delhi operator expects first oil production by mid-calendar 2010.**

 

·                 **Establish proved reserves at Delhi.** Under currentSEC rules, proved reserves cannot be assigned to our Delhi EOR property untilfirst EOR production response, projected by the Operator to occur by mid-yearcalendar 2010. Alternatively, the SEC’s “Modernization” rules that arescheduled to become effective on January 1, 2010, state that reservoirengineers can consider other relevant factors in assigning proved reserves toEOR projects, including current technology, the results of field pilot testsand EOR projects in geologically comparable fields, all of which we believe arecharacteristics of the EOR project at Delhi.

 

***Continued conservative financialmanagement.***

 

·                 **Emphasizing long-term share value over near-term earnings during thecurrent period of low natural gas prices.**

 

·                 **Retain financial strength and flexibility to assure we obtain propervalue of our core assets.**

 

·                 **Primarily use internally generated funds and our working capital forfiscal 2010 goals,**whilelooking to joint ventures and project financing for additional growth whencapital and natural gas market conditions improve.

 

**Liquidity and Capital Resources**

 

At June 30, 2009,our working capital was $7.6 million and we continued to be debt free.  This compares to working capital of $13.6million at June 30, 2008.  Thedecrease in working capital of $6.0 million since June 30, 2008 was dueprimarily to investments of $8.6 million in oil and natural gas properties,consisting of $2.3 million in leasehold acquisition costs and $6.3 million indevelopment activities. We also repurchased 788,200 shares of our common stockfor $0.9 million and spent approximately $0.2 million on retiring certain assetretirement obligations and acquiring other property and equipment.  These transactions, which reduced our workingcapital, were partially offset by EBTDA of $1.3 million, income taxesrecoverable of $2.1 million from the carry-back of our 2009 income tax loss,and a reclassification of a $0.3 million certificate of deposit from otherassets to current assets.  The mostdirectly comparable GAAP financial measure to EBTDA is “Net loss before incometax benefit.”  EBTDA is reconciled to our$3.6 million “Net loss before income tax benefit” by adding back non-cashcharges of $4.9 million related to stock-based compensation, depreciation,depletion, and amortization, and accretion on asset retirement obligations(charges that had no impact on our working capital).

 

Cash flows provided byoperating activities for the year ended June 30, 2009 were $6.0million.  Cash flows provided byoperations includes cash proceeds of $7.3 million from oil and natural gasproduction primarily from our properties in the Giddings Field, cash proceedsof $0.1 million from interest income and cash proceeds of $4.1 million fromincome tax refunds, primarily from our 2008 tax year net operating losscarry-back.  Sources of cash were offsetby $5.5 million of cash payments for operating activities, including leaseoperating expenses, production taxes, salaries and wages and generaladministrative expense.

 

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In comparison, $0.9million of cash was used in operations during the year ended June 30,2008, which includes $2.8 million of cash proceeds from oil and natural gasproduction ($1.7 million from our properties in the Tullos Field, which we soldduring the third quarter of fiscal 2008, and $1.1 million primarily from ourproperties in the Giddings Field) and cash proceeds from interest income of$0.9 million.  These 2008 cash sourceswere offset by $4.6 million of cash payments for operating activities, includinglease operating expenses, production taxes, salaries and wages and generaladministrative expense.

 

Cash flows used ininvesting activities totaled $12.5 million during the year ended June 30,2009, which includes the purchase of short-term certificates of deposit of $1.8million.  Our remaining investingactivities of $10.7 million were primarily for development activities in theGiddings Field and leasehold acquisitions in the Giddings Field, our Woodford Shaleprojects in Oklahoma and our Neptune oil project in South Texas.  The $10.7 million includes net payments onaccounts payable relating to expenditures for oil and natural gas properties of$2.1 million from June 30, 2008, thus we incurred $8.6 million of capitalexpenditures for oil and natural gas properties during this fiscal year.

 

Cash flows used ininvesting activities totaled $15.6 million during the year ended June 30,2008.  Cash of $20.0 million was used forinvestments to acquire and develop oil and natural gas property interests andother property and equipment, primarily for investments in oil and natural gasproperties at the Giddings Field.  The$20.0 million does not include the $1.6 million net increase in accountspayable related to capital expenditures on oil and natural gas properties from June 30,2007 to June 30, 2008, thus we incurred $21.6 million of capitalexpenditures for oil and natural gas properties during the 2008 fiscalyear.  The sale of our properties in theTullos Field partially offset our development and acquisition activities byproviding net cash proceeds of $4.4 million during the year ended June 30,2008.

 

Cash flows used in financing activities for the yearended June 30, 2009 were $0.9 million. On October 30, 2008, we repurchased 788,200 shares of common stockat an average price of $1.10 per share plus $0.02 in transaction costs from anunaffiliated accredited investor.

 

There were no significant cash flows from financingactivities during the fiscal year ended June 30, 2008.

 

We incurred $8.6 millionof capital expenditures for oil and natural gas leasehold and development costsduring year ended June 30, 2009, plus an additional $0.5 million relatedto recognition of asset retirement obligations. The $8.6 million of incurred capital expenditures in fiscal 2009, $2.3million was for leasehold acquisitions and $6.3 million for developmentactivities.  Development activities wereprimarily in the Giddings Field, with $0.3 million in test drilling in ourWoodford Shale acreage.  Leasehold costswere for properties in the Giddings Field, our Woodford Shale projects inOklahoma and our Neptune oil project in South Texas.

 

We incurred approximately$21.6 million in capital expenditures for oil and natural gas leasehold anddevelopment costs during year ended June 30, 2008, plus an additional $0.2million related to the recognition of asset retirement obligations.  The $21.6 million in capital expenditures infiscal 2008 included $8.6 million for leasehold acquisitions and $13.0 millionfor development costs, primarily in the Giddings Field.

 

Based on our currentplans, we expect capital expenditures of approximately $3.0 million during 2010for:

 

·                  Development of our first two infill oilPUDs at our Neptune South Texas properties to prospectively add production andadditional proved reserves there;

 

·                  Extended testing of our shallowmulti-reservoir gas shale project in Eastern Oklahoma;

 

·                  Commercialization and joint venture(s) ofour proprietary artificial lift technology, with the goal of sharing inadditional production from third-party operator’s incapable wells;

 

·                  Improvement of Giddings economics throughproduction and cost efficiencies, focusing on workovers to optimize productionand the drilling of a saltwater disposal well to reduce lifting costs; and

 

·                  Selected opportunistic leasing in andaround our existing projects.

 

We expect to fund ourfiscal 2010 goals with internally generated funds and our working capital,while looking to joint ventures and project financing for additional growth,when capital and natural gas market conditions improve.

 

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Due to our positive working capital, cash flows fromproducing properties, no debt and no near term expiring leases, we believe wehave the ability to fund or further adjust our capital expenditure budget tocapture select opportunities that may arise for the benefit of ourshareholders, without the need of additional financing.  Therefore, we believe that our currentsources of liquidity are sufficient to fund our ongoing cash requirements.

 

**Results of Operations**

 

*Year ended June 30, 2009 compared with theyear ended June 30, 2008*

 

The following table sets forth certain financialinformation with respect to our oil and natural gas operations:

 
| ** **                                              | ** ** | **Year Ended**   | ** **      | ** ** | ** ** | ** **      | ** ** |
|---------------------------------------------------------|------------|------------------|-----------------|------------|------------|-----------------|------------|
| ** **                                              | ** ** | **June 30** | ** **      | ** ** | ** ** | **%**           | ** ** |
| ** **                                              | ** ** | **2009**         | ** **      | **2008**   | ** ** | **Variance**    | ** ** | **change** | ** ** |
| ** **                                              |       |             | ** **      | ** ** | ** ** | ** **      | ** ** |   | ** ** |
| **Sales Volumes, net to the Company:**                  |       |             | ** **      | ** ** | ** ** | ** **      | ** ** |   | ** ** |
| ** **                                              |       |             | ** **      | ** ** | ** ** | ** **      | ** ** |   | ** ** |
| Crude oil (Bbl)                                         |       | 36,026           |            | 29,466     |       | 6,560           |       | 22 | % |
|                                                    |       |             |            |       |       |            |       |   |   |
| NGLs (Bbl)                                              |       | 44,125           |            | 10,639     |       | 33,486          |       | 315 | % |
|                                                    |       |             |            |       |       |            |       |   |   |
| Natural gas (Mcf)                                       |       | 323,301          |            | 69,051     |       | 254,250         |       | 368 | % |
| Crude oil, NGLs and natural gas (BOE)                   |       | 134,035          |            | 51,614     |       | 82,421          |       | 160 | % |
|                                                    |       |             |            |       |       |            |       |   |   |
| **Revenue data:**                                       |       |             |            |       |       |            |       |   |   |
| ** **                                              |       |             |            |       |       |            |       |   |   |
| Crude oil                                               |       | $                |  2,747,494 |       | $          |  2,918,127 |       | $ |  (170,633 | ) | (6 | )% |
|                                                    |       |             |            |       |       |            |       |   |   |
| NGLs                                                    |       | 1,625,063        |            | 670,434    |       | 954,629         |       | 142 | % |
|                                                    |       |             |            |       |       |            |       |   |   |
| Natural gas                                             |       | 1,722,626        |            | 667,567    |       | 1,055,059       |       | 158 | % |
| Total revenues                                          |       | $                |  6,095,183 |       | $          |  4,256,128 |       | $ |  1,839,055 |   | 43 | % |
|                                                    |       |             |            |       |       |            |       |   |   |
| **Average price:**                                      |       |             | ** **      | ** ** | ** ** | ** **      | ** ** |   | ** ** |
| Crude oil (per Bbl)                                     |       | $                |  76.26     |       | $          |  99.03     |       | $ |  (22.77 | ) | (23 | )% |
| NGLs (per Bbl)                                          |       | 36.83            |            | 63.02      |       | (26.19          | )          | (42 | )% |
| Natural gas (per Mcf)                                   |       | 5.33             |            | 9.67       |       | (4.34           | )          | (45 | )% |
| Crude oil, NGLs and natural gas (per BOE)               |       | $                |  45.47     |       | $          |  82.46     |       | $ |  (36.99 | ) | (45 | )% |
|                                                    |       |             |            |       |       |            |       |   |   |
| **Expenses (per BOE)**                                  |       |             | ** **      | ** ** | ** ** | ** **      | ** ** |   | ** ** |
| Lease operating expenses and production taxes           |       | $                |  10.69     |       | $          |  25.39     |       | $ |  (14.70 | ) | (58 | )% |
| Depletion expense on oil and natural gas properties (a) |       | $                |  18.07     |       | $          |  16.44     |       | $ |  1.63 |   | 10 | % |

 

----

(a)          Excludesdepreciation of office equipment, furniture and fixtures, and other of $38,965and $54,668, for the year ended June 30, 2009 and 2008, respectively.

 

Net loss.  For the year ended June 30, 2009, wereported a net loss of $2,601,593, or $0.10 loss per share (which includes$2,405,900 of non-cash stock-based compensation expense) on total oil andnatural gas revenues of $6,095,183.  Thiscompares to a net loss of $1,570,974, or $0.06 loss per share (which includes$1,791,486 of non-cash stock-based compensation expense) on total oil andnatural gas revenues of $4,256,128 for the year ended June 30, 2008.  An increase in our revenues of $1,839,055 wasoffset by increases in operating costs of $2,069,226 (primarily related to anincrease in stock-based compensation and depreciation, depletion, andamortization), a decrease in interest income of $731,858, and a decrease in ourincome tax benefit of $68,590. Additional details of the components of net loss are explained ingreater detail below.

 

Sales Volumes.  Crude oil,NGLs, and natural gas sales volumes, net to our interest, for the year ended June 30,2009 increased 160% to 134,035 BOE, compared to 51,614 BOE for the year ended June 30,2008.  The increase in sales volumes isdue to production of crude oil, NGLs and natural gas from our properties in theGiddings Field.  Production in ourGiddings Field began late in our third fiscal quarter for the year ended June 30,2008.  Our properties in the TullosField, which were sold on March 3, 2008, accounted for 35% of total salesvolumes for the year ended June 30, 2008.

 

Oil, NGLs and Natural GasRevenues.  Crude oil, NGLs and natural gas revenues forthe year ended June 30, 2009 increased 43% from the year ended June 30,2008.  This was due to an increase insales volumes of crude oil, NGLs, and natural gas during the year ended June 30,2009 from our properties in the Giddings Field. Production in our Giddings Field began late in our third fiscal quarterfor the year ended June 30, 2008, and accounted for 64% of total netproduction sold.  Increased productionwas substantially offset by a 45% decline in the average price received perBOE, from $82 per BOE for year ended June 30, 2008 to $45 per BOE for theyear ended June 30, 2009.  Ourproperties in the Giddings Field generated

 

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almost 100% of ourrevenues for year ended June 30, 2009. Oil revenues from our properties in the Tullos Field, which were sold inMarch 2008, accounted for 35% of total revenues for the year ended June 30,2008.

 

Lease Operating Expenses (including productionseverance taxes).  Lease operating expenses and production taxesfor the year ended June 30, 2009 increased approximately 7% from the yearended June 30, 2008.  The increaseis primarily attributable to a an increase in production taxes in the Giddings Fieldas compared to the Tullos Field, which accounted for 35% of our productionduring the previous fiscal year.  Thehigher production taxes are due to higher revenues in our Texas propertiescompared to our production from our Louisiana properties in the previous fiscalyear, even after adjusting for the Texas limited severance tax holiday on wellsrestored to production.  Lease operatingcosts increased 2% from the prior fiscal year, primarily due to increased productionin the Giddings Field.  On a BOE basis,lease operating expenses (including production severance taxes) decreased by58% over the prior fiscal year, due to increased production from our propertiesin the Giddings Field, which accounted for almost 100% of total production forthe fiscal year ended June 30, 2009, but approximately 64% of productionin the prior fiscal year.  Our propertiesin the Tullos Field, which were sold in the third quarter of the prior fiscalyear and accounted for 35% of total production for that year, consisted of numerouslower producing wells as compared to our properties in the Giddings Field,which consist of fewer higher producing wells.

 

General and Administrative Expenses (“G&A”). G&A expenses increased 7% to $5.9 million for the year ended June 30,2009, compared to $5.5 million for the year ended June 30, 2008.  Personnel costs decreased $0.6 million fromthe prior fiscal year, offset by an increases in non-cash stock-basedcompensation expense, which was $2,405,900 (41% of total G&A) and$1,791,486 (33% of total G&A) for the years ended June 30, 2009 and2008, respectively.  Also contributing tothe increase were professional fees associated with the Delhi litigation ofapproximately $0.4 million for the year ended June 30, 2009.  Non-cash stock-based compensation is anintegral part of total staff compensation utilized to recruit quality stafffrom other, more established companies and, as a result, will likely continueto be a significant component of our G&A costs.

 

Depreciation, Depletion & Amortization Expense(“DD&A”).  DD&A increased by $1,557,948 to$2,461,162 for the year ended June 30, 2009, compared to $903,214 for theyear ended June 30, 2008.  Theincrease is primarily due to a 160% increase in sales volumes from the priorfiscal year, and a higher depletion rate ($18.07 vs. $16.44) per BOE.  The increase in the depletion rate is due tothe higher development cost of PUDs locations in the Giddings Field that weadded in amount far in excess of the volume of lower cost PDP production fromour properties in the Tullos Field, which we sold in March 2008.  Proved reserves in the Giddings Fieldtypically are higher cost, but higher valued, compared to the long life, highoperating cost proved reserves in the Tullos Field.

 

Interest Income.  Interest incomefor the year ended June 30, 2009 decreased $731,858 to $122,272, comparedto $854,130 for the year ended June 30, 2008.  The decrease in interest income is due tolower available cash balances averaging $8.7 million during the year ended June 30,2009, as compared to cash balances averaging $19.5 million during the yearended June 30, 2008, combined with a lower interest rate environmentduring the year ended June 30, 2009. The lower cash balance is primarily due to cash used for additions toour oil and natural gas properties.

 

Inflation. Although the general inflation rate in the United States, as measured bythe Consumer Price Index and the Producer Price Index, has been relatively lowin recent years, the oil and gas industry has experienced unusually volatileprice movements.  With the general risein the price of oil and natural gas products over two of the last three fiscalyears, increased prices for drilling and oilfield services, oilfield equipment,tubulars, labor, expertise and other services, have also increased, therebyescalating our lease operating expenses and our capital expenditures.  Most recently, we have seen a precipitousdecline in both petroleum product prices and drilling and oilfield servicescosts, although product prices, operating costs and development costs may notalways move in tandem.  Such declines asof June 30, 2009 are reflected in our ceiling test calculations.

 

Known Trends andUncertainties.  General worldwide economic conditions havedeteriorated due to credit conditions impacted by the sub-prime mortgageturmoil and other factors.  Concerns over slower or decliningeconomic growth are affecting numerous industries, companies, as well asconsumers, which has resulted in reduced demand for crude oil and naturalgas.  If demand continues to decrease in the future, it may continueto put downward pressure on crude oil and natural gas prices, thereby loweringour revenues and working capital going forward.

 

Seasonality. Our business is generally not seasonal, except for certain rareinstances when weather conditions may adversely affect access to our propertiesor delivery of our petroleum products. Although we do not generally modify our production for changes in marketdemand, we do experience seasonality in the product prices we receive,generally based on higher demand for natural gas in the summer and winter andhigher demand for downstream oil products during the summer driving season.

 

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**Critical Accounting Policies and Estimates**

 

The preparation of financial statements in accordancewith accounting principles generally accepted in the United States of Americarequires that we select certain accounting policies and make estimates andassumptions that affect the reported amounts of the assets and liabilities anddisclosures of contingent assets and liabilities as of the date of the balancesheet as well as the reported amounts of revenues and expenses during the reportingperiod.  These policies, together withour estimates have a significant affect on our consolidated financialstatements.  Our significant accountingpolicies are included in Note 2 to the consolidated financial statements.  Following is a discussion of our mostcritical accounting estimates, judgments and uncertainties that are inherent inthe preparation of our consolidated financial statements.

 

*Oil and Natural Gas Properties*.  Companies engaged in the production of oil and naturalgas are required to follow accounting rules that are unique to the oil andgas industry.  We apply the full-costaccounting method for our oil and natural gas properties. Another acceptablemethod of accounting for oil and natural gas production activities is the successfulefforts accounting method. In general, the primary differences between the twomethods are related to the capitalization of costs and the evaluation for assetimpairment.  Under full-cost accounting,all geological and geophysical costs, exploratory dry holes and delay rentalsare capitalized to the full cost pool, whereas under the successful effortsaccounting method such costs are expensed as incurred.  In the assessment of impairment of oil andnatural gas properties, the successful efforts accounting method follows theguidance of SFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*, under which the netbook value of assets are measured for impairment against the undiscountedfuture cash flows using commodity prices consistent with managementexpectations.  Under the full-costaccounting method, the full-cost pool is measured against future net cash flowsdiscounted at 10% using commodity prices in effect at the end of the reportingperiod.  The financial results for agiven period could be substantially different depending on the method ofaccounting that a company adopts.

 

*Proved Reserves, DD&A, and theCeiling Test.*  Under full-cost accounting, the estimatedquantities of proved oil and natural gas reserves have a significant impact onthe underlying financial statements.  Theestimated quantities of proved reserves are used to calculate DD&A and theestimated future net cash flows associated with those proved reserves is thebasis in determining impairment under the quarterly ceiling testcalculation.  The process of estimatingoil and natural gas reserves is very complex, requiring significant decisionsin the evaluation of all available geological, geophysical, engineering andeconomic data. Estimated reserves are often subject to future revisions, whichcould be substantial, based on the availability of additional information,including reservoir performance, additional development activity, newgeological and geophysical data, additional drilling, technological advancements,price changes and other economic factors. As a result, material revisions to existing reserve estimates may occurfrom time to time. Although every reasonable effort is made to ensure that thereported reserve estimates represent the most accurate assessments possible,including the hiring of independent engineers to prepare the report, thesubjective decisions and variances in available data for the properties makethese estimates generally less precise than other estimates included in ourfinancial statements.

 

Material revisions to reserve estimates and orsignificant changes in commodity prices could substantially affect ourestimated future net cash flows of our proved reserves, affecting our quarterlyceiling test calculation and could significantly affect our DD&A rate.  A 10% decrease in commodity prices as of June 30,2009, would not have resulted in an impairment of our oil and natural gasproperties.  A 10% decrease in our provedreserve quantities would have increased our DD&A by approximately $50thousand for the year ended June 30, 2009 and would increase our DD&Arate by $1.87 per BOE.

 

On December 31, 2008, the SEC released new “Modernization”requirements for reporting oil and gas reserves.  The Modernization disclosure requirements,when effective, provide for consideration of new technologies in evaluatingreserves, allows companies to disclose their probable and possible reserves toinvestors, requires reporting of oil and gas reserves using an average pricebased on the prior 12-month period rather than year-end prices, revises thedisclosure requirements for oil and gas operations, and revises accounting forthe limitation on capitalized costs for full-cost companies.  The Modernization disclosure requirementswill become effective for our Annual Report on Form 10-K for the yearended June 30, 2010. The SEC is coordinating with the FASB to obtain therevisions necessary to provide consistency with the Modernization. In the eventthat consistency is not achieved in time for companies to comply with theModernization, the SEC will consider delaying the compliance date. Asignificant change as a result of the Modernization requirements relates to thecalculation of reserves. Under the Modernization requirements, reserves will becalculated on an average price which will reduce the volatility of the reserveestimate.

 

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*Unproved Properties. *On a quarterly basis, the costs of unproved propertiesare evaluated for inclusion in full cost pool due to the determination ofproved reserves or impairment of the property. To the extent that theevaluation indicates these properties are impaired, the amount of theimpairment is added to the full cost pool, which is amortized using theunit-of-production method, with no losses recognized.

 

*Valuation of Deferred Tax Assets*.  We make certain estimates and judgments in determiningour income tax expense for financial reporting purposes.  These estimates and judgments occur in thecalculation of certain tax assets and liabilities that arise from differencesin the timing and recognition of revenue and expense for tax and financialreporting purposes.  Our federal andstate income tax returns are generally not prepared or filed before theconsolidated financial statements are prepared or filed; therefore, we estimatethe tax basis of our assets and liabilities at the end of each period as wellas the effects of tax rate changes, tax credits, and net operating loss carrybacks and carry forwards.  Adjustments relatedto these estimates are recorded in our tax provision in the period in which wefile our income tax returns. Further, we must assess the likelihood that wewill be able to recover or utilize our deferred tax assets (primarily our netoperating loss).  If recovery is notlikely, we must record a valuation allowance against such deferred tax assetsfor the amount we would not expect to recover, which would result in anincrease to our income tax expense.  Asof June 30, 2009, we have recorded a valuation allowance for the portionof our net operating loss that is limited by IRS Section 382.

 

Management considers the scheduled reversal ofdeferred tax liabilities, projected future taxable income, and tax planningstrategies in making the assessment of the ultimate realization of deferred taxassets.  Based upon the level ofhistorical taxable income and projections for future taxable income over theperiods for which the deferred tax assets are deductible, as of end of thecurrent fiscal year, we believe that it is more likely than not that theCompany will realize the benefits of its net deferred tax assets. If ourestimates and judgments change regarding our ability to utilize our deferredtax assets, our tax provision would increase in the period it is determinedthat recovery is not probable.

 

*Stock-based Compensation.*  We estimate the fair value of stock option awards onthe date of grant using the Black-Scholes option pricing model.  This valuation method requires the input ofcertain assumptions, including expected stock price volatility, expected termof the award, the expected risk-free interest rate, and the expected dividendyield of the Company’s stock .  Therisk-free interest rates used is the U.S. Treasury yield for bonds matching theexpected term of the option on the date of grant.  Our dividend yield is zero, as we do not paya dividend.  Because of our limitedtrading experience of our common stock and limited exercise history of ourstock option awards, estimating the volatility and expected term is verysubjective.  We base our estimate of ourexpected future volatility, on peer companies whose common stock has beentrading longer than ours, along with our own limited trading history whileoperating as an oil and natural gas producer. Future estimates of our stock volatility could be substantiallydifferent from our current estimate, which could significantly affect theamount of expense we recognize for our stock-based compensation awards.

 

**Off Balance Sheet Arrangements**

 

The Company has nooff-balance sheet arrangements as of June 30, 2009.

 

**ITEM 7A.**** QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISKS**

 

*InterestRate Risk*

 

We are exposed to changesin interest rates. Changes in interest rates affect the interest earned on ourcash and cash equivalents.  Under ourcurrent policies, we do not use interest rate derivative instruments to manageexposure to interest rate changes.

 

*CommodityPrice Risk*

 

Our most significant market risk is the pricing forcrude oil, natural gas and NGLs. We expect energy prices to remain volatile andunpredictable. If energy prices decline significantly, revenues and cash flowwould significantly decline. In addition, a non-cash write-down of our oil andgas properties could be required under full cost accounting rules iffuture oil and gas commodity prices sustained a significant decline. Pricesalso affect the amount of cash flow available for capital expenditures and ourability to borrow and raise additional capital, as, if and when needed.  Although our current production base may notbe sufficient enough to effectively allow hedging, we may use derivativeinstruments to hedge our commodity price risk.

 

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**Item8. Financial Statements**

 

**Index toConsolidated Financial Statements**

 
| Report  of Independent Registered Public Accounting Firm                                              | 36     |
|-------------------------------------------------------------------------------------------------------|--------|
|                                                                                                  |   |
| Consolidated  Balance Sheets as of June 30, 2009 and 2008.                                       | 37     |
|                                                                                                  |   |
| Consolidated  Statements of Operations for the Years ended June 30, 2009 and 2008.               | 38     |
|                                                                                                  |   |
| Consolidated  Statements of Cash Flows for the Years ended June 30, 2009 and 2008.               | 39     |
|                                                                                                  |   |
| Consolidated Statements of Stockholders’ Equity for  the Years ended June 30, 2009 and 2008 | 40     |
|                                                                                                  |   |
| Notes to Consolidated Financial Statements                                                            | 41     |

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

Board of Directors and Stockholders

Evolution Petroleum Corporation

Houston, Texas

 

We have audited theaccompanying consolidated balance sheets of Evolution Petroleum Corporation asof June 30, 2009 and 2008 and the related consolidated statements ofoperations, stockholders’ equity, and cash flows for each of two years in theperiod ended June 30, 2009.  Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudits to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Evolution PetroleumCorporation as of June 30, 2009 and 2008, and the consolidated results ofits operations and its cash flows for each of the two years in the period endedJune 30, 2009 in conformity with accounting principles generally acceptedin the United States of America.

 

We were not engaged toexamine management’s assertion about the effectiveness of Evolution PetroleumCorporation’s internal controls over financial reporting as of June 30,2009 included in the accompanying Management’s Report on Internal Control overFinancial Reporting and, accordingly, we do not express an opinion thereon.

 

 

HEIN & ASSOCIATESLLP

 

Houston, Texas

September 23, 2009

 

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**PART I — FINANCIALINFORMATION**

 

**ITEM 1. CONSOLIDATED FINANCIALSTATEMENTS**

 

**EvolutionPetroleum Corporation and Subsidiaries**

**ConsolidatedBalance Sheets**

** **
| ** **                                                                                                                                                                                           | ** ** | **June 30,** | ** **       | **June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------------|-------------------|------------|
| ** **                                                                                                                                                                                           | ** ** | **2009**          | ** **       | **2008**          | ** ** |
| **Assets**                                                                                                                                                                                           | ** ** | ** **        | ** **       | ** **        | ** ** |
| Current assets                                                                                                                                                                                       |       |              |             |              |       |
| Cash and cash equivalents                                                                                                                                                                            |       | $                 |  3,891,764  |              | $          |  11,272,280 |   |
| Certificates of deposit                                                                                                                                                                              |       | 2,059,147         |             | —            |       |
| Receivables                                                                                                                                                                                          |       |              |             |              |       |
| Oil and natural gas sales                                                                                                                                                                            |       | 532,318           |             | 2,066,300         |       |
| Income taxes                                                                                                                                                                                         |       | —            |             | 478,599           |       |
| Other                                                                                                                                                                                                |       | 172,314           |             | 86,966            |       |
| Income taxes recoverable                                                                                                                                                                             |       | 2,055,802         |             | 3,625,987         |       |
| Prepaid expenses and other current assets                                                                                                                                                            |       | 162,441           |             | 270,938           |       |
| Total current assets                                                                                                                                                                                 |       | 8,873,786         |             | 17,801,070        |       |
|                                                                                                                                                                                                 |       |              |             |              |       |
| Property and equipment, net of depreciation,  depletion, and amortization                                                                                                                            |       |              |             |              |       |
| Oil and natural gas properties — full-cost method  of accounting, of which $9,819,465 and $8,754,429 at June 30, 2009 and  2008, respectively, were excluded from amortization.            |       | 28,751,178        |             | 22,047,233        |       |
| Other property and equipment                                                                                                                                                                         |       | 150,697           |             | 161,027           |       |
| Total property and equipment                                                                                                                                                                         |       | 28,901,875        |             | 22,208,260        |       |
|                                                                                                                                                                                                 |       |              |             |              |       |
| Other assets                                                                                                                                                                                         |       | 53,162            |             | 356,518           |       |
|                                                                                                                                                                                                 |       |              |             |              |       |
| Total assets                                                                                                                                                                                         |       | $                 |  37,828,823 |              | $          |  40,365,848 |   |
|                                                                                                                                                                                                 |       |              |             |              |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                       |       |              |             |              |       |
| Current liabilities                                                                                                                                                                                  |       |              |             |              |       |
| Accounts payable                                                                                                                                                                                     |       | $                 |  690,639    |              | $          |  2,892,459 |   |
| Accrued payroll                                                                                                                                                                                      |       | 71,427            |             | 772,559           |       |
| Royalties payable                                                                                                                                                                                    |       | 218,477           |             | 473,327           |       |
| State taxes payable                                                                                                                                                                                  |       | 157,736           |             | —            |       |
| Other current liabilities                                                                                                                                                                            |       | 99,625            |             | 32,703            |       |
| Total current liabilities                                                                                                                                                                            |       | 1,237,904         |             | 4,171,048         |       |
|                                                                                                                                                                                                 |       |              |             |              |       |
| Long term liabilities                                                                                                                                                                                |       |              |             |              |       |
| Deferred income taxes                                                                                                                                                                                |       | 3,721,317         |             | 2,901,929         |       |
| Asset retirement obligations                                                                                                                                                                         |       | 664,710           |             | 215,056           |       |
| Stock bonus (Note 16)                                                                                                                                                                                |       | 370,440           |             | —            |       |
| Deferred rent                                                                                                                                                                                        |       | 77,858            |             | 74,081            |       |
|                                                                                                                                                                                                 |       |              |             |              |       |
| Total liabilities                                                                                                                                                                                    |       | 6,072,229         |             | 7,362,114         |       |
|                                                                                                                                                                                                 |       |              |             |              |       |
| Commitments  and contingencies (Note 13)                                                                                                                                                             |       |              |             |              |       |
|                                                                                                                                                                                                 |       |              |             |              |       |
| Stockholders’ equity                                                                                                                                                                            |       |              |             |              |       |
| Preferred stock, par value $0.001; 5,000,000 shares  authorized; no shares issued or outstanding                                                                                                     |       | —            |             | —            |       |
| Common stock; par value $0.001; 100,000,000 shares  authorized;  issued 27,318,517 shares;outstanding 26,530,317  shares and 26,870,439 shares as of June 30, 2009 and 2008, respectively. |       | 27,318            |             | 26,870            |       |
| Additional paid-in capital                                                                                                                                                                           |       | 16,424,868        |             | 14,188,841        |       |
| Retained earnings                                                                                                                                                                                    |       | 16,186,430        |             | 18,788,023        |       |
|                                                                                                                                                                                                 |       | 32,638,616        |             | 33,003,734        |       |
| Treasury stock, at cost, 788,200 shares as of  June 30, 2009.                                                                                                                                   |       | (882,022          | )                | —            |       |
|                                                                                                                                                                                                 |       |              |             |              |       |
| Total stockholders’ equity                                                                                                                                                                      |       | 31,756,594        |             | 33,003,734        |       |
|                                                                                                                                                                                                 |       |              |             |              |       |
| Total liabilities and stockholders’ equity                                                                                                                                                      |       | $                 |  37,828,823 |              | $          |  40,365,848 |   |

 

See accompanyingnotes to consolidated financial statements.

 

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**EvolutionPetroleum Corporation and Subsidiaries**

**Consolidated Statements of Operations**

** **
| ** **                                 | ** ** | **Year Ended**    | ** **       |
|--------------------------------------------|------------|-------------------|------------------|
| ** **                                 | ** ** | **June 30,** | ** **       |
| ** **                                 | ** ** | **2009**          | ** **       | **2008** | ** ** |
| Revenues                                   |       |              |             |   |   |
| Crude  oil                                 |       | $                 |  2,747,494  |   | $ |  2,918,127 |   |
| Natural  gas liquids                       |       | 1,625,063         |             | 670,434 |   |
| Natural  gas                               |       | 1,722,626         |             | 667,567 |   |
| Total  revenues                            |       | 6,095,183         |             | 4,256,128 |   |
|                                       |       |              |             |   |   |
| Operating Costs                            |       |              |             |   |   |
| Lease  operating expenses                  |       | 1,281,989         |             | 1,255,787 |   |
| Production  taxes                          |       | 158,794           |             | 90,252 |   |
| Depreciation,  depletion and amortization  |       | 2,461,162         |             | 903,214 |   |
| Accretion  of asset retirement obligations |       | 37,601            |             | 20,196 |   |
| General  and administrative expenses *     |       | 5,896,366         |             | 5,497,237 |   |
| Total  operating costs                     |       | 9,835,912         |             | 7,766,686 |   |
|                                       |       |              |             |   |   |
| Loss from operations                       |       | (3,740,729        | )                | (3,510,558 | ) |
|                                       |       |              |             |   |   |
| Other income                               |       |              |             |   |   |
| Interest  income                           |       | 122,272           |             | 854,130 |   |
| ** **                                 |       |              |             |   |   |
| Net loss before income tax benefit         |       | (3,618,457        | )                | (2,656,428 | ) |
|                                       |       |              |             |   |   |
| Income tax benefit                         |       | 1,016,864         |             | 1,085,454 |   |
| ** **                                 |       |              |             |   |   |
| Net loss                                   |       | $                 |  (2,601,593 | ) | $ |  (1,570,974 | ) |
|                                       |       |              |             |   |   |
| Loss per common share                      |       |              |             |   |   |
| Basic  and Diluted                         |       | $                 |  (0.10      | ) | $ |  (0.06 | ) |
|                                       |       |              |             |   |   |
| Weighted average number of common shares   |       |              |             |   |   |
| Basic  and Diluted                         |       | 26,366,677        |             | 26,786,270 |   |

 

----

*General and administrativeexpenses for the year ended June 30, 2009 and 2008 included non-cashstock-based compensation expense of $2,405,900 and $1,791,486, respectively.

 

See accompanyingnotes to consolidated financial statements.

 

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**EvolutionPetroleum Corporation and Subsidiaries**

**Consolidated Statements of Cash Flow**

 
| ** **                                                                                 | ** ** | **Year Ended********June 30,** | ** **       |
|--------------------------------------------------------------------------------------------|------------|-------------------------------------|------------------|
| ** **                                                                                 | ** ** | **2009**                            | ** **       | **2008** | ** ** |
| Cash flows from operating activities                                                       |       |                                | ** **       | ** ** | ** ** |
| Net  loss                                                                                  |       | $                                   |  (2,601,593 | ) | $ |  (1,570,974 | ) |
| Adjustments  to reconcile net loss to net cash provided by (used in) operating activities: |       |                                |             |   |   |
| Depreciation,  depletion and amortization                                                  |       | 2,461,162                           |             | 903,214 |   |
| Stock-based  compensation                                                                  |       | 2,405,900                           |             | 1,791,486 |   |
| Issuance  of common stock for charitable donation                                          |       | 28,600                              |             | — |   |
| Accretion  of asset retirement obligations                                                 |       | 37,601                              |             | 20,196 |   |
| Settlement  of asset retirement obligations                                                |       | (90,761                             | )                | — |   |
| Deferred  income taxes                                                                     |       | 819,388                             |             | 2,563,928 |   |
| Deferred  rent                                                                             |       | 3,777                               |             | 26,792 |   |
| Other  assets                                                                              |       | 6,236                               |             | 6,236 |   |
| Changes  in operating assets and liabilities:                                              |       |                                |             |   |   |
| Receivables  from oil and natural gas sales                                                |       | 1,533,982                           |             | (1,876,090 | ) |
| Receivables  from income taxes and other                                                   |       | 1,963,436                           |             | (3,747,852 | ) |
| Prepaid  expenses and other current assets                                                 |       | 108,497                             |             | 90,902 |   |
| Accounts  payable and accrued expenses                                                     |       | (624,333                            | )                | 468,866 |   |
| Royalties  payable                                                                         |       | (254,850                            | )                | 466,496 |   |
| Income  taxes payable                                                                      |       | 157,736                             |             | — |   |
| Net  cash provided by (used in) operating activities                                       |       | 5,954,778                           |             | (856,800 | ) |
|                                                                                       |       |                                |             |   |   |
| Cash flows from investing activities                                                       |       |                                |             |   |   |
| Net  proceeds from the sale of the Tullos Assets                                           |       | —                              |             | 4,420,868 |   |
| Proceeds  from other asset sales                                                           |       | —                              |             | 31,582 |   |
| Development  of oil and natural gas properties                                             |       | (8,063,465                          | )                | (11,187,291 | ) |
| Acquisitions  of oil and natural gas properties                                            |       | (2,603,098                          | )                | (8,789,501 | ) |
| Capital  expenditures for other equipment                                                  |       | (28,635                             | )                | (87,544 | ) |
| Purchases  of certificates of deposit                                                      |       | (1,757,312                          | )                | — |   |
| Other  assets                                                                              |       | (4,715                              | )                | (6,052 | ) |
| Net  cash used in investing activities                                                     |       | (12,457,225                         | )                | (15,617,938 | ) |
|                                                                                       |       |                                |             |   |   |
| Cash flows from financing activities                                                       |       |                                |             |   |   |
| Proceeds  from issuance of restricted stock                                                |       | 130                                 |             | 76 |   |
| Purchase  of treasury stock                                                                |       | (882,022                            | )                | — |   |
| Other                                                                                      |       | 3,823                               |             | — |   |
| Net  cash (used in) provided by financing activities                                       |       | (878,069                            | )                | 76 |   |
|                                                                                       |       |                                |             |   |   |
| Net  decrease in cash and cash equivalents                                                 |       | (7,380,516                          | )                | (16,474,662 | ) |
|                                                                                       |       |                                |             |   |   |
| Cash  and cash equivalents, beginning of period                                            |       | 11,272,280                          |             | 27,746,942 |   |
|                                                                                       |       |                                |             |   |   |
| Cash  and cash equivalents, end of period                                                  |       | $                                   |  3,891,764  |   | $ |  11,272,280 |   |

 

See accompanyingnotes to consolidated financial statements.

 

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**Evolution Petroleum Corporation andSubsidiaries**

**ConsolidatedStatements of Changes in Stockholders’ Equity**

** **
| ** **                                                                                   | ** ** | ** **        | ** ** | ** **     | ** ** | **Additional** | ** ** | ** **   | ** ** | ** **             | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|--------------|------------|------------------------|------------|------------|------------|
| ** **                                                                                   | ** ** | **Common  Stock** | ** ** | **Paid-in**    | ** ** | **Retained**   | ** ** | **Treasury** | ** ** | **Stockholders’** | ** ** |
| ** **                                                                                   | ** ** | **Shares**        | ** ** | **Par  Value** | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Stock**              | ** ** | **Equity** | ** ** |
| Balance, July 1, 2007                                                                   |       | 26,776,234        |       | $              | 26,776     |           | $          | 12,397,373   |       | $                      | 20,358,997 |       | $          | — |   | $ | 32,783,146 |   |
| Issuance of restricted common stock                                                          |       | 75,899            |       | 76             |       | —         |       | —       |       | —                 |       | 76         |       |
| Exercise of warrants                                                                         |       | 8,306             |       | 8              |       | (8             | )          | —       |       | —                 |       | —     |       |
| Exercise of stock options                                                                    |       | 10,000            |       | 10             |       | (10            | )          | —       |       | —                 |       | —     |       |
| Stock-based compensation                                                                     |       | —            |       | —         |       | 1,791,486      |       | —       |       | —                 |       | 1,791,486  |       |
| Net loss                                                                                     |       | —            |       | —         |       | —         |       | (1,570,974   | )          | —                 |       | (1,570,974 | )          |
| Balance, June 30, 2008                                                                  |       | 26,870,439        |       | $              | 26,870     |           | $          | 14,188,841   |       | $                      | 18,788,023 |       | —     |   | $ | 33,003,734 |   |
| Issuance of common stock to certain employees in  lieu of partial payment of 2008 cash bonus |       | 46,795            |       | 47             |       | 168,415        |       | —       |       | —                 |       | 168,462    |       |
| Issuance of restricted common stock                                                          |       | 390,283           |       | 390            |       | (260           | )          | —       |       | —                 |       | 130        |       |
| Issuance of common stock for charitable donation                                             |       | 11,000            |       | 11             |       | 28,589         |       | —       |       | —                 |       | 28,600     |       |
| Purchase of 788,200 treasury shares                                                          |       | (788,200          | )          | —         |       | —         |       | —       |       | (882,022               | )          | (882,022   | )          |
| Other                                                                                        |       | —            |       | —         |       | 3,823          |       | —       |       | —                 |       | 3,823      |       |
| Stock-based compensation                                                                     |       | —            |       | —         |       | 2,035,460      |       | —       |       | —                 |       | 2,035,460  |       |
| Net loss                                                                                     |       | —            |       | —         |       | —         |       | (2,601,593   | )          | —                 |       | (2,601,593 | )          |
| Balance, June 30, 2009                                                                  |       | 26,530,317        |       | $              | 27,318     |           | $          | 16,424,868   |       | $                      | 16,186,430 |       | $          | (882,022 | ) | $ | 31,756,594 |   |

 

See accompanyingnotes to consolidated financial statements.

 

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**EVOLUTION PETROLEUM CORPORATIONAND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1****—****Organization and Basis ofPreparation**

 

***Nature of Operations.***  Evolution PetroleumCorporation (“EPM”) and its subsidiaries (the “Company”, “we”, “our” or “us”),is an independent petroleum company headquartered in Houston, Texas andincorporated under the laws of the State of Nevada.  We are engaged primarily in the acquisition,exploitation and development of properties for the production of crude oil andnatural gas.  We acquire properties withknown oil and natural gas resources and exploit them through the application ofconventional and specialized technology to increase production, ultimaterecoveries, or both.

 

***Principles ofConsolidation and Reporting.***  Ourconsolidated financial statements include the accounts of EPM and itswholly-owned subsidiaries. All significant intercompany transactions have beeneliminated in consolidation. The consolidated financial statements for theprevious year include certain reclassifications that were made to conform tothe current presentation.  Suchreclassifications have no impact on previously reported income or stockholders’equity.

 

***Use ofEstimates. ***The preparation of financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America (“GAAP”) requires us to make estimates and assumptions thataffect the reported amounts of assets and liabilities at the dates of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting periods.  Significantestimates include reserve quantities and estimated future cash flows associatedwith proved reserves, which significantly impact depletion expense andpotential impairments of oil and natural gas properties, income taxes and thevaluation of deferred tax assets, stock-based compensation and commitments andcontingencies.  We analyze our estimatesbased on historical experience and various other assumptions that we believe tobe reasonable. While we believe that our estimates and assumptions used inpreparation of the consolidated financial statements are appropriate, actualresults could differ from those estimates.

 

**Note 2****—****Summary of SignificantAccounting Policies**

 

***Cash and Cash Equivalents.*** We consider all highly liquid investments, with original maturities of90 days or less when purchased, to be cash and cash equivalents.

 

***Allowance for Doubtful Accounts.*** We establish provisions for losses on accounts receivables if it isdetermined that collection of all or a part of an outstanding balance is notprobable.  Collectibility is reviewedregularly and an allowance is established or adjusted, as necessary, using thespecific identification method.  As of June 30,2009 and 2008, no allowance for doubtful accounts was considered necessary.

 

***Oil and Natural Gas Properties*****.**  We use thefull-cost method of accounting for our investments in oil and natural gasproperties.  Under this method ofaccounting, all costs incurred in the acquisition, exploration and developmentof oil and natural gas properties, including unproductive wells, arecapitalized.  This includes any internalcosts that are directly related to property acquisition, exploration anddevelopment activities but does not include any costs related to production,general corporate overhead or similar activities.  Gain or loss on the sale or other dispositionof oil and natural gas properties is not recognized, unless the gain or losswould significantly alter the relationship between capitalized costs and provedreserves.

 

Oil and natural gas properties include costs that areexcluded from costs being depleted or amortized. Excluded costs representinvestments in unproved and unevaluated properties and include non-producingleasehold, geological and geophysical costs associated with leasehold ordrilling interests and exploration drilling costs. We exclude these costs untilthe project is evaluated and proved reserves are established or impairment isdetermined. Excluded costs are reviewed at least quarterly to determine ifimpairment has occurred. The amount of any evaluated or impaired oil andnatural gas properties is transferred to capitalized costs being amortized (the“Full-cost Pool”).

 

***Limitation onCapitalized Costs.***Under the full-cost method of accounting, we are required, at the endof each fiscal quarter, to perform a test to determine the limit on the bookvalue of our oil and natural gas properties (the “Ceiling Test”). If thecapitalized cost of our oil and natural gas properties, net of accumulatedamortization and related deferred income taxes (the “Net Capitalized Costs”),exceed the “Ceiling”, this excess or impairment is charged to expense andreflected as additional accumulated depreciation, depletion and amortization oras a credit to oil and natural gas properties. The expense may not be reversed in future periods, even though higheroil and natural gas prices may subsequently increase the Ceiling.  The Ceiling is defined as the sum of: (a) thepresent value, discounted at 10 percent, and assuming continuation of existingeconomic

 

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**EVOLUTION PETROLEUM CORPORATIONAND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 2****—****Summary of SignificantAccounting Policies**(Continued)

 

conditions, of 1) estimated future gross revenues fromproved reserves, which is computed using oil and natural gas prices in effectat the balance sheet date (with consideration of price changes only to theextent provided by contractual arrangements including hedging arrangementspursuant to SAB 103), less 2) estimated future expenditures (based on currentcosts) to be incurred in developing and producing the proved reserves; plus (b) thecost of properties not being amortized (pursuant to Reg. S-X Rule 4-10(c)(3)(ii)); plus (c) the lower of cost or estimated fair value ofunproven properties included in the costs being amortized; net of (d) therelated tax effects related to the difference between the book and tax basis ofour oil and natural gas properties.   OurCeiling Test did not result in an impairment of our oil and natural gasproperties during the years ended June 30, 2009 and 2008.

 

***Other Property and Equipment.*** Other property and equipment includes buildings, data processing andtelecommunications equipment, office furniture and equipment, and other fixedassets. These items are recorded at cost and are depreciated using thestraight-line method based on expected lives of the individual assets or groupof assets, which ranges from three to five years. Repairs and maintenance costsare expensed in the period incurred.

 

***Asset Retirement Obligations*****.**  Our investmentin oil and natural gas properties includes an estimate of the future costassociated with dismantlement, abandonment and restoration of our properties.These costs are recorded as provided in Statement of Financial AccountingStandards (“SFAS”) No. 143, *Accounting  forAsset Retirement Obligations* . The present value of the future costs(the “asset retirement cost”) is added to the capitalized cost of our oil andnatural gas properties and recorded as a long-term or current liability.  The asset retirement cost is depleted overthe life of our oil and natural gas properties. The estimation of future costsassociated with dismantlement, abandonment and restoration requires the use ofestimated costs in future periods that, in some cases, will not be incurreduntil a substantial number of years in the future. Such cost estimates could besubject to significant revisions in subsequent years due to changes inregulatory requirements, technological advances and other factors which may bedifficult to predict.

 

***Fair Value of FinancialInstruments.***  Our financial instruments consist of cash andcash equivalents, certificates of deposit, accounts receivable, and accountspayable. The carrying amounts of these approximate fair value, due to thehighly liquid nature of these short-term instruments.

 

***Stock-based Compensation.**** *Effective July 1, 2006, we adopted SFAS No. 123(R),*Share-Based Payment* (“SFAS No. 123(R)”),using the modified prospective transition method which requires, among otherthings, current recognition of compensation expense for share-basedcompensation granted after July 1, 2006, and for that portion of priorperiod share-based compensation for which the requisite service had not beenrendered as of July 1, 2006.  SFAS No. 123(R) requiresthat we record all share-based payment expense in our financial statementsbased on the fair value of the award on the grant date.  We use the Black-Scholes option-pricing modelas the most appropriate fair-value method for our awards and recognizecompensation cost on a straight-line basis over our awards’ vesting periods.

 

***Revenue Recognition.*** We recognize oil and natural gas revenue from our interests in producingwells at the time that title passes to the purchaser.  As a result, we accrue revenues related toproduction sold for which we have not received payment.

 

***Depreciation, Depletion andAmortization.***  The depreciable base for oil and natural gasproperties includes the sum of all capitalized costs net of DD&A, estimatedfuture development costs and asset retirement costs not included in oil andnatural gas properties, less costs excluded from amortization. The depreciablebase of oil and natural gas properties is amortized using the unit-of-productionmethod. Other property including, leasehold improvements, office and computerequipment and vehicles which are stated at original cost and depreciated usingthe straight-line method over the useful life of the assets, which ranges fromthree to five years.

 

***Income Taxes*****.**  We account forincome taxes in accordance with SFAS No. 109,*Accounting for Income Taxes* (“SFAS No. 109”) and, as of July 1, 2007, theFinancial Accounting Standards Board (“FASB”) Interpretation No. 48, *Accounting for Uncertainty in Income Taxes* (“FIN 48”).  We recognize deferred tax assets andliabilities based on the differences between the tax basis of assets andliabilities and their reported amounts in the financial statements that mayresult in taxable or deductible amounts in future years. The measurement ofdeferred tax assets may be reduced by a valuation allowance based uponmanagement’s assessment of available evidence if it is deemed more likely thannot some or all of the deferred tax assets will not be realizable.

 

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**EVOLUTION PETROLEUM CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 2****—****Summary of SignificantAccounting Policies**(Continued)

 

FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with SFAS No. 109.  FIN 48 prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition.  Werecognize estimated interest and penalties related to any potentialunderpayment on unrecognized tax benefits as a component of income tax expensein the Consolidated Statement of Operations.

 

***Earnings (loss) per share.*** Earnings (loss) per share (“EPS”) of common Stock is computed inaccordance with SFAS No. 128 *Earningsper Share*(“SFAS No. 128”). Under the provisions of SFAS No. 128, basic EPS is computed bydividing earnings or loss by the weighted-average number of common sharesoutstanding less any non-vested restricted common stock outstanding.  The computation of diluted EPS is similar tothe computation of basic EPS, except that the denominator is increased toinclude the number of additional common shares that would have been outstandingif potential dilutive common shares had been issued.  Our potential dilutive common shares are ouroutstanding stock options, warrants, and non-vested restricted common stock.  The dilutive effect of our potential dilutivecommon shares is reflected in diluted EPS by application of the treasury stock method.  Under the treasury stock method, exercise ofstock options and warrants shall be assumed at the beginning of the period (orat time of issuance, if later) and common shares shall be assumed to be issued;the proceeds from exercise shall be assumed to be used to purchase common stockat the average market price during the period; and the incremental shares (thedifference between the number of shares assumed issued and the number of sharesassumed purchased) shall be included in the denominator of the diluted EPScomputation.  Potential dilutive commonshares are excluded from the computation if their effect is anti-dilutive.   Including potential dilutive common sharesin the denominator of a diluted EPS computation for continuing operationsalways will result in an anti-dilutive per-share amount when an entity has aloss from continuing operations and no potential dilutive common shares shallbe included in the computation of diluted EPS when a loss from continuing operations exists.

 

**Note 3 —Recent Accounting Pronouncements**

 

***New AccountingStandards.***  The following discloses the existence and effect ofaccounting standards issued but not yet adopted by us with respect toaccounting standards that may have an impact on the Company when adopted in thefuture.

 

***Consolidation rules as theyrelate to variable interest entities***.  In June 2009,the FASB issued SFAS No. 167, *Amendments to FASBInterpretation No. 46(R) *(“SFAS No. 167”), which amendsthe consolidation guidance applicable to variable interest entities. Theamendments significantly reduce the previously required quantitativeconsolidation analysis, and require ongoing reassessments of whether theCompany is the primary beneficiary of a variable interest entity. SFAS No. 167also requires enhanced disclosures about an enterprise’s involvement with avariable interest entity. This statement is effective for the beginning of thefirst annual reporting period beginning after November 15, 2009. TheCompany is currently evaluating the impact, if any, of the adoption of SFAS No. 167on its consolidated financial statements.

 

***Modernization ofOil and Gas Reporting.***  On December 31, 2008, the SEC released newrequirements for reporting oil and gas reserves.  The new disclosurerequirements, when effective, provide for consideration of new technologies inevaluating reserves, allows companies to disclose their probable and possiblereserves to investors, requires reporting of oil and gas reserves using anaverage price based on the prior 12-month period rather than year-end prices,revises the disclosure requirements for oil and gas operations, and revisesaccounting for the limitation on capitalized costs for full costcompanies.  The new rule is expected to be effective for fiscal yearsending on or after December 31, 2009, although the transition may beextended.  A company may not apply thenew rules to disclosures in quarterly reports prior to the first annualreport in which the revised disclosures are required.  We have not yet evaluated the effects the newrule will have on our financial statements.

 

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**EVOLUTION PETROLEUM CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 3 —Recent Accounting Pronouncements**(Continued)

 

***Accountingfor Earnings Per Share.***  In June 2008,the FASB issued Staff Position No. EITF 03-6-1, *Determining Whether Instruments Granted in Share-Based PaymentTransactions Are Participating Securities*(“FSP No. EITF 03-6-1”). FSP No. EITF 03-6-1 addresses whether instruments granted in share-basedpayment transactions are participating securities prior to vesting and,therefore, need to be included in the earnings allocation in computing earningsper share under the two-class method described in FASB Statement No. 128, *Earnings Per Share*.  FSP No. EITF03-6-1 is effective for fiscal years, and interim periods within those fiscalyears, beginning after December 15, 2008; early adoption is notpermitted.  The adoption of FSP No. EITF 03-6-1 will be effective forus for interim and annual periods ending after July 1, 2009.  We are currently evaluating what the impact,if any, of FSP No. EITF 03-6-1 will have on our earnings per share.

 

***Accounting for Business Combinations.***  In December 2007, the FASB issued SFAS No. 141R,*Business Combinations* (“SFAS No. 141R”),which replaces SFAS No. 141,*  Business Combinations*.  SFAS No. 141R establishes principles andrequirements for determining how an enterprise recognizes and measures the fairvalue of certain assets and liabilities acquired in a business combination,including non-controlling interests, contingent consideration, and certainacquired contingencies.  SFAS No. 141Ralso requires acquisition-related transaction expenses and restructuring costsbe expensed as incurred rather than capitalized as a component of the businesscombination.  SFAS No. 141R will beapplicable prospectively to business combinations for which the acquisitiondate is on or after the beginning of the first annual reporting periodbeginning on or after December 15, 2008. SFAS No. 141R would have an impact on accounting for any businessesacquired after the effective date of this pronouncement.

 

**Note 4 —Sale of Oil and Natural Gas Properties**

 

On March 3, 2008,NGS Sub Corp., a Delaware corporation wholly owned by EPM (“NGS Sub”),pursuant to an Asset Purchase and Sale Agreement (the “Asset Sale Agreement”)dated February 15, 2008, completed the sale of its 100% working interestand approximately 79% average net revenue interest in producing and shut-incrude oil wells, water disposal wells, equipment and improvements (the “TullosAssets”) located in the Tullos Urania, Colgrade and Crossroads Fields inLaSalle and Winn Parishes, Louisiana (the “Tullos Field”).  The following table presents the transactionand its affect on our financial statements.

 
| **Proceeds from sale of  properties in the Tullos Field**                       |   | $          | 4,649,241 |   |
|---------------------------------------------------------------------------------|--------|------------|-----------|--------|
| Less payout of a third party carried interest  arrangement                      |   | (168,106   | )         |
| Less miscellaneous transaction costs                                            |   | (60,267    | )         |
| *Net proceeds*                                                                  |   | 4,420,868  |      |
| **Net book value of our  properties in the Tullos Field on March 3, 2008** |   |       |      |
| Asset retirement obligation                                                     |   | 153,886    |      |
| Oil and natural gas properties                                                  |   | (1,721,990 | )         |
| Other property and equipment                                                    |   | (26,721    | )         |
| Prepaid expenses and other current assets                                       |   | (178,826   | )         |
| Other assets                                                                    |   | (13,347    | )         |
| **Remaining credit recorded to  oil and natural gas properties**                |   | $          | 2,633,870 |   |

 

The following unauditedpro forma consolidated financial information is presented for illustrativepurposes only and presents the pro forma operating results for the Company forthe year ended June 30, 2008 as though the disposition of our propertiesin the Tullos Field occurred on July 1, 2007.  The unaudited pro forma consolidatedfinancial information is not intended to be indicative of the operating resultsthat actually would have occurred if the transaction had been consummated atthe beginning of the period presented, nor is the information intended to beindicative of future operating results.

 

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**EVOLUTION PETROLEUM CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 4 —Sale of Oil and Natural Gas Properties**(Continued)

 

The unaudited pro formaconsolidated financial information for the year ended June 30, 2008 is asfollows:

 
| ** **                                     | ** ** | **Year Ended**         | ** ** |
|------------------------------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **June 30, 2008** | ** ** |
| ** **                                     | ** ** | **As********Reported** | ** ** | **Pro********Forma** | ** ** |
| Oil and natural gas revenues                   |       | $                      | 4,256,128  |   | $ | 2,778,773 |   |
| Loss from operations                           |       | (3,510,558             | )          | (3,740,623 | ) |
| Net loss                                       |       | (1,570,974             | )          | (1,705,917 | ) |
|                                           |       |                   |       |   |   |
| Loss per common share — basic and diluted |       | $                      | (.06       | ) | $ | (.07 | ) |

 

**Note 5 —****Property and Equipment**

 

As of June 30, 2009and June 30, 2008 our oil and natural gas properties and other propertyand equipment consisted of the following:

 
| ** **                                                  | ** ** | **June 30,********2009** | ** ** | **June 30,  2008** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------|------------|-------------------------|------------|
| **Oil and natural gas properties**                          |       |                          |       |                    |       |
| Property costs subject to amortization                      |       | $                             | 21,985,950 |                    | $          | 13,924,844 |   |
| Less: Accumulated depreciation, depletion, and amortization |       | (3,054,237                    | )          | (632,040                | )          |
| Unproved properties not subject to amortization             |       | 9,819,465                     |       | 8,754,429               |       |
| Oil and natural gas properties, net                         |       | $                             | 28,751,178 |                    | $          | 22,047,233 |   |
|                                                        |       |                          |       |                    |       |
| **Other property and equipment**                            |       |                          |       |                    |       |
| Furniture, fixtures and office equipment, at cost           |       | 260,476                       |       | 231,841                 |       |
| Less: Accumulated depreciation                              |       | (109,779                      | )          | (70,814                 | )          |
| Other property and equipment, net                           |       | $                             | 150,697    |                    | $          | 161,027 |   |

 

Unproved properties notsubject to amortization include unevaluated acreage of $7.5 and $6.8 million asof June 30, 2009 and June 30, 2008, respectively.  As of June 30, 2009, this acreageconsists of properties in the Giddings Field, our projects in the WoodfordShale trend in Oklahoma, and our Neptune oil project in South Texas.  As of June 30, 2008, the unevaluatedacreage consisted of properties in the Giddings Field and our projects in theWoodford Shale trend in Oklahoma. Unproved properties also include $2.0 million as of June 30, 2009and June 30, 2008 of participating interests through royalty andoverriding royalty interests aggregating 7.4% of the Delhi Holt Bryant Unit inthe Delhi Field in Louisiana.  Weincurred $0.3 million during the year ended June 30, 2009 to initiatedrilling of three test wells and re-entry of four test wells, all verticaltests with light acid hydraulic fracturing, on our acreage in Wagoner County inOklahoma.  Subject to industryconditions, evaluation of these properties is expected to be completed withinone to five years.  Our evaluation ofimpairment of unproved properties occurs, at a minimum, on a quarterly basis.

 

The following table provides a summary of costs thatare not being amortized as of June 30, 2009, by the fiscal year in whichthe costs were incurred:

 
| ** **                               | ** ** | ** ** | ** ** | **During  the Year Ended June 30,** | ** ** |
|------------------------------------------|------------|------------|------------|------------------------------------------|------------|
| **Costs  excluded from amortization**    | ** ** | **Total**  | ** ** | **2009**                                 | ** ** | **2008** | ** ** | **2007** | ** ** | **2006 and  Prior** | ** ** |
|                                     |       |       |       |                                     |       |   |   |   |   |   |   |
| Leasehold acquisition costs and other    |       | $          | 7,515,685  |                                     | $          | 1,410,305 |   | $ | 5,278,419 |   | $ | 826,961 |   | $ | — |   |
| Royalty and overriding royalty interests |       | 1,954,377  |       | 3,636                                    |       | — |   | 966,794 |   | 983,947 |   |
| Test drilling                            |       | 349,403    |       | 349,403                                  |       | — |   | — |   | — |   |
|                                     |       | $          | 9,819,465  |                                     | $          | 1,763,344 |   | $ | 5,278,419 |   | $ | 1,793,755 |   | $ | 983,947 |   |

 

45

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Tableof Contents

 

**EVOLUTION PETROLEUM CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 6****—****Asset Retirement Obligations**

 

Our asset retirementobligations represent the estimated present value of the amount we will incurto plug, abandon and remediate our producing properties at the end of theirproductive lives in accordance with applicable laws. The following is areconciliation of the beginning and ending asset retirement obligation for theyears ended June 30, 2009 and 2008:

 
| ** **                                                  | ** ** | **Year  Ended** | ** ** |
|-------------------------------------------------------------|------------|-----------------|------------|
| ** **                                                  | ** ** | **2009**        | ** ** | **2008** | ** ** |
| **Asset retirement obligations — beginning of period** |       | $               | 215,056    |   | $ | 140,998 |   |
| Liabilities incurred                                        |       | 238,702         |       | 170,890 |   |
| Liabilities settled                                         |       | (90,761         | )          | — |   |
| Liabilities sold (See Note 4)                               |       | —          |       | (153,886 | ) |
| Accretion                                                   |       | 37,601          |       | 20,196 |   |
| Revisions to previous estimates                             |       | 264,112         |       | 36,858 |   |
| **Asset retirement obligations — end of period**       |       | $               | 664,710    |   | $ | 215,056 |   |

 

**Note 7 — Stockholders’ Equity**

 

During the year ended June 30,2009, warrants to purchase 53,000 shares of common stock, with an exerciseprice of $1.00 per share, expired unexercised. During the year ended June 30, 2008, 8,306 shares of common stockwere issued through a net cashless exercise of warrants to purchase 14,463shares.

 

We entered into a one-year consulting agreement in February 2008for investor relations services.  Ascompensation for services, we issued the consultant 50,000 shares of restrictedcommon stock, which was subject to vesting, through December 2008.  We did not renew this agreement for the yearended June 30, 2009.

 

On August 19, 2008,the Board of Directors authorized the issuance of 46,795 shares of common stockto certain employees who elected to receive these shares in lieu of a portionof their fiscal 2008 cash bonus.  Thevalue of the shares issued was $168,462, based on the fair market value on thedate of issuance, or $3.60 per share. See Note 8.

 

On October 30, 2008, we repurchased 788,200shares of our common stock at an average price of $1.10 per share, plusapproximately $15,000 of transaction costs, from an unaffiliated accreditedinvestor.  At this time, we currentlyhave no plan to repurchase additional common shares.

 

On December 9, 2008, three outside directors eachreceived 30,000 shares of restricted common stock, with a per share price of$1.20, as part of their board compensation for calendar 2009. The same outsidedirectors each received 8,633 shares of restricted common stock, with a pershare price of $4.17, as part of their board compensation for calendar year2008.  All issuances of common stock weresubject to vesting terms per individual stock agreements, which is generallyone year for directors.

 

On January 16 and February 10, 2009, weissued 24,324 and 15,789 shares of restricted common stock, respectively, to adirector as compensation for his services for calendar year 2009.   The 15,789 share award was elected by thedirector in lieu of cash retainers for his board service during calendar2009.   These issuances of common stock are subject tovesting terms per the individual stock agreements, which is generally one yearfor directors.

 

On May 29, 2009, we issued 11,000 shares ofunregistered common stock to various non-profit entities as a charitabledonation.  We recognized an expense of$28,600 based on the per share price of $2.60 on the date of issue.  These shares of common stock are subject torestrictions on transfer and cannot be sold until registered or the earlier of April 17,2014, or written release by a duly appointed officer of the Company.

 

On June 19, 2009, pursuant to an offer by theCompany as discussed in Note 8, we issued 260,170 shares of restricted commonstock to certain employees in exchange for stock options to purchase 449,390shares of common stock with a weighted average exercise price of $4.67.

 

46

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Tableof Contents

 

**EVOLUTION PETROLEUM CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 8****—****Stock-Based Incentive Plan**

 

We have granted optionawards to purchase common stock (the “Stock Options”) and restricted commonstock awards  (“Restricted Stock”) toemployees, directors, and consultants of the Company and its subsidiaries underthe Natural Gas Systems Inc. 2003 Stock Plan (the “2003 Stock Plan”) and theEvolution Petroleum Corporation Amended and Restated 2004 Stock Plan (the “2004Stock Plan” or together, the “EPM Stock Plans”).  Option awards for the purchase of 600,000shares of common stock were issued under the 2003 Stock Plan.  The 2004 Stock Plan authorized the issuanceof 5,500,000 shares of common stock. There are no shares available for grant under the 2003 Stock Plan and,as of June 30, 2009, 1,006,461 shares remain available for grant under the2004 Stock Plan.

 

We have also grantedcommon stock warrants, as authorized by the Board of Directors, to employees inlieu of cash bonuses or as incentive awards to reward previous service orprovide incentives to individuals to acquire a proprietary interest in theCompany’s success and to remain in the service of the Company (the “IncentiveWarrants”).  These Incentive Warrantshave similar characteristics of the Stock Options.  A total of 1,037,500 Incentive Warrants havebeen issued, with Board of Directors approval, outside of the EPM StockPlans.  We did not issue IncentiveWarrants during the fiscal years ended June 30, 2009 and 2008.

 

On September 8,2009, the Board of Directors authorized the issuance of 138,224 shares ofcommon stock from the 2004 Stock Plan to certain employees for the payment offiscal 2009 bonuses in lieu of cash.  Thevalue of the shares issued was $370,440, based on the fair market value on thedate of issuance, or $2.68 per share. The amount of bonus was accrued as of June 30, 2009, and recognizedas a long term liability. On September 8, 2009, the liability wasreclassified as additional paid-in capital.

 

On August 19, 2008,the Board of Directors authorized the issuance of 46,795 shares of common stockfrom the 2004 Stock Plan to certain employees who elected to receive theseshares in lieu of a portion of their fiscal 2008 cash bonus.  The value of the shares issued was $168,462,based on the fair market value on the date of issuance, or $3.60 per share.

 

***Offerto Exchange***

 

The extreme financialmarket volatility encountered during fiscal 2009 caused us to reassess thecontinued effectiveness of our outstanding stock options granted to employeesfor the purposes of retention and equity participation.  Based on management’s analysis andconsiderable review, our Board of Directors approved an “exchange offer” toemployees with “out-of-the-money” options, excluding Executive Officers andDirectors.  Under the terms of the offer,each eligible option to purchase 1.727 shares could be exchanged for one shareof restricted common stock.  In return,the company and shareholders benefited by (i) re-establishing theretention incentive for nonexecutive employees, (ii) adding one additionalyear of vesting to all awards exchanged, as further described below, (iii) reduceddilution as the number of restricted shares issued was substantially less thanthe options exchanged and the exchanged options were returned to the 2004 Plan,and (iv) spread the expense of the incentives over a longer period oftime.

 

Accordingly, we filed aTender Offer Statement on Schedule TO with the SEC on May 15, 2009, andamendments on May 21, 2009, June 9, 2009, and a final filing on July 2,2009 announcing termination of the offer, relating to an offer by us to certainemployees to exchange certain outstanding Stock Options granted under the 2004Stock Plan, with shares of Restricted Stock (the “Offer to Exchange”).  The Offer to Exchange expired on June 19,2009 (the “Expiration Date”).  Pursuant to the Offer to Exchange, 449,390eligible Stock Options were tendered and subsequently cancelled, representing54% of the total Stock Options that were eligible for exchange in the Offer toExchange.  The shares of common stockthat were subject to the cancelled Stock Options will be available for futureawards under our 2004 Stock Plan.  On June 19,2009 the Company granted an aggregate of 260,170 shares of Restricted Stock inexchange for the Stock Options surrendered in the Offer to Exchange.

 

Under SFAS No. 123(Revised) *Share-Based Payment*, we will recognizethe unrecognized compensation cost associated with the 449,390 Stock Optionscancelled pursuant to the Offer to Exchange of approximately $1,068,430 alongwith the incremental compensation cost of $78,891 ratably over the vestingperiod of the Restricted Stock.  Theincremental compensation, determined on June 19, 2009, was measured as theexcess of the fair value of the Restricted Stock granted in the Offer toExchange, over the fair value of the Stock Options surrendered prior tocancellation.  The price of our common stock as of June 19, 2009 was$2.85, however, due to the requirements of SFAS No. 123 (Revised) *Share-Based Payment*, we will recognize expense ratably overthe vesting period of the Restricted Stock granted in the Offer to Exchange ofapproximately $4.41 per share.

 

47

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Table of Contents

 

**EVOLUTION PETROLEUM CORPORATIONAND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**Note 8****—****Stock-Based Incentive Plan**(Continued)

 

The shares of RestrictedStock granted in the Offer to Exchange were unvested at the time of grant andwill become vested on the basis of continued service with the Company inaccordance with and subject to the terms of the Offer to Exchange asfollows:  If and to the extent the Stock Options surrendered were vestedon the Expiration Date, the Restricted Stock exchanged for those vested StockOptions will become vested on the first anniversary of the Expiration Date,being June 19, 2010.  If and to the extent any Stock Optionssurrendered were not vested on the Expiration Date the Restricted Stockexchanged for those unvested Stock Options will become vested on the firstanniversary of the original vesting dates on which such unvested StockOptions would have otherwise become vested. The Restricted Stock granted pursuant to the Offer to Exchange will vestover a weighted average period of approximately four years.

 

***StockOptions and Incentive Warrants***

 

Non-cash stock-basedcompensation expense related to Stock Options and Incentive Warrants for theyear ended June 30, 2009 and 2008 was $1,786,055 and $1,522,661,respectively.

 

During the year ended June 30,2009 and 2008, we granted Stock Options to purchase 591,090 and 1,435,000shares of common stock, respectively, under the 2004 Stock Plan with a weightedaverage exercise price of $4.27 and $2.58, respectively.  The exercise price was determined based onthe market price of the Company’s common stock on the date of grant.  The Stock Options granted during the yearsended June 30, 2009 and 2008 generally vest quarterly, on a straight linebasis, over a period of four years.  TheStock Options granted during the year ended June 30, 2009 and 2008 have acontractual life of seven and ten years, respectively.  The weighted average assumptions used tocalculate the fair value of these Stock Options and the weighted average fairvalue of each option granted are as follows:

 
| ** **               | ** ** | **Year Ended**    | ** ** |
|--------------------------|------------|-------------------|------------|
| ** **               | ** ** | **June 30,** | ** ** |
| ** **               | ** ** | **2009**          | ** ** | **2008** | ** ** |
| Expected volatility      |       | 87.1              | %          | 93.3 | % |
| Expected dividends       |       | —            |       | — |   |
| Expected term (in years) |       | 4.6               |       | 6.1 |   |
| Risk-free rate           |       | 3.10              | %          | 4.10 | % |
| Fair value               |       | $                 | 2.62       |   | $ | 2.01 |   |
|                          |            |                   |            |  |  |  |  |

 

We estimated the fairvalue of Stock Options and Incentive Warrants issued to employees and directorsunder SFAS No. 123R at the date of grant using a Black-Scholes-Mertonvaluation model.  The risk-free rate isbased on the U.S. Treasury yield curve in effect at the time of grant.  The expected term (estimated period of timeoutstanding) of Stock Options and Incentive Warrants is based on the “simplified”method of the estimated expected term for “plain vanilla” options allowed bythe SEC Staff Accounting Bulletin (“SAB”) No. 107 and SAB No. 110,and varied based on the vesting period and contractual term of the StockOptions or Incentive Warrants.   Expected volatility is based on thehistorical volatility of the Company’s closing common stock price and that ofan evaluation of a peer group of similar companies trading activity.  Wehave not declared any cash dividends on the Company’s common stock.

 

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Tableof Contents

 

**EVOLUTION PETROLEUM CORPORATIONAND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**Note 8****—****Stock-Based Incentive Plan**(Continued)

 

The following summarypresents information regarding outstanding Stock Options and Incentive Warrantsas of June 30, 2009, and the changes during the fiscal year:

 
| ** **                                                             | ** ** | **Number of Stock  Options  and Incentive Warrants** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Aggregate  Intrinsic Value  (1)** | ** ** | **Weighted  Average  Remaining  Contractual  Term (in  years)** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | ** **                                                               | ** ** | ** **                                     | ** ** | ** **                               | ** ** | ** **                                                           | ** ** |
| Stock Options and Incentive Warrants outstanding at July 1, 2008  |       | 5,483,500                                                                |       | $                                              | 1.81       |                                     |       |                                                                 |       |   |
|                                                                   |       |                                                                     |       |                                           |       |                                     |       |                                                                 |       |
| Granted                                                                |       | 591,090                                                                  |       | $                                              | 4.27       |                                     |       |                                                                 |       |   |
| Exercised                                                              |       | —                                                                   |       | —                                         |       |                                     |       |                                                                 |       |
| Cancelled or forfeited                                                 |       | (139,380                                                                 | )          | $                                              | 2.65       |                                     |       |                                                                 |       |   |
| Voluntary cancellation and forfeiture under the Offer to Exchange      |       | (449,390                                                                 | )          | $                                              | 4.53       |                                     |       |                                                                 |       |   |
| Expired                                                                |       | —                                                                   |       | —                                         |       |                                     |       |                                                                 |       |
|                                                                   |       |                                                                     |       |                                           |       |                                     |       |                                                                 |       |
| Stock Options and Incentive Warrants outstanding at June 30, 2009 |       | 5,485,820                                                                |       | $                                              | 1.83       |                                     | $          | 4,789,050                                                            |       | 6.4 |   |
|                                                                   |       |                                                                     |       |                                           |       |                                     |       |                                                                 |       |
| Vested or expected to vest at June 30, 2009                       |       | 5,485,820                                                                |       | $                                              | 1.83       |                                     | $          | 4,789,050                                                            |       | 6.4 |   |
|                                                                   |       |                                                                     |       |                                           |       |                                     |       |                                                                 |       |
| Exercisable at June 30, 2009                                      |       | 4,393,908                                                                |       | $                                              | 1.63       |                                     | $          | 4,441,131                                                            |       | 6.1 |   |

 

----

(1) Basedupon the difference between the market price of our common stock on the lasttrading date of the period ($2.60 as of June 30, 2009) and the StockOption or Incentive Warrant exercise price of in-the-money Stock Options andIncentive Warrants.

 

There were no Stock Options or Incentive Warrants thatwere exercised during the year ended June 30, 2009.  There were 10,000 Stock Options exercisedduring the year ended June 30, 2008 with an aggregate intrinsic value of$58,790.

 

A summary of the statusof our unvested Stock Options and Incentive Warrants as of June 30, 2009and the changes during the year ended June 30, 2009, is presented below:

 
| ** **                                       | ** ** | **Number  of  Stock Options********and  Incentive  Warrants** | ** ** | **Weighted  Average Grant-  Date Fair Value** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                       | ** ** | ** **                                                    | ** ** | ** **                                                   | ** ** |
| Unvested at July 1, 2008                    |       | 2,003,437                                                     |       | $                                                            | 1.83       |   |
|                                             |       |                                                          |       |                                                         |       |
| Granted                                          |       | 591,090                                                       |       | $                                                            | 2.62       |   |
|                                             |       |                                                          |       |                                                         |       |
| Vested                                           |       | (1,063,029                                                    | )          | $                                                            | 1.76       |   |
|                                             |       |                                                          |       |                                                         |       |
| Forfeited                                        |       | (93,207                                                       | )          | $                                                            | 1.97       |   |
|                                             |       |                                                          |       |                                                         |       |
| Voluntary forfeiture under the Offer to Exchange |       | (346,379                                                      | )          | $                                                            | 3.08       |   |
|                                             |       |                                                          |       |                                                         |       |
| Unvested at June 30, 2009                   |       | 1,091,912                                                     |       | $                                                            | 1.97       |   |

 

During the years ended June 30,2009 and 2008, there were 1,063,029 and 1,004,688 Stock Options and IncentiveWarrants that vested with a total grant date fair value of $1,870,931 and$1,577,360, respectively.

 

The total unrecognizedcompensation cost at June 30, 2009, relating to non-vested Stock Optionsand Incentive Warrants was $2,059,852. Such unrecognized expense is expected to be recognized over a weightedaverage period of 2.3 years.

 

49

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**EVOLUTION PETROLEUM CORPORATIONAND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**Note 8****—****Stock-Based Incentive Plan**(Continued)

 

***RestrictedStock***

 

During the year ended June 30, 2009, we issued130,113 shares of restricted common stock to certain members of our board ofdirectors.  For the year ended June 30,2008, we issued 25,899 and 50,000 shares of restricted common stock to certainmembers of our board of directors and a consultant, respectively.

 

On June 19, 2009, we issued 260,170 shares ofrestricted common stock to certain employees pursuant to the Offer to Exchangeas described above.

 

Stock-based compensationexpense related to Restricted Stock grants for the three year ended June 30,2009 and 2008 was $249,405 and $268,825, respectively.

 

The following table setsforth the Restricted Stock transactions for the year ended June 30, 2009:

 
| ** **                          | ** ** | **Number of  Restricted  Shares** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|----------------------------------------------------|------------|
| ** **                          | ** ** | ** **                             | ** ** | ** **                                         | ** ** |
| Unvested at July 1, 2008       |       | 50,898                                 |       | $                                                  | 4.11       |   |
|                                |       |                                   |       |                                               |       |
| Granted                             |       | 130,113                                |       | $                                                  | 1.29       |   |
|                                |       |                                   |       |                                               |       |
| Granted under the Offer to Exchange |       | 260,170                                |       | $                                                  | 4.41       |   |
|                                |       |                                   |       |                                               |       |
| Vested                              |       | (50,898                                | )          | $                                                  | 4.11       |   |
|                                |       |                                   |       |                                               |       |
| Forfeited                           |       | —                                 |       | —                                             |       |
|                                |       |                                   |       |                                               |       |
| Unvested at June 30, 2009      |       | 390,283                                |       | $                                                  | 3.37       |   |

 

At June 30, 2009,unrecognized stock compensation expense related to Restricted Stock grantstotaled $1,221,246.  Such unrecognizedexpense will be recognized over a weighted average period of 3.7 years.

 

**Note 9 — Supplemental Disclosureof Cash Flow Information**

 

Our supplemental disclosuresof cash flow information for the year ended June 30, 2009 and 2008 are asfollows:

 
| ** **                                                                                                                                   | ** ** | **Year Ended**    | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                                   | ** ** | **June 30,** | ** ** |
| ** **                                                                                                                                   | ** ** | **2009**          | ** ** | **2008** | ** ** |
| Income taxes paid:                                                                                                                           |       | $                 | 15,000     |   | $ | 33,879 |   |
|                                                                                                                                         |       |              |       |   |   |
| Income tax refunds and net operating loss carry-back received:                                                                               |       | $                 | 4,057,772  |   | — |   |
|                                                                                                                                         |       |              |       |   |   |
| Non-cash transactions:                                                                                                                       |       |              |       |   |   |
| Increase (decrease) in accounts payable used to acquire oil and  natural gas leasehold interests and develop oil and natural gas properties: |       | $                 | (2,043,235 | ) | $ | 1,639,128 |   |
| Oil and natural gas properties incurred through recognition of asset  retirement obligations:                                                |       | $                 | 502,814    |   | $ | 207,748 |   |
| Common stock issued in lieu of a portion of 2008 cash bonus accrued at  June 30, 2008:                                                  |       | $                 | 168,462    |   | $ | — |   |

 

50

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**EVOLUTION PETROLEUM CORPORATIONAND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**Note 10****—****Income Taxes**

 

We file a consolidatedfederal income tax return in the United States and various combined andseparate filings in several state and local jurisdictions.

 

There were nounrecognized tax benefits nor any accrued interest or penalties associated withunrecognized tax benefits as of the date of adoption of FIN 48 and through June 30,2009.  We believe that we haveappropriate support for the income tax positions taken and to be taken on theCompany’s tax returns and that the accruals for tax liabilities are adequatefor all open years based on our assessment of many factors including pastexperience and interpretations of tax law applied to the facts of each matter.The Company’s federal and state income tax returns are open to audit under thestatute of limitations for the years ending June 30, 2006 through June 30,2008.

 

The components of ourincome tax benefit are as follows:

 
| ** **                            | ** ** | **June 30,********2009** | ** ** | **June 30,  2008** | ** ** |
|---------------------------------------|------------|-------------------------------|------------|-------------------------|------------|
| **Current:**                          |       |                          |       |                    |       |
| Federal                               |       | $                             | (1,993,988 | )                       | $          | (3,551,036 | ) |
| State                                 |       | 157,736                       |       | (98,346                 | )          |
| *Total current income tax benefit*    |       | (1,836,252                    | )          | (3,649,382              | )          |
| **Deferred:**                         |       |                          |       |                    |       |
| Federal                               |       | 528,787                       |       | 2,573,023               |       |
| State                                 |       | 290,601                       |       | (9,095                  | )          |
| *Total deferred income tax provision* |       | 819,388                       |       | 2,563,928               |       |
| **Total income tax benefit**          |       | $                             | (1,016,864 | )                       | $          | (1,085,454 | ) |

 

The following is areconciliation of statutory income tax expense to our income tax provision:

 
| ** **                                                     | ** ** | **June 30,********2009** | ** ** | **June 30,  2008** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------|------------|-------------------------|------------|
| **Income tax benefit computed at the statutory federal rate:** |       | $                             | (1,230,275 | )                       | $          | (929,750 | ) |
| Reconciling items:                                             |       |                          |       |                    |       |
| State income taxes, net of federal tax benefit                 |       | 148,134                       |       | (87,377                 | )          |
| Stock-based compensation (primarily incentive stock options)   |       | 264,060                       |       | 425,236                 |       |
| Deferred tax asset valuation adjustment                        |       | (152,588                      | )          | (417,058                | )          |
| Rate adjustment                                                |       | 21,931                        |       | —                  |       |
| IRC section 199 deduction                                      |       | —                        |       | (69,771                 | )          |
| Other                                                          |       | (68,126                       | )          | (6,734                  | )          |
| **Income tax benefit**                                         |       | $                             | (1,016,864 | )                       | $          | (1,085,454 | ) |

 

Deferred income taxesprimarily represent the net tax effect of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. The components of our deferred taxesare detailed in the table below:

 
| ** **                             | ** ** | **June 30,********2009** | ** ** | **June 30,  2008** | ** ** |
|----------------------------------------|------------|-------------------------------|------------|-------------------------|------------|
| **Deferred tax assets:**               |       |                          |       |                    |       |
| Non qualified stock-based compensation |       | $                             | 657,369    |                    | $          | 274,836 |   |
| Net operating loss carryforwards       |       | 5,389,065                     |       | 5,547,567               |       |
| Other                                  |       | 22,841                        |       | 5,708                   |       |
| *Gross deferred tax assets*            |       | 6,069,275                     |       | 5,828,111               |       |
| Valuation allowance                    |       | (5,187,983                    | )          | (5,340,571              | )          |
| *Total deferred tax assets*            |       | 881,292                       |       | 487,540                 |       |
| **Deferred tax liability:**            |       |                          |       |                    |       |
| Oil and natural gas properties         |       | (4,602,609                    | )          | (3,389,469              | )          |
| *Total deferred tax liability*         |       | (4,602,609                    | )          | (3,389,469              | )          |
| **Net deferred tax liability**         |       | $                             | (3,721,317 | )                       | $          | (2,901,929 | ) |

 

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**EVOLUTION PETROLEUM CORPORATIONAND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**Note 10****—****Income Taxes**(Continued)

 

We expect to recoverapproximately $2.1 million in federal income taxes paid during the tax yearended June 30, 2007, as a result of the carry-back of our 2009 income taxloss.  Significant intangible drillingcosts were incurred during the 2009 fiscal year, of which, we elected to deduct(expense) approximately $4.8 million for federal and state income tax purposes.    During the year ended June 30, 2008,we received approximately $3.6 million in federal income taxes paid during thetax years ended June 30, 2007 and 2006, as a result of the carry-back ofour 2008 income tax loss.  Significantintangible drilling costs were incurred during the 2008 fiscal year, of which,we elected to deduct (expense) approximately $10.9 million for federal andstate income tax purposes.  Under GAAP,and specifically the full-cost accounting method, intangible drilling costs arecapitalized as part of oil and natural gas properties, and depleted using theunit-of-production method.  The deductionof intangible drilling costs resulted in a significant difference in the incometax and book basis of our oil and natural gas properties, which resulted in anincrease in our net deferred tax liability as of June 30, 2009.

 

At June 30, 2009, wehave a federal tax loss carryforward of approximately $15.9 million we acquiredthrough reverse merger in May 2004, of which, approximately $0.6  million is available to us to use in equalamounts through 2023.  We have applied avaluation allowance against the portion of the federal tax loss carryforwardthat has been disallowed through IRC Section 382.

 

**Note 11****—****Related Party Transactions**

 

Laird Q. Cagan, a member of our Board of Directors, isa Managing Director and co-owner of Cagan McAfee Capital Partners, LLC (“CMCP”).  CMCP has performed financial advisoryservices to us pursuant to a written agreement amended in November 2005(the “Agreement”), providing for a retainer of $5,000 per month.  Also pursuant to the Agreement, Mr. Cagan,as a registered representative of Chadbourn Securities Inc. (“Chadbourn”) andas a partner of CMCP could serve as our placement agent in private equityfinancings, wherein CMCP could earn cash fees equal to 8% of gross equityproceeds, declining to 4% subject to the amount of equity raised through CMCP,and a fixed 4% warrant fee.  During theterm of the Agreement , Mr. Cagan received no compensation for serving asa director or as the Chairman of our Board of Directors.   Effective December 31, 2008, theAgreement was modified to remove the monthly retainer and Mr. Cagan wasre-elected as a director of our Board with remuneration consistent with otheroutside directors of our Board.

 

Eric A. McAfee, a major shareholder of the Company, isalso a Managing Director of CMCP.

 

During the year ended June 30, 2009, we expensedand paid $30,000, through monthly retainers of $5,000 through December 31,2008.  During the year ended June 30,2008, we expensed and paid CMCP $60,000, through monthly retainers of$5,000.  There were no other earned feesby CMCP during these periods.

 

See also Note 7 for equity transactions with relatedparties.

 

**Note 12 —****Net loss Per Share**

 

The following table sets forth the computation ofbasic and diluted loss per share:

 
| ** **                                                         | ** ** | **Year Ended********June 30,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                         | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| *Numerator*                                                        |       |                                     |       |   |   |
| Net loss                                                           |       | $                                        | (2,601,593 | ) | $ | (1,570,974 | ) |
|                                                               |       |                                     |       |   |   |
| *Denominator*                                                      |       |                                     |       |   |   |
| Weighted average number of common shares — basic  and diluted |       | 26,366,677                               |       | 26,786,270 |   |
|                                                               |       |                                     |       |   |   |
| Net Loss per common share — basic and diluted                 |       | $                                        | (0.10      | ) | $ | (0.06 | ) |

 

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**EVOLUTION PETROLEUM CORPORATIONAND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**Note 12 —****Net loss Per Share**(Continued)

 

As of June 30, 2009,there were 390,283 shares of unvested Restricted Stock outstanding.  Other outstanding potentially dilutivesecurities as of June 30, 2009 are as follows:

 
| **Outstanding Potential Dilutive Securities**                                      | ** ** | **Weighted********Average  Exercise Price** | ** ** | **Outstanding  at  June 30, 2009** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|-----------------------------------------|------------|
|                                                                               |       |                                        |       |                                    |       |
| Common stock warrants issued in connection with  equity and financing transactions |       | $                                           | 1.46       |                                    | 348,058    |   |
| Stock Options and Incentive Warrants                                               |       | $                                           | 1.83       |                                    | 5,485,820  |   |
| Total                                                                              |       | $                                           | 1.81       |                                    | 5,833,878  |   |

 

As of June 30, 2008,there were 50,898 shares of unvested Restricted Stock outstanding.  Other outstanding potentially dilutivesecurities as of June 30, 2008 are as follows:

 
| **Outstanding Potential Dilutive Securities**                                      | ** ** | **Weighted********Average  Exercise Price** | ** ** | **Outstanding  at June 30, 2008** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------------|------------|
|                                                                               |       |                                        |       |                                   |       |
| Common stock warrants issued in connection with  equity and financing transactions |       | $                                           | 1.40       |                                   | 401,058    |   |
| Stock Options and Incentive Warrants                                               |       | $                                           | 1.81       |                                   | 5,483,500  |   |
| Total                                                                              |       | $                                           | 1.78       |                                   | 5,884,558  |   |

 

**Note13 — Commitments and Contingencies**

 

We are subject to variousclaims and contingencies in the normal course of business.  In addition, from time to time, we receivecommunications from government or regulatory agencies concerning investigationsor allegations of noncompliance with laws or regulations in jurisdiction inwhich we operate.  We disclose suchmatters if we believe it is reasonably possible that a future event or eventswill confirm a loss through impairment of an asset or the incurrence of aliability. We establish reserves if we believe it is probable that a futureevent or events will confirm a loss and we can reasonably estimate suchloss.  Furthermore, we will disclose anymatter that is unasserted if we consider it probable that a claim will beasserted and there is a reasonable possibility that the outcome will beunfavorable.  As of June 30, 2009, andsubsequently through the date these financial statements were available to be issued,no claim or unasserted claim existed that required an accrual or disclosure,except for that which has been disclosed.

 

***Litigation.*** In November 2005, a multi-plaintiff lawsuit was filed in the FifthJudicial District Court, Richland Parish, Louisiana, against 18 defendantsincluding NGS Sub Corp. and Arkla Petroleum LLC, the Company’s direct andindirect wholly owned subsidiaries (the “Subsidiaries”), as working interestowners/operators of various oil and natural gas leases in the Delhi Field.  Plaintiffs claimed that the defendants’ oiland natural gas exploration, development and production activities on theirproperties had caused soil and ground water contamination as a result of therelease of hydrocarbons and drilling fluids.

 

In July 2009 all claims filed against theSubsidiaries, along with eleven other previous operators and owners of theDelhi Field, were dismissed following settlement.  Our obligations under the settlement arelimited to a cash contribution to the cost of completing certain lease remediationoperations. The amount of the cash contribution is contractually limited, andthe maximum contribution was charged to general and administrative expenseduring the year ended June 30, 2009. In exchange for the cash contribution, our Subsidiaries received awaiver of any indemnity claim by the active predecessor operator, who isobligated to carry out the remediation operations.  Although other previous operators may attemptto assert indemnity claims against subsequent operators for their settlement costs,including the indirect subsidiary of the Company that operated the field, theCompany believes that such claims against its indirect operating subsidiarywould be without merit.

 

***Lease Commitments.***  We have anon-cancelable operating lease for office space that expires on August 1,2016. Future minimum lease commitments as of June 30, 2009 under thisoperating lease are as follows:

 
| **For the year ended June 30,** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------|------------|
| 2010                                 |       | $          | 138,089    |   |
| 2011                                 |       | 138,089    |       |
| 2012                                 |       | 157,268    |       |
| 2013                                 |       | 159,011    |       |
| 2014                                 |       | 159,011    |       |
| Thereafter                           |       | 331,272    |       |
| Total                                |       | $          | 1,082,740  |   |

 

Rent expense for the yearended June 30, 2009 and 2008 was $149,397 and $141,866, respectively.

 

***EmploymentContracts.***  We have entered into employment agreementswith the Company’s three senior executives. The employment contracts provide for a severance package for terminationby the Company for any reason other than cause or permanent disability, or inthe event of a constructive termination, that includes payment of base pay andcertain medical and disability benefits from six months to a year after termination.   The total contingent obligation under theemployment contracts as of June 30, 2009 is approximately $499,000.

 

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**EVOLUTION PETROLEUM CORPORATIONAND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**Note14 — Concentrations of Credit Risk**

 

***MajorCustomers.***  We market substantially all of our oiland natural gas production from the properties we operate.  The majority of our operated gas, oil andcondensate production is sold to a variety of purchasers under short-term (lessthan 12 months) contracts at market-based prices. The following tableidentifies customers from whom we derived 10 percent or more our net oil andnatural gas revenues during the years ended June 30, 2009 and 2008.  Based on the current demand for oil andnatural gas and availability of other customers, we do not believe the loss ofany of these customers would have a significant affect on our operations orfinancial condition.

 
| ** **               | ** ** | **Percent  of Total Revenue**             | ** ** |
|--------------------------|------------|-------------------------------------------|------------|
| **Customer**             | ** ** | **Year  Ended********June 30, 2009** | ** ** | **Year  Ended********June 30, 2008** | ** ** |
|                     |       |                                      |       |   |   |
| Plains Marketing L.P.    |       | 40                                        | %          | 67 | % |
| ETC Texas Pipeline, LTD. |       | 36                                        | %          | 26 | % |
| DCP Midstream, LP        |       | 16                                        | %          | — |   |

 

***AccountsReceivable.***  Substantially all of our accounts receivableresult from oil and natural gas sales to third parties in the oil and naturalgas industry. This concentration of customers may impact our overall creditrisk in that these entities may be similarly affected by changes in economicand other conditions.

 

***Cash and CashEquivalents and Certificates of Deposit.***  We are subjectto concentrations of credit risk with respect to our cash and cash equivalents,which we attempt to minimize by maintaining our cash and cash equivalents inhigh quality money market funds. At times cash balances may exceed limitsfederally insured by the Federal Deposit Insurance Corporation (“FDIC”).  Our certificates of deposit are below or atthe maximum federally insured limit set by the FDIC.

 

**Note 15****—****Retirement Plan**

 

Effective February 1,2007, we implemented a 401(k) Savings Plan which covers allemployees.  At our discretion, we maymatch a certain percentage of the employees’ contributions to the plan. Thematching percentage is currently 100% of the first 4% of each participant’scompensation, vesting fully upon our contributions.  Our matching contribution to the plan was$58,884 and $59,437 for the years ended June 30, 2009 and 2008,respectively.

 

**Note 16****—****Subsequent Events**

 

On September 8,2009, the Board of Directors authorized and the Company issued 138,224 sharesof common stock from the 2004 Stock Plan to certain employees for the paymentof fiscal 2009 bonuses.  The value of theshares issued were $370,440, based on the fair market value on the date ofissuance, or $2.68 per share.  The amountof bonus was accrued as of June 30, 2009 and recognized as a long termliability. On September 8, 2009, the liability was reclassified as additionalpaid-in capital.

 

On September 8,2009, the Board of Directors authorized and the Company issued 324,597 sharesof restricted common stock from the 2004 Stock Plan to certain employees as along-term incentive award.  Totalunrecognized stock-based compensation expense of $869,917 related to thelong-term incentive award will be recognized ratably over a four year period asthe restricted common stock vests.

 

Subsequent events havebeen evaluated through September 23, 2009, the date these financialstatements were available to be issued.

 

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**EVOLUTION PETROLEUM CORPORATIONAND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**Note 17****—****Supplemental Disclosures aboutOil and Natural Gas Producing Properties (unaudited)**

 

***Costs incurred for oil andnatural gas property acquisition, exploration and development activities***

 

The following tablesummarizes costs incurred and capitalized in oil and natural gas propertyacquisition, exploration and development activities.  Property acquisition costs are those costsincurred to lease property, including both undeveloped leasehold and thepurchase of reserves in place. Exploration costs include costs of identifying areas that may warrantexamination and examining specific areas that are considered to have prospectscontaining oil and natural gas reserves, including costs of drillingexploratory wells, geological and geophysical costs and carrying costs onundeveloped properties. Development costs are incurred to obtain access toproved reserves, including the cost of drilling.  Development costs also include amountsincurred due to the recognition of asset retirement obligations, of $502,814and $207,748, during the years ended June 30, 2009 and 2008, respectively.

 
| ** **                                               | ** ** | **For the Years Ended June 30** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                               | ** ** | **2009**                             | ** ** | **2008** | ** ** |
|                                                     |       |                                 |       |   |   |
| Oil and Natural  Gas Activities                          |       |                                 |       |   |   |
| Property  acquisition costs:                             |       |                                 |       |   |   |
| Proved property                                          |       | $                                    | 876,640    |   | $ | 2,958,538 |   |
| Unproved  property                                       |       | 1,413,941                            |       | 5,648,955 |   |
| Exploration  costs                                       |       | 349,403                              |       | — |   |
| Development  costs                                       |       | 6,486,158                            |       | 13,216,175 |   |
| Total costs  incurred for oil and natural gas activities |       | $                                    | 9,126,142  |   | $ | 21,823,668 |   |

 

***Estimated NetQuantities of Proved Oil and Natural Gas Reserves (Unaudited)***

 

Proved oil and natural gas reserves are estimatedquantities of crude oil, natural gas and natural gas liquids that geologicaland engineering data demonstrate with reasonable certainty to be recoverable infuture years from known reservoirs under existing economic and operatingconditions. Proved developed oil and natural gas reserves are reserves that canbe expected to be recovered through existing wells with existing equipment andoperating methods. There are uncertainties inherent in estimating quantities ofproved oil and natural gas reserves, projecting future production rates, andtiming of development expenditures. Accordingly, reserve estimates often differfrom the quantities of oil and natural gas that are ultimately recovered.  All of our proved reserves are located in theUnited States. The following information about our proved and proved developedoil and natural gas reserves was developed from reserve reports prepared byindependent reserve engineers:

 
| ** **                       | ** ** | **Crude Oil  (Bbls)** | ** ** | **Natural Gas Liquids  (Bbls)** | ** ** | **Natural Gas  (Mcf)** | ** ** | **BOE**    | ** ** |
|----------------------------------|------------|-----------------------|------------|---------------------------------|------------|------------------------|------------|------------|------------|
|                             |       |                  |       |                            |       |                   |       |       |       |
| July 1,  2007               |       | 1,084,200             |       | —                          |       | 3,838,000              |       | 1,723,867  |       |
| Revisions of  previous estimates |       | (298,793              | )          | 274,699                         |       | (1,013,358             | )          | (192,987   | )          |
| Purchases of  minerals in place  |       | 629,700               |       | 1,046,400                       |       | 7,778,800              |       | 2,972,567  |       |
| Production  (sales volumes)      |       | (29,466               | )          | (10,639                         | )          | (69,051                | )          | (51,614    | )          |
| Sales of  minerals in place      |       | (433,600              | )          | —                          |       | —                 |       | (433,600   | )          |
| July 1,  2008               |       | 952,041               |       | 1,310,460                       |       | 10,534,391             |       | 4,018,233  |       |
| Revisions of  previous estimates |       | (92,729               | )          | (272,689                        | )          | (4,498,026             | )          | (1,115,089 | )          |
| Purchases of  minerals in place  |       | 122,662               |       | 60,648                          |       | 645,724                |       | 290,931    |       |
| Production  (sales volumes)      |       | (36,026               | )          | (44,125                         | )          | (323,301               | )          | (134,035   | )          |
| July 1,  2009               |       | 945,948               |       | 1,054,294                       |       | 6,358,788              |       | 3,060,040  |       |
|                             |       |                  |       |                            |       |                   |       |       |       |
| **Proved  developed reserves:**  |       |                  |       |                            |       |                   |       |       |       |
| July 1,  2007               |       | 389,700               |       | —                          |       | —                 |       | 389,700    |       |
| July 1,  2008               |       | 96,167                |       | 109,716                         |       | 561,001                |       | 299,383    |       |
| July 1,  2009               |       | 104,731               |       | 141,372                         |       | 1,106,028              |       | 430,441    |       |

 

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**EVOLUTION PETROLEUM CORPORATIONAND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**Note 17****—****Supplemental Disclosures aboutOil and Natural Gas Producing Properties (unaudited)**(Continued)

 

Therevisions of previous estimates during our fiscal year ended June 30,2009, were due primarily to the decline in the price of natural gas.  During the year ended June 30, 2008, the revisions ofprevious estimates were primarily due to the identification and separation ofnatural gas liquids in 2008 and the effects of the new SEC guideline on PUDlocations with fractured reservoirs. Natural gas liquids were not separately identified in the July 1,2007 independent report prepared by Von Gonten.

 

Purchases of minerals inplace during 2009 resulted from leasehold acquisitions of proved undevelopedreserves in the Giddings Field and in our Neptune oil project in South Texas.

 

Purchases of minerals inplace during 2008 resulted from leasehold acquisitions of proved undevelopedreserves that directly offset currently or historically productive wells in thesame fracture trend in the Giddings Field.

 

***Standardized Measure ofDiscounted Future Net Cash Flows***

 

Future oil and natural gas sales and production anddevelopment costs have been estimated using prices and costs in effect at theend of the years indicated, as required by SFAS No. 69, *Disclosures about Oil and Gas Producing Activities* (“SFAS No. 69”).  SFAS No. 69 requires that netcash flow amounts be discounted at 10%. Future production and development costsare computed by estimating the expenditures to be incurred in developing andproducing our proved oil and natural gas reserves assuming continuation ofexisting economic conditions. Future income tax expenses are computed byapplying the appropriate period-end statutory tax rates to the future pretaxnet cash flow relating to our proved oil and natural gas reserves, less the taxbasis of the related properties. The future income tax expenses do not giveeffect to tax credits, allowances, or the impact of general and administrativecosts of ongoing operations relating to the Company’s proved oil and naturalgas reserves.  Changes in the demand foroil and natural gas, inflation, and other factors make such estimatesinherently imprecise and subject to substantial revision. The table belowshould not be construed to be an estimate of the current market value of theour proved reserves.

 

The standardized measure of discounted future net cashflows related to proved oil and natural gas reserves as of June 30, 2009and 2008 are as follows:

 
| ** **                                                | ** ** | **For the Years Ended June 30** | ** **  |
|-----------------------------------------------------------|------------|--------------------------------------|-------------|
| ** **                                                | ** ** | **2009**                             | ** **  | **2008** | ** ** |
| ** **                                                | ** ** | ** **                           | ** **  | ** ** | ** ** |
| Future cash  inflows                                      |       | $                                    | 127,639,699 |   | $ | 390,107,980 |   |
| Future  production costs and severance taxes              |       | (36,128,247                          | )           | (61,351,774 | ) |
| Future  development costs                                 |       | (33,317,000                          | )           | (62,457,700 | ) |
| Future income  tax expenses                               |       | (15,697,532                          | )           | (95,022,328 | ) |
| Future net cash  flows                                    |       | 42,496,920                           |        | 171,276,178 |   |
| 10% annual  discount for estimated timing of cash flows   |       | (18,947,129                          | )           | (74,203,537 | ) |
| Standardized  measure of discounted future net cash flows |       | $                                    | 23,549,791  |   | $ | 97,072,641 |   |

 

The following table presents the NYMEX spot crude oil,natural gas liquid, and natural gas price used to compute future cash inflows foreach period:

 
| ** **                              | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|
| ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Crude oil price  per barrel             |       | $          | 69.890     |       | $          | 140.000 |   |
| Natural gas  liquids price per barrel * |       | $          | 36.960     |       | $          | 84.390 |   |
| Natural gas  price per MMbtu            |       | $          | 3.885      |       | $          | 13.095 |   |

 

----

* The NGL price was based on the historical price receivedversus the NYMEX basis oil price.

 

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**EVOLUTION PETROLEUM CORPORATIONAND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**Note 17****—****Supplemental Disclosures aboutOil and Natural Gas Producing Properties (unaudited)**(Continued)

 

A summary of the changes in the standardized measureof discounted future net cash flows applicable to proved crude oil, natural gasliquids, and natural gas reserves is as follows:

 
| ** **                                                                     | ** ** | **For the Years Ended June 30** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                     | ** ** | **2009**                             | ** ** | **2008** | ** ** |
|                                                                           |       |                                 |       |   |   |
| Balance,  beginning of year                                                    |       | $                                    | 97,072,641 |   | $ | 21,990,298 |   |
| Net changes in  sales prices and production costs related to future production |       | (145,566,788                         | )          | 19,582,657 |   |
| Changes in  estimated future development costs                                 |       | 24,399,826                           |       | (27,754,046 | ) |
| Sales of oil and  gas produced during the period, net of production costs      |       | (4,654,400                           | )          | (2,910,089 | ) |
| Net change due  to purchases of minerals in place                              |       | 2,683,261                            |       | 146,355,022 |   |
| Net change due  to sales of minerals in place                                  |       | —                               |       | (7,302,851 | ) |
| Net change due  to revisions in quantity estimates                             |       | (20,564,731                          | )          | (5,791,427 | ) |
| Development  costs incurred during the period                                  |       | 5,960,423                            |       | 2,000,000 |   |
| Accretion of  discount                                                         |       | 13,315,725                           |       | 2,746,274 |   |
| Net change in  discounted income taxes                                         |       | 50,903,834                           |       | (51,843,197 | ) |
| Balance, end of  year                                                          |       | $                                    | 23,549,791 |   | $ | 97,072,641 |   |

 

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**Item 9.  Changes In and Disagreements with Accountantson Accounting and Financial Disclosure**

 

None.

 

**Item 9A. Controls and Procedures**

 

**Disclosure Controls and Procedures**

 

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in ourExchange Act reports is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms and that such information is accumulated and communicated to this Company’smanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate to allow for timely decisions regarding required disclosure.

 

As required by Securities and Exchange Commission Rule 13a-15(b),we carried out an evaluation, under the supervision and with the participationof the Company’s management, including our Chief Executive Officer and theCompany’s Chief Financial Officer, of the effectiveness of the design andoperation of our disclosure controls and procedures as of the end of the periodcovered by this report. Based on this evaluation, our Chief Executive Officerand Chief Financial Officer concluded that our disclosure controls andprocedures are effective in ensuring that the information required to bedisclosed in our reports filed or submitted under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission rules and forms.

 

**Management’s Report on InternalControl Over Financial Reporting**

 

The Company’s management is responsible forestablishing and maintaining adequate internal control over financialreporting, as such term is defined in Rule 13a-15(f) of theSecurities Exchange Act of 1934, as a process designed by, or under thesupervision of, the company’s principal executive and principal financialofficers and effected by the Company’s board of directors, management and otherpersonnel, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with accounting principles generally accepted in theUnited States of America and includes those policies and procedures that:

 

·                  Pertain to the maintenance of records that inreasonable detail accurately and fairly reflect the transactions anddispositions of the assets of the company;

 

·                  Provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with accounting principles generally accepted in the United Statesof America and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and

 

·                  Provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use or disposition of the company’sassets that could have a material affect on the financial statements.

 

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Therefore,even those systems determined to be effective can provide only reasonableassurance with respect to financial statement preparation and presentation.  Also, projections of any evaluation ofeffectiveness to future periods are subject to risk that controls may becomeinadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.  Under the supervision and with the participationof management, including the Chief Executive Officer and the Chief FinancialOfficer, an evaluation was conducted on the effectiveness of the Company’sinternal control over financial reporting based on criteria established in theInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission. Management concluded that the Company maintained effective internalcontrol over financial reporting as of June 30, 2009.

 

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This annual report does not include an attestationreport of the Company’s registered public accounting firm regarding internalcontrol over financial reporting. Management’s report was not subject to attestation by the Company’sregistered public accounting firm pursuant to temporary rules of theSecurities and Exchange Commission that permit the Company, as a smallerreporting company, to provide only management’s report in this annual report.

 

**Changes in Internal Control OverFinancial Reporting**

 

There has been no change in the Company’s internalcontrol over financial reporting during the year ended June 30, 2009 thathas materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

**Item 9B. Other Information**

 

None.

 

**PART III**

 

**Item10.  Directors, Executive Officers  And Corporate Governance**

 

Incorporated by referenceto the Company’s Proxy Statement to be filed with the Commission pursuant toRegulation 14A within 120 days of the end of the Company’s 2009 fiscal year.

 

**Item11. Executive Compensation**

 

Incorporated by referenceto the Company’s Proxy Statement to be filed with the Commission pursuant toRegulation 14A within 120 days of the end of the Company’s 2009 fiscal year.

 

**Item12.****SecurityOwnership****of Certain Beneficial Owners and Management and Related StockholderMatters**

 

Incorporated by referenceto the Company’s Proxy Statement to be filed with the Commission pursuant toRegulation 14A within 120 days of the end of the Company’s 2009 fiscal year.

 

**Item13. Certain Relationships and Related Transactions, Director Independence**

 

Incorporated by referenceto the Company’s Proxy Statement to be filed with the Commission pursuant toRegulation 14A within 120 days of the end of the Company’s 2009 fiscal year.

 

**Item14.  Principal Accountant Fees andServices**

 

Incorporated by referenceto the Company’s Proxy Statement to be filed with the Commission pursuant toRegulation 14A within 120 days of the end of the Company’s 2009 fiscal year.

 

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**PART IV.**

 

**Item 15. Exhibits and Financial Statement Schedules**

 

Thefollowing documents are filed as part of this report:

 
| **1.** | **Financial  Statements.**                                                                                                                                                                                                                                                                                                                                                                                        |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | **Our  consolidated financial statements are included in Part II, Item 8 of  this report:**                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | Report of Independent  Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | Consolidated Balance  Sheets                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | Consolidated Statements  of Operations                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | Consolidated Statements  of Cash Flows                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | Consolidated Statements  of Stockholders’ Equity                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | Notes to the  Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| **2.** | **Financial  Statements Schedules and supplementary information required to be submitted:**                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | None.                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| **3.** | **Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | A list of the exhibits  filed or furnished with this report on Form 10-K (or incorporated by  reference to exhibits previously filed or furnished by us) is provided in the  Exhibit Index of this report.  Those exhibits incorporated by  reference herein are indicated as such by the information supplied in the  parenthetical thereafter.  Otherwise, the exhibits are filed herewith. |

 

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**SIGNATURES**

 

In accordance with Section 13or 15(d) of the Securities Exchange Act of 1934, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized in the City of Houston, Texas, on the date indicated.

 
| **Evolution Petroleum Corporation** |
|-------------------------------------|
|                                |   |   |   |
|                                | *By:* | */s/* | *ROBERT S. HERLIN* |
|                                | * * | * * | *Robert S. Herlin* |
|                                | * * | * * | *Chairman, President and Chief Executive Officer* |
|                                | * * | * * | *(Principal Executive Officer)* |
| * *                            | * * | * * | * * |
| * *                            | * * | * * | * * |
|                                | *By:* | */s/* | *STERLING H. MCDONALD* |
|                                | * * | * * | *Sterling H. McDonald* |
|                                | * * | * * | *Vice President and Chief Financial Officer* |
|                                | * * | * * | *(Principal Financial and Accounting Officer)* |
| *Date: September 23, 2009*     | * * | * * | * * |

 

Inaccordance with the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **Date**                  | ** ** | **Signature** | ** **          | **Title** |
|---------------------------|------------|---------------|---------------------|-----------|
|                      |       |          |                |      |
| *September 23, 2009* | * *   | */s/*         | *EDWARD J. DIPAOLO* | * *  | *Director* |
|                      | * *   |          | *Edward J. DiPaolo* |      |   |
|                      |       |          |                |      |   |
|                      |       |          |                |      |   |
| *September 23, 2009* | * *   | */s/*         | *GENE STOEVER*      | * *  | *Director* |
|                      | * *   |          | *Gene Stoever*      |      |   |
|                      |       |          |                |      |   |
|                      |       |          |                |      |   |
| *September 23, 2009* | * *   | */s/*         | *WILLIAM DOZIER*    | * *  | *Director* |
|                      | * *   |          | *William Dozier*    |      |   |
|                      |       |          |                |      |   |
|                      |       |          |                |      |   |
| *September 23, 2009* | * *   | */s/*         | *KELLY W. LOYD*     | * *  | *Director* |
|                      | * *   |          | *Kelly W. Loyd*     |      |   |
|                      |       |          |                |      |   |
|                      |       |          |                |      |   |
| *September 23, 2009* | * *   | */s/*         | *LAIRD Q. CAGAN*    | * *  | *Director* |
|                      | * *   | * *      | *Laird Q. Cagan*    | * *  | * * |
|                      |       | * *      | * *            | * *  | * * |
|                      |       | * *      | * *            | * *  | * * |
| *September 23, 2009* | * *   | */s/*         | *ROBERT S. HERLIN*  | * *  | *Chairman of the Board* |
|                      | * *   |          | *Robert S. Herlin*  |      |   |

 

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**INDEX OF EXHIBITS**

 

****MASTER EXHIBITINDEX****

 
| ****EXHIBIT**********NUMBER****** | **** **** | ****DESCRIPTION****                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|-----------------------------------|----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                               |           | Asset  Purchase Agreement for Tullos Field, dated September 3, 2004 (Previously  filed as an exhibit to Form 8-K on September 9, 2004)                                                                                                                                                                                                                                                                                                                                                   |
|                              |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.2                               |           | Definitive  Asset Purchase Agreement, dated as of February 2, 2005, by and between  Chadco, Inc., Alan Chadwick McCartney, Sonya McCartney and NGS Sub.  Corp. (Previously filed as an exhibit in Form 8-K on February 8,  2005)                                                                                                                                                                                                                                                    |
|                              |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.3                               |           | Purchase  and Sale Agreement, by and between NGS Sub Corp. and Denbury Onshore, LLC,  dated May 8, 2006 (Previously filed as an exhibit to Form 8-K on  May 11, 2006)                                                                                                                                                                                                                                                                                                                    |
|                              |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.4                               |           | Purchase  and Sale Agreement I, by and between NGS Sub Corp. and Denbury Onshore, LLC,  dated May 8, 2006 (Previously filed as an exhibit to Form 8-K on  June 16, 2006)                                                                                                                                                                                                                                                                                                                 |
|                              |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.5                               |           | Purchase  and Sale Agreement II, by and between NGS Sub Corp. and Denbury Onshore, LLC,  dated May 8, 2006 (Previously filed as an exhibit to Form 8-K on  June 16, 2006)                                                                                                                                                                                                                                                                                                                |
|                              |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.6                               |           | Conveyance,  Assignment and Bill of Sale Agreement, by and between NGS Sub Corp. and  Denbury Onshore, LLC, dated May 8, 2006 (Previously filed as an exhibit  to Form 8-K on June 16, 2006)                                                                                                                                                                                                                                                                                             |
|                              |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.7                               |           | Agreement  and Plan of Reorganization dated as of April 12, 2004 among Reality  Interactive, Inc., Reality Acquisition Corp., Global Marketing  Associates, Inc., Dean H. Becker and Natural Gas Systems, Inc.  (incorporated by reference to the Current Report on Form 8-K/A filed by  Natural Gas Systems, Inc. with the Securities and Exchange Commission on  April 27, 2004) (Previously filed as an exhibit to Form Schedule  13D on July 11, 2008) |
|                              |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.1                               |           | Articles  of Incorporation (Previously filed as an exhibit to the Company’s Current  Report on Form 8-K on February 7, 2002)                                                                                                                                                                                                                                                                                                                                                             |
|                              |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.2                               |           | Certificate  of Amendment to Articles of Incorporation (Previously filed as an exhibit to  the Company’s Current Report on Form 8-K on February 7, 2002)                                                                                                                                                                                                                                                                                                                                 |
|                              |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.3                               |           | Certificate  of Amendment to Articles of Incorporation (Previously filed as an exhibit to  Form SB 2/A on October 19, 2005)                                                                                                                                                                                                                                                                                                                                                                   |
|                              |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.4                               |           | Bylaws  (Previously filed as an exhibit to the Company’s Current Report on  Form 8-K on February 7, 2002)                                                                                                                                                                                                                                                                                                                                                                                |
|                              |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.5                               |           | Amended  Bylaws (Previously filed as an exhibit to Form 10KSB on March 31,  2004)                                                                                                                                                                                                                                                                                                                                                                                                             |
|                              |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.1                               |           | Form of  Stock Option Agreement for the Natural Gas Systems 2004 Stock Plan  (Previously filed as an exhibit to the Current Report on Form 8—K on  April 8, 2005)                                                                                                                                                                                                                                                                                                                   |
|                              |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.2                               |           | Articles  of Merger (Previously filed as an exhibit to Form SB — 2/A on  October 19, 2005)                                                                                                                                                                                                                                                                                                                                                                                               |
|                              |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.3                               |           | Form of  Warrant Agreement between Natural Gas Systems, Inc. and Tatum CFO  Partners, LLP (Previously filed as an exhibit to the Company’s Current Report  on Form 8-K on April 8, 2005)                                                                                                                                                                                                                                                                                       |
|                              |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.4                               |           | Revocable  Warrant Agreement between Natural Gas Systems, Inc. and Daryl V.  Mazzanti (Previously filed as an exhibit to the Company’s Current Report on  Form 8-K on June 29, 2005)                                                                                                                                                                                                                                                                                                |
|                              |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.5                               |           | Specimen  form of the Company’s Common Stock Certificate (Previously filed herewith as  an exhibit to Form SB — 2/A on October 19, 2005)                                                                                                                                                                                                                                                                                                                                            |
|                              |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.6                               |           | Securities  Purchase Agreement dated as of May 6, 2005, by and between Natural Gas  Systems, Inc. and Rubicon Master Fund (Previously filed as an exhibit to  the Company’s Current Report on Form 8-K on May 11, 2005)                                                                                                                                                                                                                                                        |
|                              |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.7                               |           | Registration  Rights Agreement dated as of May 6, 2005, by and between Natural Gas  Systems, Inc. and Rubicon Master Fund (Previously filed as an exhibit to  the Company’s Current Report on Form 8-K on May 11, 2005)                                                                                                                                                                                                                                                        |

 

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| 4.8    |   | Stock  Grant Agreement, dated as of May 4, 2005, by and between Natural Gas  Systems, Inc. and Liviakis Financial Communications, Inc.  (Previously filed as an exhibit to the Company’s Current Report on  Form 8-K on May 11, 2005)                        |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                       |
| 4.9    |   | Herlin  Stock Option Agreement, dated April 4, 2005 (Previously filed as an  exhibit to the Company’s Current Report on Form 8-K on April 8,  2005)                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                       |
| 4.10   |   | Revocable  Warrant Agreement between Natural Gas Systems, Inc. and Robert S.  Herlin, dated April 4, 2005 (Previously filed as an exhibit to the  Company’s Current Report on Form 8-K on April 8, 2005)                                                          |
|   |   |                                                                                                                                                                                                                                                                                       |
| 4.11   |   | Amended  and Restated Tatum Resources Agreement, dated January 1, 2005  (Previously filed as an exhibit to the Company’s Current Report on  Form 8-K on April 8, 2005)                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                       |
| 4.12   |   | Warrant  Agreement between Natural Gas Systems, Inc. and Tatum CFO Partners, LLP,  dated January 1, 2005 (Previously filed as an exhibit to the Company’s  Current Report on Form 8-K on April 8, 2005)                                                           |
|   |   |                                                                                                                                                                                                                                                                                       |
| 4.13   |   | McDonald  Stock Option Agreement, dated April 4, 2005 (Previously filed as an  exhibit to the Company’s Current Report on Form 8-K on April 8,  2005)                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                       |
| 4.14   |   | Warrant  Agreement, dated as of February 2, 2005, between Natural Gas  Systems, Inc. and Prospect Energy Corporation (Previously filed as an  exhibit to the Company’s Current Report on Form 8-K on February 8,  2005)                                           |
|   |   |                                                                                                                                                                                                                                                                                       |
| 4.15   |   | Natural  Gas Systems, Inc. Common Stock Purchase Warrant in favor of Prospect  Energy Corporation, dated as of February 2, 2005 (Previously filed as an  exhibit to the Company’s Current Report on Form 8-K on February 8,  2005)                                |
|   |   |                                                                                                                                                                                                                                                                                       |
| 4.16   |   | Revocable  Warrant Agreement, dated as of February 2, 2005, between Natural Gas  Systems, Inc. and Prospect Energy Corporation (Previously filed as an  exhibit to the Company’s Current Report on Form 8-K on February 8,  2005)                                 |
|   |   |                                                                                                                                                                                                                                                                                       |
| 4.17   |   | Natural  Gas Systems, Inc. Revocable Common Stock Purchase Warrant in favor of  Prospect Energy Corporation, dated as of February 2, 2005 (Previously  filed as an exhibit to the Company’s Current Report on Form 8-K on  February 8, 2005)                      |
|   |   |                                                                                                                                                                                                                                                                                       |
| 4.18   |   | Registration  Rights Agreement, dated as of February 2, 2005, between Natural Gas Systems, Inc.  and Holders of Common Stock of Natural Gas Systems, Inc. (Previously  filed as an exhibit to the Company’s Current Report on Form 8-K on  February 8, 2005) |
|   |   |                                                                                                                                                                                                                                                                                       |
| 4.19   |   | Form of  Registration Rights Agreement (Previously filed as an exhibit to the Company’s  Current Report on Form 8-K on October 26, 2004)                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                       |
| 4.20   |   | 2004  Stock Plan (Previously filed as an exhibit to the Company’s Definitive  Information Statement on Schedule 14C on August 9, 2004)                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                       |
| 4.21   |   | 2003  Stock Option Plan, adopted September 25, 2003 (Previously filed as an  exhibit to the Company’s Form 8-K on January 24, 2007)                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                       |
| 4.22   |   | Second  Revocable Warrant Agreement , dated as of September 27, 2005, between  Natural Gas Systems, Inc. and Prospect Energy Corporation (Previously  filed as an exhibit to the Company’s Report on Form 10-KSB on  September 28, 2005)                          |
|   |   |                                                                                                                                                                                                                                                                                       |
| 4.23   |   | Stock  Option Agreement, dated June 23, 2005 between Natural Gas  Systems, Inc. and Daryl V. Mazzanti (Previously filed as an exhibit to  the Company’s Current Report on Form 8-K on June 29, 2005)                                                              |
|   |   |                                                                                                                                                                                                                                                                                       |
| 4.24   |   | Stock  Option Grant Agreement, dated June 23, 2005 between Natural Gas  Systems, Inc. and Daryl V. Mazzanti (Previously filed as an exhibit to  the Company’s Current Report on Form 8-K on June 29, 2005)                                                        |
|   |   |                                                                                                                                                                                                                                                                                       |
| 4.25   |   | Securities  Purchase Agreement dated as of January 13, 2006, by and between Natural  Gas Systems, Inc. and Rubicon Master Fund (Previously filed as an  exhibit to the Company’s Current Report on Form 8-K on January 20,  2006)                                 |
|   |   |                                                                                                                                                                                                                                                                                       |
| 4.26   |   | Amended  and Restated Registration Rights Agreement dated as of January 13, 2006,  by and between Natural Gas Systems, Inc. and Rubicon Master Fund  (Previously filed as an exhibit to the Company’s Current Report on  Form 8-K on January 20, 2006)            |
|   |   |                                                                                                                                                                                                                                                                                       |
| 4.27   |   | Third  Revocable Warrant Agreement, by and between Prospect Energy Corporation and  Natural Gas Systems, Inc., dated January 31, 2006 (Previously filed  as an exhibit to Form SB — 2/A on March 3, 2006)                                                         |

 

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| 4.28   |   | Amendment  No. 1 to the Registration Rights Agreement, by and between Prospect  Energy Corporation and Natural Gas Systems, Inc., dated January 31,  2006 (Previously filed as an exhibit to Form SB — 2/A on March 3,  2006) |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                        |
| 4.29   |   | Subordinated  Promissory Note, dated March 3, 2006, between Natural Gas  Systems, Inc. and Laird Q. Cagan (Previously filed as an exhibit to  Form 8-K on March 8, 2006)                                                                |
|   |   |                                                                                                                                                                                                                                                        |
| 4.30   |   | Form of  Restricted Stock Agreement (Previously filed as an exhibit to the Company’s  Schedule TO on May 15, 2009)                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                        |
| 10.1   |   | Third  Amendment to Consulting Agreement between Liviakis Financial  Communications, Inc. and Evolution Petroleum dated November 14,  2006 (Previously filed as an exhibit to Form 10-QSB on February 14,  2007)                        |
|   |   |                                                                                                                                                                                                                                                        |
| 10.2   |   | Executive  Employment Agreement of Robert S. Herlin, dated April 4, 2005  (Previously filed as an exhibit to Form 8-K on April 8, 2005)                                                                                                      |
|   |   |                                                                                                                                                                                                                                                        |
| 10.3   |   | Executive  Employment Agreement of Sterling H. McDonald, dated April 4, 2005 (Previously  filed as an exhibit to Form 8-K on April 8, 2005)                                                                                                  |
|   |   |                                                                                                                                                                                                                                                        |
| 10.4   |   | Executive  Employment Agreement of Daryl V. Mazzanti, dated June 23, 2005  (Previously filed as an exhibit to Form 8-K on June 29, 2005)                                                                                                     |
|   |   |                                                                                                                                                                                                                                                        |
| 10.5   |   | Master  Services Agreement, dated September 29, 2005, by and between the NGS  Technologies, Inc. and MTEM, Ltd. (Previously filed as an exhibit on  Form 8-K on October 7, 2005)                                                        |
|   |   |                                                                                                                                                                                                                                                        |
| 10.6   |   | Agreement  with Chadbourn Securities, Inc., dated February 13, 2006  (Previously filed as an exhibit to Form 10QSB on February 14, 2006)                                                                                                |
|   |   |                                                                                                                                                                                                                                                        |
| 10.7   |   | Agreement  with Cagan McAfee Capital Partners, LLC, dated February 13, 2006  (Previously filed as an exhibit to Form 10QSB on February 14, 2006)                                                                                             |
|   |   |                                                                                                                                                                                                                                                        |
| 10.8   |   | Unit  Operating Agreement, by and between NGS Sub Corp. and Denbury Onshore, LLC,  dated May 8, 2006 (Previously filed as an exhibit to Form 8-K on  June 16, 2006)                                                                          |
|   |   |                                                                                                                                                                                                                                                        |
| 10.9   |   | Form of  Indemnification Agreement for Officers and Directors, as adopted on  September 20, 2006 (Previously filed as an exhibit to Form 8-K on  September 22, 2006)                                                                    |
|   |   |                                                                                                                                                                                                                                                        |
| 10.10  |   | Asset  Purchase and Sale Agreement by and between NGS SUB. CORP. (Seller) and MWM  Energy, LLC (Buyer), dated February 15, 2008 (Previously filed as an  exhibit to Form 10-Q on May 14, 2008)                                               |
|   |   |                                                                                                                                                                                                                                                        |
| 10.11  |   | Evolution  Petroleum Corporation Amended and Restated 2004 Stock Plan (Previously filed  as Annex A to Form Schedule 14A on October 29, 2007)                                                                                                     |
|   |   |                                                                                                                                                                                                                                                        |
| 10.12  |   | Gas  Purchase and Gas Processing Contract by and between EVOLUTION OPERATION CO.,  INC. (Seller) and ETC TEXAS PIPELINE LTD. (Buyer) dated October 8, 2007  (Previously filed as an exhibit to Form 10-K/A on April 7, 2009)                 |
|   |   |                                                                                                                                                                                                                                                        |
| 10.13  |   | Gas  Purchase Contract by and between EVOLUTION OPERATION CO., INC. (Seller) and  DCP MIDSTREAM, LP (Buyer) dated December 1, 2007 (Previously filed as an  exhibit to Form 10-K/A on April 7, 2009)                                         |
|   |   |                                                                                                                                                                                                                                                        |
| 10.14  |   | Gas  Purchase and Sale Agreement by and between EVOLUTION OPERATION CO., INC.  (Seller) and COPANO FIELD SERVICES/UPPER GULF COAST, L.P. (Buyer) dated  February 1, 2009 (Previously filed as an exhibit to Form 10-Q on May 15,  2009)      |
|   |   |                                                                                                                                                                                                                                                        |
| 14.1   |   | Code  of Business Conduct and Ethics for Natural Gas Systems, Inc. (Previously  filed as an exhibit to Form 8-K on May 4, 2006)                                                                                                              |
|   |   |                                                                                                                                                                                                                                                        |
| 21.1   |   | List  of Subsidiaries of Evolution Petroleum Corporation (Filed herein)                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                        |
| 23.1   |   | Consent  of Hein & Associates, LLP, independent auditors (Filed herein)                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                        |
| 23.2   |   | Consent  of W. D. Von Gonten & Co. (Filed herein)                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                        |
| 31.1   |   | Certification  of Chief Executive Officer Robert S. Herlin Pursuant to Rule 15D-14 of  the Securities Exchange Act of 1934, as Amended as Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herein)                       |

 

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| 31.2   |   | Certification  of Chief Financial Officer Sterling H. McDonald Pursuant to Rule 15D-14  of the Securities Exchange Act of 1934, as Amended as Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herein) |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                      |
| 32.1   |   | Certification  of Chief Executive Officer Robert S. Herlin Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (Filed herein)                                            |
|   |   |                                                                                                                                                                                                                                      |
| 32.2   |   | Certification  of Chief Financial Officer Sterling H. McDonald Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (Filed herein)                                        |
|   |   |                                                                                                                                                                                                                                      |
| 99.1   |   | Audit  Committee Charter of the Board of Directors of Natural Gas Systems, Inc.  (Previously filed as an exhibit to Form 8-K on May 4, 2006)                                                                               |
|   |   |                                                                                                                                                                                                                                      |
| 99.2   |   | Compensation  Committee Charter of the Board of Directors of Natural Gas Systems, Inc.  (Previously filed as an exhibit to Form 8-K on May 4, 2006)                                                                        |
|   |   |                                                                                                                                                                                                                                      |
| 99.3   |   | Nominating  Committee Charter of the Board of Directors of Natural Gas Systems, Inc.  (Previously filed as an exhibit to Form 8-K on May 4, 2006)                                                                          |

 

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