**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-KSB**




(Mark
      One)




**þ**
            ANNUAL
                REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
                OF
                1934




For
      the
      fiscal year ended December 31, 2006





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




Commission
      File number 0-8157




**THE
      RESERVE PETROLEUM COMPANY**


(Name
      of
      small business issuer in its charter)





**DELAWARE**
            **73-0237060**(State
                or other jurisdiction of incorporation or organization)
            (I.R.S.
                Employer Identification No.)**6801
                N. BROADWAY, SUITE 300**
              **OKLAHOMA
                CITY, OKLAHOMA**
            **73116-9092**(Address
                of principal executive offices)
            (Zip
                Code)


Issuer’s
      telephone number:  **(405)
      848-7551**




Securities
      registered under Section 12(b) of the Exchange Act: **NONE**




Securities
      registered under Section 12(g) of the Exchange Act:





**COMMON
                STOCK ($0.50 PAR VALUE)**(Title
                of Class)





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act.  o





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days.          Yes þ No o





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB.    þ





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





The
      issuer’s revenues for the fiscal year ended December 31, 2006 were $9,932,949.





The
      aggregate market value of the voting stock held by non-affiliates was
      $18,880,742 as computed by reference to the last reported sale which was on
      February 28, 2007.





As
      of
      March 28, 2007, there were 162,868.64 common shares outstanding.









**DOCUMENTS
      INCORPORATED BY REFERENCE**




Portions
      of the definitive proxy statement relating to the registrant’s Annual Meeting of
      Shareholders to be held on May 22, 2007 (the “Proxy Statement”) are incorporated
      by reference into Part III of this Form 10-KSB.





Transitional
      Small Business Disclosure Format (Check one): Yes o No þ




**TABLE
      OF CONTENTS**




**Page**Forward
              Looking Statements
            3**PART
                I**Item
                1.
            Description
                of Business
            3Item
                2.
            Description
                of Property
            6Item
                3.
            Legal
                Proceedings
            7Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            7**PART
                II**Item
                5.
            Market
                for Common Equity, Related Stockholder Matters and Small Business
                Issuer
                Purchases of Equity Securities
            7Item
                6.
            Management’s
                Discussion and Analysis or Plan of Operation
            8Item
                7.
            Financial
                Statements
            20Item
                8.
            Changes
                in and Disagreements with Accountants on Accounting andFinancial Disclosure
            42Item
                8A.
            Controls
                and Procedures
            42**PART
                III**Item
                9.
            Directors,
                Executive Officers, Promoters, Control Persons and Corporate Governance;
                Compliance with Section 16(a) of the Exchange Act
            43Item
                10.
            Executive
                Compensation
            43Item
                11.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            43Item
                12.
            Certain
                Relationships and Related Transactions, and Director
                Independence
            43Item
                13.
            Exhibits
            43Item
                14.
            Principal
                Accountant Fees and Services
            43




2




**Forward-Looking
      Statements**





This
      Report on Form 10-KSB contains forward-looking statements. Actual events and/or
      future results of operations may differ materially from those contemplated
      by
      such forward-looking statements. See Item 6, “Management’s Discussion and
      Analysis or Plan of Operation” for a summation of some of the risks and
      uncertainties inherent in forward-looking statements.





**PART
      I**





**ITEM
              1.**
            **DESCRIPTION
                OF BUSINESS****.**





**Overview**





The
      Reserve Petroleum Company (the “Company”) is engaged principally in the
      exploration for and the development of oil and natural gas properties. Other
      business segments are not significant factors in the Company’s operations. The
      Company is a corporation organized under the laws of the State of Delaware
      in
      1931.





**Oil
      and Natural Gas Properties**




For
      a
      summary of certain data relating to the Company’s oil and gas properties
      including production, undeveloped acreage, producing and dry wells drilled
      and
      recent activity, see Item 2, “Description of Property”. For a discussion and
      analysis of current and prior years’ revenue and related costs of oil and gas
      operations, and a discussion of liquidity and capital resource requirements,
      see
      Item 6, “Management’s Discussion and Analysis or Plan of
      Operation”.





**Mineral
      Property Management**





The
      Company owns non-producing mineral interests in approximately 263,567 gross
      acres equivalent to 90,774 net acres. These mineral interests are located in
      nine states with 54,804 net acres in the States of Oklahoma and Texas, the
      area
      of concentration for the Company in its present exploration and development
      programs.





Management
      continually reviews various industry reports and other sources for activity
      (leasing, drilling, significant discoveries, etc.) in areas where the Company
      has mineral ownership. Based on its analysis of any activity and assessment
      of
      the potential risk relative to the particular area, management may negotiate
      a
      lease or farmout agreement and accept a royalty interest, or it may choose
      to
      participate as a working interest owner and pay its proportionate share of
      costs
      for any exploration or development drilling.





A
      substantial amount of the Company’s oil and gas revenue has resulted from its
      mineral property management. In 2006, $5,942,930 (61%) of oil and gas sales
      was
      from royalty interests as compared to $4,635,747 (57%) in 2005. As a result
      of
      its mineral ownership, the Company had royalty interests in 43 gross (.92 net)
      wells which were drilled and completed as producing wells in 2006. See the
      following paragraphs for a discussion of mineral interests in which the Company
      chooses to participate as a working interest owner.


3





**Development
      Program**





The
      development of a drilling program is usually initiated in one of three ways.
      The
      Company may participate as a working interest owner with a third party operator
      in the development of non-producing mineral interests which it owns; along
      with
      a joint interest operator, it may participate in drilling additional wells
      on
      its producing leaseholds; or if its exploration program discussed below results
      in a successful exploratory well, it may participate in the development of
      additional wells on the exploratory prospect. In 2006, the Company participated
      in the drilling of 16 development wells with 13 wells (2.02 net) completed
      as
      producers, two as dry holes and one that is still drilling.





**Exploration
      Program**




The
      Company’s exploration program is normally conducted by purchasing interests in
      prospects developed by independent third parties, participating in third party
      exploration of Company-owned non-producing minerals, developing its own
      exploratory prospects, or a combination of the above.





The
      Company normally acquires interests in exploratory prospects from someone in
      the
      industry with whom management has conducted business in the past and/or if
      management has confidence in the quality of the geological and geophysical
      information presented for evaluation by Company personnel. If evaluation
      indicates the prospect is within the Company’s risk limits, the Company may
      negotiate to acquire an interest in the prospect and participate in a
      non-operating capacity.





The
      Company develops exploratory drilling prospects by identification of an area
      of
      interest, development of geological and geophysical information and purchase
      of
      leaseholds in the area. The Company may then attempt to sell an interest in
      the
      prospect to one or more companies in the petroleum industry with one of the
      purchasing companies functioning as operator.





For
      a
      summation of exploratory wells drilled in 2006 or planned for in 2007, see
      Item
      6, “Management’s Discussion and Analysis of Financial Condition or Plan of
      Operation,” subheading, “Update of Oil and Gas Exploration Activity from
      December 31, 2005.”





**Customers**




In
      2006,
      the Company had two customers whose total purchases were greater than 10% of
      revenues from oil and gas sales. XTO Energy purchases were $1,494,274 or 15.4%
      of total oil and gas sales. Burlington Resources purchases were $1,719,354,
      or
      17.7% of total oil and gas sales. The Company sells most of its oil and gas
      under short-term sales contracts that are based on the spot market price. A
      minor amount of oil and gas sales are made under fixed price contracts having
      terms of more than one year.





**Competition**




The
      oil
      and gas industry is highly competitive in all of its phases. There are numerous
      circumstances within the industry and related market place that are out of
      the
      Company’s control such as cost and availability of alternative fuels, the level
      of consumer demand, the extent of other domestic production of oil and gas,
      the
      price and extent of importation of foreign oil and gas, the cost of and
      proximity of pipelines and other transportation facilities, the cost and
      availability of drilling rigs, regulation by state and Federal authorities
      and
      the cost of complying with applicable environmental regulations.




4





The
      Company is a very minor factor in the industry and must compete with other
      persons and companies having far greater financial and other resources. The
      Company’s ability to participate in and/or develop viable prospects, and secure
      the financial participation of other persons or companies in exploratory
      drilling on these prospects is limited.





**Regulation**




The
      Company’s operations are affected in varying degrees by political developments
      and Federal and state laws and regulations. Although released from Federal
      price
      controls, interstate sales of natural gas are subject to regulation by the
      Federal Energy Regulatory Commission (FERC). Oil and gas operations are affected
      by environmental laws and other laws relating to the petroleum industry and
      both
      are affected by constantly changing administrative regulations. Rates of
      production of oil and gas have for many years been subject to a variety of
      conservation laws and regulations, and the petroleum industry is frequently
      affected by changes in the Federal tax laws.





Generally,
      the respective state regulatory agencies supervise various aspects of oil and
      gas operations within the state and transportation of oil and gas sold
      intrastate.





**Environmental
      Protection**




The
      operation of the various producing properties in which the Company has an
      interest is subject to Federal, state and local provisions regulating discharge
      of materials into the environment, the storage of oil and gas products, and
      the
      contamination of subsurface formations. The Company’s lease operations and
      exploratory activity have been and will continue to be affected by regulation
      in
      future periods. However, the known effect to date has not been material as
      to
      capital expenditures, earnings or industry competitive position, nor are
      estimated expenditures for environmental compliance expected to be material
      in
      the coming year. Such expenditures produce no increase in productive capacity
      or
      revenue and require more of management’s time and attention, a cost which cannot
      be estimated with any assurance of certainty.





**Other
      Business**




See
      Item
      6, “Management’s Discussion and Analysis or Plan of Operation”, subheading,
“Equity Investments” and Item 7, “Notes to Financial Statements,” Notes 2 and 7,
      for a discussion of other business including guarantees.





**Employees**




At
      December 31, 2006, the Company had eight employees, including officers. See
      the
      Proxy Statement for additional information. During 2006, all the Company’s
      employees devoted a portion of their time to duties with affiliated companies
      and the Company was reimbursed for the affiliates’ share of compensation
      directly from those companies. See Item 6, “Management’s Discussion and Analysis
      or Plan of Operation," subheading “Certain Relationships and Related
      Transactions” and Item 7, “Notes to Financial Statements,” Note 12, for
      additional information.




5








**ITEM
              2.**
            **DESCRIPTION
                OF PROPERTY.**




The
      Company’s principal properties are oil and natural gas properties as described
      below.




**Oil
      and Natural Gas Operations**




**Oil
      and Gas Reserves**




Reference
      is made to the unaudited supplemental financial information beginning on Page
      38
      for working interest reserve quantity information.





Since
      January 1, 2006, the Company has not filed any reports with any Federal
      authority or agency which included estimates of total proved net oil or gas
      reserves, except for its 2005 annual report on Form 10-KSB and Federal income
      tax return for the year ended December 31, 2005. Those reserve estimates were
      identical.





**Production**




The
      average sales price of oil and gas produced and, for the Company’s working
      interests, the average production cost (lifting cost) per equivalent thousand
      cubic feet (MCF) of gas production is presented in the table below for the
      years
      ended December 31, 2006, 2005 and 2004. Equivalent MCF was developed using
      approximate relative energy content.




Royalties
              
              Working
                  InterestsSales
                  Price
              
              Sales
                  Price
              
              Average
                  ProductionOil
              
              Gas
              
              Oil
              
              Gas
              
              Cost
                  perPer
                  Bbl
              
              Per
                  MCF
              
              Per
                  Bbl
              
              Per
                  MCF
              
              Equivalent
                  MCF2006
              
              $
              62.72
              
              $
              6.06
              
              $
              59.68
              
              $
              6.63
              
              $
              1.652005
              
              $
              54.93
              
              $
              7.55
              
              $
              54.56
              
              $
              7.55
              
              $
              1.732004
              
              $
              38.79
              
              $
              5.42
              
              $
              40.47
              
              $
              5.65
              
              $
              1.61




At
      December 31, 2006, the Company had working interests in 127 gross (15.15 net)
      wells producing primarily gas and/or gas liquids (condensates) and had working
      interests in 83 gross (5.88 net) wells producing primarily oil. These interests
      were in 44,409 gross (4,766 net) producing acres. These wells include 41 gross
      (.243 net) wells associated with secondary recovery projects.





Sixteen
      percent, or 6,578 barrels of the Company’s oil production during 2006 was
      derived from royalty interests in mature West Texas water-floods.





**Undeveloped
      Acreage**




The
      Company’s undeveloped acreage consists of non-producing mineral interests and
      undeveloped leaseholds. The following table summarizes the Company’s gross and
      net acres in each at December 31, 2006.


AcreageGross
              
              NetNon-producing
                  Mineral Interests
              
              
              263,567
              
              
              90,774Undeveloped
                  Leaseholds
              
              
              6,688
              
              
              2,839




6





**Net
      Productive and Dry Wells Drilled**




The
      following table summarizes the net wells drilled in which the Company had a
      working interest for the years ended December 31, 2004 and thereafter, as to
      net
      productive and dry exploratory wells drilled and net productive and dry
      development wells drilled.




Number
                  of Net Working Interest Wells DrilledExploratory
              
              DevelopmentProductive
              
              Dry
              
              Productive
              
              Dry2006
              
              
              .22
              
              
              .33
              
              
              2.02
              
              
              .102005
              
              
              .83
              
              
              .27
              
              
              2.17
              
              
              .212004
              
              
              1.03
              
              
              .50
              
              
              1.01
              
              
              —




**Recent
      Activities**




See
      Item
      6, under the subheading, “Update of Oil and Gas Exploration Activity from
      December 31, 2005” for a summary of recent activities related to oil and natural
      gas operations.





**ITEM
              3.**
            **LEGAL
                PROCEEDINGS.**




There
      are
      no material pending legal proceedings affecting the Company or any of its
      properties.





**ITEM
              4.**
            **SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS**.





None.




**PART
      II**





**ITEM
              5.**
            **MARKET
                FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS****AND
                SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES**.




The
      Company’s stock is dually traded in the Pink Sheet Electronic Quotation Service
      and the OTC Bulletin Board under the symbol “RSRV”. The following high and low
      bid information was quoted on the Pink Sheets OTC Market Report. Prices reflect
      inter-dealer prices without retail markup, markdown or commission and may not
      reflect actual transactions.


Quarterly
                  RangesQuarter
                  Ending
              
              High
                  Bid
              
              Low
                  Bid03/31/05
              
              
              58.00
              
              
              45.0006/30/05
              
              
              83.00
              
              
              52.2509/30/05
              
              
              120.00
              
              
              74.0012/31/05
              
              
              172.00
              
              
              120.0003/31/06
              
              
              178.00
              
              
              140.0006/31//06
              
              
              177.00
              
              
              150.0009/30/06
              
              
              175.00
              
              
              158.0012/31/06
              
              
              166.00
              
              
              153.00




There
      was
      limited public trading in the Company’s common stock in 2006 and 2005. In 2006
      there were 14 brokered trades appearing in the Company’s transfer ledger, versus
      9 in 2005.




7





At
      March
      23, 2007, the Company had approximately 1,454 record holders of its common
      stock. The Company paid dividends on its common stock in the amount of $4.00
      per
      share in the second quarter of 2006 and $2.00 per share in 2005. Management
      will
      review the amount of the annual dividend to be paid in 2007 with the Board
      of
      Directors for their approval.





**SMALL
      BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES**





Period
            
            Total
                Number of Shares Purchased
            
            Average
                Price Paid Per Share
            
            Total
                Number of Shares Purchased as Part of Publicly Announced Plans or
                Programs
                (1)
            
            Approximate
                Dollar Value of Shares that May Yet Be Purchased Under the Plans
                or
                Programs (1)October
                1, 2006 toOctober
                31, 2006
            
            
            129
            
            $
            160.00
            
            
            -
            
            
            -November
                1, 2006 to November 30, 2006
            
            
            6
            
            $
            160.00
            
            
            -
            
            
            -December
                1, 2006 to December 31, 2006
            
            
            46
            
            $
            160.00
            
            
            -
            
            
            -Total
            
            
            181
            
            $
            160.00
            
            
            -
            
            
            -





(1)
            The
                Company has no formal equity security purchase program or plan. The
                Company acts as its own transfer agent and most purchases result
                from
                requests made by shareholders receiving small odd lot share quantities
                as
                the result of probate transfers.





**Item
              6.**
            **MANAGEMENT’S
                DISCUSSION AND ANALYSIS OR PLAN OF
                OPERATION.**





Please
      refer to the financial statements and related notes in Item 7 of this Form
      10-KSB to supplement this discussion and analysis.





**Forward-Looking
      Statements**





In
      addition to historical information, from time to time the Company may publish
      forward-looking statements within the meaning of Section 27A of the Securities
      Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
      Forward-looking statements provide the reader with management’s current
      expectations of future events. They include statements relating to such matters
      as anticipated financial performance, business prospects such as drilling of
      oil
      and gas wells, technological development and similar matters.





Although
      management believes that the expectations reflected in such forward-looking
      statements are based on reasonable assumptions, a variety of factors could
      cause
      the Company’s actual results and experience to differ materially from the
      anticipated results or other expectations expressed in the Company’s
      forward-looking statements. The risks and uncertainties that may affect the
      operations, performance, development and results of the Company’s business
      include, but are not limited to, the following:


The
        Company’s future operating results will depend upon management’s ability to
        employ and retain quality employees, generate revenues and control expenses.
        Any
        decline in operating revenues without corresponding reduction in operating
        expenses could have a material adverse effect on the Company’s business, results
        of operations and financial condition.


8





Estimates
      of future revenues from oil and gas sales are derived from a combination of
      factors which are subject to significant fluctuation over any given period
      of
      time. Reserve estimates by their nature are subject to revision in the
      short-term. The evaluating engineer considers production performance data,
      reservoir data and geological data available to the Company, as well as makes
      estimates of production costs, sale prices and the time period the property
      can
      be produced at a profit. A change in any of the above factors can significantly
      change the timing and amount of net revenues from a property. The Company’s
      producing properties are composed of many small working interest and royalty
      interest properties. As a non-operating owner, the Company has limited access
      to
      the underlying data from which working interest reserve estimates are
      calculated, and estimates of royalty interest reserves are not made because
      the
      information required for the estimation is not available.





The
      Company has no significant long-term sales contracts for either oil or gas.
      For
      the most part, the price the Company receives for its product is based upon
      the
      spot market price which in the past has experienced significant fluctuations.
      Management anticipates such price fluctuations will continue in the future,
      making any attempt at estimating future prices subject to significant
      uncertainty.





Exploration
      costs have been the most significant component of the Company’s capital
      expenditures and are expected to remain so, at least in the near term. Under
      the
      successful efforts method of accounting for oil and gas properties, which the
      Company uses, these costs are capitalized if the prospect is successful, or
      charged to operating costs and expenses if unsuccessful. Estimating the amount
      of such future costs which may relate to successful or unsuccessful prospects
      is
      extremely imprecise, at best.





The
      provisions for depreciation, depletion and amortization of oil and gas
      properties constitute a particularly sensitive accounting estimate.
      Non-producing leaseholds are amortized over the life of the leasehold using
      a
      straight line method; however, when a leasehold is impaired or condemned, an
      appropriate adjustment to the provision is made at that time. Forward-looking
      estimates of such adjustments are very imprecise. The provision for impairment
      of long-lived assets is determined by review of the estimated future cash flows
      from the individual properties. A significant unforeseen downward adjustment
      in
      future prices and/or potential reserves could result in a material change in
      estimated long-lived assets impairment. Depletion and depreciation of oil and
      gas properties are computed using the units-of-production method. A significant
      unanticipated change in volume of production or estimated reserves would result
      in a material un-forecasted change in the estimated depletion and depreciation
      provisions.





Income
      from available for sale securities and trading securities has made substantial
      contributions to net income in certain prior periods. Available for sale
      securities and trading securities are used to invest funds until needed in
      the
      Company’s capital investing and financing activities. Net income has been
      materially affected in past and current years and could be in the future years
      by utilization of those funds in operations as well as significant fluctuation
      in the interest rates and/or quoted market values applicable to the Company’s
      available for sale securities and trading securities.





The
      Company’s trading securities consist primarily of equity securities. These
      securities are carried at fair value with unrealized gains and losses included
      in earnings. The equity securities are traded on various stock exchanges and/or
      the NASDAQ and over the counter markets. Therefore, these securities are
      market-risk sensitive instruments. The stock market is subject to wide price
      swings in short periods of time.




9





The
      Company has equity investments in organizations over which the Company has
      limited or no control. These equity investments have in the past made
      substantial contributions to the Company’s net income. The management of these
      entities could at any time make decisions in their own best interests which
      could materially affect the Company’s net income, or the value of the Company’s
      investments. See “Equity Investments”, below, in this Item 6 for information
      regarding these equity investments.





The
      Company does not undertake any obligation to publicly revise forward-looking
      statements to reflect events or circumstances that arise after the date hereof.
      Readers should carefully review the information described in other documents
      the
      Company files from time to time with the Securities and Exchange Commission,
      including the Quarterly Reports on Form 10-QSB to be filed by the Company in
      2007 and any Current Reports on Form 8-K filed by the Company. The Private
      Securities Litigation Reform Act of 1995 provides a safe harbor for
      forward-looking statements.





**Certain
      Relationships and Related Transactions**




The
      Company is affiliated by common management and ownership with Mesquite Minerals,
      Inc., (Mesquite), Mid-American Oil Company (Mid-American), Lochbuie Limited
      Partnership (LLTD) and Lochbuie Holding Company (LHC). The Company also owns
      interests in certain producing and non-producing oil and gas properties as
      tenants in common with Mesquite, Mid-American and LLTD.





Mason
      McLain and Robert T. McLain, directors and officers of the Company, are
      directors and officers of Mesquite and Mid-American. Jerry Crow, a Director
      of
      the Company, is a director of Mesquite and Mid-American. Kyle McLain and Cameron
      R. McLain are sons of Mason McLain, who is a more than 5% owner of the Company,
      and are directors and employees of the Company. Kyle McLain is a director and
      employee of Mesquite and an advisory director and employee of Mid-American.
      Cameron R. McLain is a director and employee of Mid-American and an advisory
      director and employee of Mesquite. Mason McLain and Robert T. McLain, who are
      brothers, each own an approximate 32% limited partner interest in LLTD, and
      Mason McLain is president of LHC, the general partner of LLTD. Robert T. McLain
      is not an employee of any of the above entities, and devotes only a small amount
      of time conducting their business.





The
      above
      named officers, directors and employees as a group beneficially own
      approximately 30% of the common stock of the Company, approximately 32% of
      the
      common stock of Mesquite, and approximately 17% of the common stock of
      Mid-American. These three corporations each have only one class of stock
      outstanding. Item 7, “Notes to Financial Statements,” Note 12 includes
      additional disclosures regarding these relationships.





**Equity
      Investments**




The
      Company has investments in four entities which it accounts for on the equity
      method. In using the equity method, the Company records the original investment
      in an entity as an asset and adjusts the asset balance for the Company’s share
      of any income or loss as well as any additional contributions to or
      distributions from the entity. The four entities include one Oklahoma limited
      partnership and three Oklahoma limited liability companies. The Company does
      not
      have actual or effective control of any of the entities. The management of
      these
      entities could at any time make decisions in their own best interests which
      could materially effect the Company’s net income, or the value of the Company’s
      investments.




10





These
      entities are Broadway Sixty-Eight, Ltd. (33% limited partnership interest),
      Millennium Golf Properties, LLC (9% ownership), OKC Industrial Properties,
      LLC
      (10% ownership) and JAR Investments, LLC (25% ownership). These entities
      collectively and/or individually have had a significant effect, both positively,
      and negatively, on the Company’s net income in the past and are expected to in
      the future. Two of these entities have guarantee arrangements under which the
      Company is contingently liable. Item 7, Note 7 to the accompanying financial
      statements includes related disclosures.




**Liquidity
      and Capital Resources**





To
      supplement the following discussion, please refer to the Balance Sheets on
      Pages
      23 and 24, and the Statements of Cash Flows beginning on page 27 of this Form
      10-KSB.





In
      2006,
      as in prior years, the Company funded its business activity through the use
      of
      internal sources of capital. For the most part, these internal sources are
      cash
      flows from operations, cash, cash equivalents and available for sale securities.
      When cash flows from operating activities are in excess of those needed for
      other business activities, the remaining balance is used to increase cash,
      cash
      equivalents and/or available for sale securities. When cash flows from operating
      activities are not adequate to fund other business activities, withdrawals
      are
      made from cash, cash equivalents and/or available for sale securities. Cash
      equivalents are highly liquid debt instruments purchased with a maturity of
      three months or less. Available for sale securities are US Treasury Bills.





In
      2006,
      net cash provided by operating activities was $5,218,413. Sales, net of
      production, exploration general and administrative costs and income taxes paid
      of $4,629,788 accounted for 89% of the operations net cash flow. The remaining
      components provided $588,625 or 11% of cash flow. In 2006, net cash applied
      to
      investing and financing activities was $4,600,828. Net purchases of available
      for sale securities discussed below, capitalized property additions (net of
      disposals) of $3,946,744 and dividend payments and treasury stock purchases
      of
      $654,083 accounted for most of the net cash applied. Maturing available for
      sale
      securities provided $12,141,847 of gross cash flow due to their six month
      maturities. However, these funds plus $1,951,152 of excess cash from operations
      were re-invested in the same type of securities.





In
      2005,
      cash utilized for capitalized property additions (net of disposals) of
      $3,503,888 and dividend payments and treasury stock purchases of $451,118 were
      $499,887 less than cash provided by operating activities.




Other
      than cash, cash equivalents and available for sale securities, other significant
      changes in working capital include the following:





Trading
      securities increased $35,295 (14%) to $289,729 in 2006 from $254,434 in 2005.
      Most of the increase is due to a $27,235 increase in unrealized gains which
      represent the change in the market value of the securities over their original
      cost. The remaining $8,060 increase represents the earnings from the securities
      plus the net realized gains for the year. All earnings and net realized gains
      are reinvested in additional securities.





Receivables
      increased $523,428 (25%) to $2,616,395 in 2006 from $2,092,967 in 2005. For
      the
      most part, the increase was the result of a receivable of approximately $295,000
      from a purchaser for a royalty interest in a new well in Tyler County, Texas.
      This amount represents sales from July 2006 through December 2006 and was paid
      to the Company in January 2007. The remaining receivables increase of about
      $225,000 is due to increased average monthly sales for 2006. See the discussion
      of revenues under subheading “Operating Revenues”, below for more information
      about the increased sales of oil and natural gas, including the wells in
      Robertson County, Texas.




11





Income
      taxes refundable were $52,547 in 2006 versus a $331,412 payable in 2005. This
      was due to the more timely estimated tax payments as a result of the increased
      current Federal and State income taxes in 2006 versus 2005.





Accounts
      payable decreased $217,249 (67%) to $107,426 in 2006 from $324,675 in 2005.
      This
      decrease was primarily due to decreased drilling and leasehold acquisition
      activity at year end 2006 versus 2005. See the discussion of this activity
      under
“Update of Oil and Gas Exploration and Development Activity” from December 31,
      2005 in the “Results of Operations” section below.





Deferred
      income taxes and other increased $116,954 (25%) to $582,062 in 2006 from
      $465,108 in 2005. Of the increase, deferred income taxes increased $74,732
      primarily because of the tax effect of increased sales accruals. The remaining
      increase was due entirely to an accrual for some delayed ad valorem tax bills
      on
      several new Robertson County, Texas gas wells.





The
      following is a discussion of material changes in cash flow by activity between
      the years ending December 31, 2006 and 2005. Also see the discussion of changes
      in operating results under “Results of Operations” below in this Item
      6.





**Operating
      Activities**





As
      noted
      above, net cash flows provided by operating activities in 2006 were $5,218,413,
      which when compared against the $4,454,893 provided in 2005, represents an
      increase of $763,520 or a 17% increase in net cash flows provided by operating
      activities from 2005 to 2006. For the most part, the increase resulted because
      of an increase in oil and gas sales cash flows of $2,367,547, and an increase
      in
      interest income of $158,276. Those increases in cash flows were partially offset
      by increased production costs of $51,717, an increase in exploration costs
      expensed of $92,533, an increase in general, administrative, taxes and other
      expenses of $143,900, a decrease in cash flows from lease bonuses and other
      revenues of $(29,479), and an increase in income taxes paid of $1,435,623.
      Additional discussion of the more significant items follows.





**Discussion
      of Selected Material Line Items Resulting in an Increase in Cash
      Flows.** The
      $2,367,547 (35%) increase in cash received from oil and gas sales to $9,119,666
      in 2006 from $6,752,119 in 2005 was the result of an increase in the average
      oil
      price and volume of both oil and gas sales offset somewhat by a lower average
      gas price. See “Results of Operations” below for a price/volume analysis and the
      related discussion of oil and gas sales.




Cash
      received for interest earned on cash equivalents and available for sale
      securities increased $158,276 (128%) to $281,548 in 2006 from $123,272 in 2005.
      The increase was the result of an increase in the average rate of return to
      3.71% in 2006 from 2.21% in 2005 and an increase in the average balance of
      cash
      equivalents and available for sale securities outstanding to $7,590,730 in
      2006
      from $5,582,429 in 2005.




**Discussion
      of Selected Material Line Items Resulting in a Decrease in Cash
      Flows.** Production costs increased $51,717 (5%) to $1,049,288 in 2006 from $997,571
      in
      2005. Most of the increase was due to a $94,908 increase in lease operating
      expenses and handling expenses offset by a net decrease of $43,191 in production
      taxes in 2006 versus 2005. Most of the lease operating expense increase was
      attributable to wells which first produced in 2006 and late 2005. The net
      decrease in production taxes was a result of production tax refunds received
      in
      2006. These refunds and the reason for the refunds are discussed later in the
      “Results of Operations” section.


12




Cash
      paid
      for exploration costs charged to expense increased $92,533 (19%) to $582,426
      in
      2006 from $489,893 in 2005. This increase is primarily due to an increase in
      unsuccessful drilling activity in 2006 over 2005. Exploration costs consist
      of
      unsuccessful exploratory drilling expenditures as well as geological and
      geophysical costs that are directly related to the Company’s oil and gas
      exploration drilling activity. That drilling activity also includes
      substantially all of the Company’s property additions discussed below under the
      subheading “Investing Activities”. In addition to the $582,426 classified as
      operating activities, $2,663,354 was classified as investing activities for
      a
      total of $3,245,780. This compares to 2005 cash applied to property additions
      which included $489,893 classified as operating activities and $3,554,593
      classified as investing activities for a total of $4,044,486. The $891,239
      decline in property additions from 2005 to 2006 is discussed below in the
“Investing Activities” section.





Cash
      received for class action lawsuit settlements decreased $9,335 (68%) to $4,440
      in 2006 from $13,775 in 2005. The decrease was due entirely fewer and smaller
      class action lawsuit settlements received in 2006 versus 2005.





Income
      taxes paid increased $1,435,623 (355%) to $1,840,264 in 2006 from $404,641
      in
      2005 due to increased income tax expense and estimated tax payments discussed
      above and below in the “Results of Operations”.




**Investing
      Activities**




Net
      cash
      applied to investing activities increased $76,593 (2%) to $3,946,744 in 2006
      from $3,870,151 in 2005. In 2006, net cash applied to available for sale
      securities increased $1,147,880 from $803,272 in 2005 to $1,951,152 in 2006.
      This was a result of investing excess cash from 2006 cash flows provided by
      operations. Cash flows related to both property acquisitions and dispositions
      resulted in decreases in cash applications to investing activities in 2006
      versus 2005. Cash applied to property acquisitions declined $891,239 (25%)
      to
      $2,663,354 in 2006 from $3,554,593 in 2005 due primarily to the Hughes County
      prospect acreage acquisitions in 2005. This prospect acreage was sold in 2006
      and these proceeds along with those from other 2006 property dispositions
      totaled $643,762 versus $50,705 in 2005 resulting in a $593,057 decrease in
      cash
      applied to financing activities. The remaining decline in cash flow from
      investing activities in 2006 from 2005 is due to a $246,950 decrease in cash
      distributions from equity investments and a $166,059 decrease in proceeds from
      the 2005 surrender of a life insurance policy. No similar surrender proceeds
      occurred in 2006. Cash distributions received from equity investments in 2005
      included proceeds from property sales by two of the investments with no similar
      proceeds or sales in 2006.




**Financing
      Activities**




Cash
      applied to financing activities increased $202,966 (45%) to $654,083 in 2006
      from $451,118 in 2005. Cash flows applied to financing activities consist of
      cash dividends on common stock and cash used for the purchase of treasury stock.
      In 2006, cash dividends paid on common stock amounted to $608,403 as compared
      to
      $315,586 in 2005. The increase was the result of an increase in the 2006
      dividends per share to $4.00 from $2.00 in 2005. Cash applied to the purchase
      of
      treasury stock was $45,680 in 2006 as compared to $135,532 in 2005. The decline
      in treasury stock purchases in 2006 from 2005 is due to fewer shares purchased
      in 2006 (313 shares) versus 2005 (1,875 shares) For additional information
      about
      treasury stock purchases, see Note (1) at the end of Part II, Item 5.”Market for
      Common Equity...” above.


13




**Forward-Looking
      Summary**




The
      latest estimate of business to be done in 2007 and beyond indicates the
      projected activity can be funded from cash flow from operations and other
      internal sources including net working capital. The Company is engaged in
      exploratory drilling. If this drilling is successful, substantial development
      drilling may result. Also, should other exploration projects which fit the
      Company’s risk parameters become available, or other investment opportunities
      become known, capital requirements may be more than the Company has available.
      If so, external sources of financing could be required.




**Results
      of Operations**




As
      disclosed in the Statements of Operations in Item 7, of this Form 10-KSB, in
      2006 the Company had net income of $4,274,921 as compared to a net income of
      $3,812,095 in 2005. Net income per share, basic and diluted was $26.14 in 2006,
      an increase of $2.97 per share from $23.17 in 2005. Material line item changes
      in the Statements of Operations will be discussed in the following
      paragraphs.




**Operating
      Revenues**




Operating
      revenues increased $1,409,603 (17%) to $9,932,949 in 2006 from $8,523,346 in
      2005. Oil and gas sales increased $1,651,234 (20%) to $9,719,183 in 2006 from
      $8,067,949 in 2005. Lease bonuses and other revenues decreased $241,631 (53%)
      to
      $213,766 in 2006 from $455,397 in 2005. This decrease was the net result of
      a
      decrease in lease bonuses and delay rentals of $307,731 due to decreased bonuses
      from East Texas leases. This decrease was offset by $66,100 of coal royalties
      received for the first time in 2006 for coal mined during the last half of
      2006
      from North Dakota leases granted in 1974. The Company does not anticipate coal
      royalties will have a significant impact on its future results of operations.
      The increase in oil and gas sales will be discussed in the following
      paragraphs.




The
      $1,651,234 increase in oil and gas sales was the net result of a $1,009,988
      increase in gas sales plus a $592,017 increase in oil sales and a $43,229
      increase in miscellaneous oil and gas product sales. The following price and
      volume analysis is presented to help explain the changes in oil and gas sales
      from 2005 to 2006. Miscellaneous oil and gas product sales of $157,444 in 2006
      and $108,215 in 2005 are not included in the analysis.


VarianceProduction
              
              2006
              
              Price
              
              Volume
              
              2005Gas
                  -MCF
                  (000 omitted)
              
              
              1,122
              
              
              
              
              
              331
              
              
              791$(000
                  omitted)
              
              $
              6,987
              
              $
              (1,486
              )
              $
              2,496
              
              $
              5,977Unit
                  Price
              
              $
              6.23
              
              $
              (1.32
              )
              
              
              
              $
              7.55Oil
                  -Bbls
                  (000 omitted)
              
              
              42
              
              
              
              
              
              6
              
              
              36$(000
                  omitted)
              
              $
              2,574
              
              $
              258
              
              $
              334
              
              $
              1,982Unit
                  Price
              
              $
              60.79
              
              $
              6.10
              
              
              
              
              $
              54.69




14




The
      $1,009,988 (17 %) increase in natural gas sales to $6,987,216 in 2006 from
      $5,977,228 in 2005 was the net result of a decrease in the average price offset
      by an increase in the volume of sales. A negative price variance of $1,486,578
      resulted because the average price received per thousand cubic feet (MCF) of
      natural gas sales decreased $1.32 per MCF to $6.23 in 2006 from $7.55 in 2005.
      A
      positive volume variance of $2,496,566 resulted from an increase in volume
      sold
      of 330,671 MCF to 1,122,045 MCF in 2006 from 791,374 in 2005. The increase
      in
      the volume of production was the net result of production of 479,525 MCF from
      properties which first produced in 2006 or late 2005 as partially offset by
      a
      148,854 MCF normal decline in production from mature producing properties.
      As
      disclosed in Supplemental Schedule 1 of the Unaudited Supplemental Financial
      Information included in Item 7, below, working interests in natural gas
      extensions and discoveries were adequate to replace reserves produced in 2006
      and 2005.





The
      gas
      production for 2005 and 2006 includes production from several royalty interest
      properties drilled by various operators in Robertson County, Texas. The first
      of
      these wells began producing in late March, 2005 and the most recent one began
      producing in September, 2006. These properties accounted for approximately
      225,000 MCF and $1,780,000 of the 2005 gas sales and approximately 590,000
      MCF
      and $3,430,000 of the 2006 gas sales. While the operators are currently drilling
      and plan more drilling in the future on the acreage in which the Company holds
      mineral interests, the Company has no control over the timing of such activity.





The
      $592,017 (30%) increase in crude oil sales to $2,574,523 in 2006 from $1,982,506
      in 2005 was the result of an increase in both the average price per barrel
      and
      oil sales volumes. The average price received per barrel (Bbl) of oil increased
      $6.10 (11%) to $60.79 per Bbl in 2006 from $54.69 per Bbl in 2005, resulting
      in
      an increase in oil sales of $258,234. An increase in oil sales volumes of 6,104
      Bbls to 42,354 Bbls in 2006 from 36,250 Bbls in 2005 resulted in a positive
      volume variance of $333,783. The positive volume variance was the net result
      of
      production of 14,548 Bbls from properties which first produced in 2006 and
      late
      2005 as partially offset by a 8,444 Bbls normal decline in production from
      mature producing properties. As disclosed in Supplemental Schedule 1 of the
      Unaudited Supplemental Financial Information included below in Item 7, working
      interests in oil extensions and discoveries were adequate to replace reserves
      produced in 2006 and 2005. For both oil and gas sales, the price change was
      mostly the result of a change in the spot market prices upon which most of
      the  Company’s
      oil and gas sales are based. These spot market prices have had significant
      fluctuations in the past and these fluctuations are expected to
      continue.





**Operating
      Costs and Expenses**





Operating
      costs and expenses increased $967,343 (26%) to $4,712,712 in 2006 from
      $3,745,369 in 2005, primarily due to increases in production costs, exploration
      costs and depreciation, depletion and amortization. The material components
      of
      operating costs and expenses will be discussed below.





**Production
      Costs.** Production costs increased $55,584 (6%) to $1,061,304 in 2006 from $1,005,720
      in
      2005. The increase was the net result of a $74,907 (17%) increase in gross
      production tax to $522,457 in 2006, from $447,550 in 2005, plus an increase
      in
      lease operating and handling expense of $166,933 (30%) to $725,102 in 2006
      from
      $558,169 in 2005, offset by gross production tax refunds $186,254 for 2005
      and
      the first half of 2006. Most of the increase in lease operating expense was
      due
      to $143,377 of costs for wells which first produced in late 2005 or in 2006.
      The
      remaining $23,357 increase relates to increased operating expenses on wells
      which first produced prior to December, 2005. Gross production taxes are state
      taxes which are calculated as a percentage of gross proceeds from the sale
      of
      products from each producing oil and gas property; therefore, they fluctuate
      with the change in the dollar amount of revenues from oil and gas sales. Most
      of
      the gross production tax refunds relate to the Robertson County, Texas
      properties and are due to a Texas program used as an incentive to encourage
      operators to drill deep or tight sands gas wells. These refunds are not
      permanent but are for a limited number of months production.




15





**Exploration
      Costs.** Under
      the successful efforts method of accounting used by the Company, geological
      and
      geophysical costs are expensed as incurred, as are the costs of unsuccessful
      exploratory drilling. The costs of successful exploratory drilling are
      capitalized. Total costs of exploration, inclusive of geological and geophysical
      costs were $3,261,774 in 2006 and $4,147,457 in 2005. Costs charged to
      operations were $803,860 in 2006 and $495,351 in 2005 inclusive of geological
      and geophysical costs of $95,614 in 2006 and $96,979 in 2005.





**Update**  **of
      Oil and Gas Exploration and Development Activity from December 31,
      2005.** For the
      twelve months ended December 31, 2006, the Company participated in the drilling
      of 5 gross exploratory and 16 gross development working interest wells with
      net
      working interests ranging from a high of 25% to a low of 3.8%. Of the five
      exploratory wells, three were deemed dry holes and charged to expense and two
      were completed as producers. Of the sixteen development wells, thirteen were
      completed as producers, two were deemed dry holes and charged to expense and
      one
      well is still drilling. In management’s opinion, the exploratory drilling
      summarized above has produced some possible development drilling opportunities
      which could increase the Company’s oil and gas reserves.





The
      following is a summary as of March 14, 2007, updating both exploration and
      development activity from December 31, 2005.




The
      Company participated with its 18% working interest in the drilling of three
      step-out wells on a Barber County, Kansas prospect. One well was started in
      January 2006 and completed in February 2006 as a marginal gas producer. It
      was
      recompleted in another zone in August 2006 and is now producing oil and gas
      at a
      commercial rate. A second well was started in June 2006 and completed in August
      2006 as a marginal oil producer. A third well was started in September 2006
      and
      completed in November 2006 as a commercial oil and gas producer with sales
      commencing in January 2007. Two other prospect wells were recompleted in new
      zones in April 2006 and are producing at commercial rates; one gas and the
      other
      oil and gas. An additional development well is scheduled to start in April
      2007.
      Capitalized costs for the period ended December 31, 2006 were $282,938 for
      the
      three new wells including $15,572 in prepaid drilling costs. Recompletion costs
      capitalized on the other prospect wells totaled $10,577.





The
      Company has a 0.96% Phase I interest and a 4.32% Phase II interest in a Harding
      County, South Dakota waterflood unit in which there were six horizontal wells
      producing oil. Water injection into one of the wells commenced in March 2006
      and
      a significant production response was observed in an offset producer starting
      in
      late October 2006. An additional horizontal well was started in August 2006
      and
      completed in October 2006, pumping oil at a commercial rate. It will be
      converted to water injection in May or June 2007. An additional lateral will
      be
      drilled from one of the producing wells in the second quarter of 2007. The
      start
      of Phase II occurred on January 1, 2007. Cumulative capitalized costs as of
      December 31, 2006 were $83,653.





The
      Company participated with a fee mineral interest in the drilling of a step-out
      horizontal well in Harding County, South Dakota. The Company has a 25% working
      interest in the well which was started in July 2006 and completed in September
      2006, pumping oil at a commercial rate. A second step-out horizontal well in
      which the Company has a 14.6% working interest was started in March 2007 and
      is
      currently drilling. The Company will participate with its 10.9% working interest
      in the drilling of an extension of an existing lateral in a previously drilled
      oil well. This should occur in the second quarter of 2007. Capitalized costs
      as
      of December 31, 2006 were $585,334.




16





The
      Company participated with a 5.7% working interest in the drilling of an
      exploratory well on a Dewey County, Oklahoma prospect. The well was started
      in
      June 2006 and completed in August 2006 as a commercial gas and gas condensate
      producer. Capitalized costs as of December 31, 2006 were $149,061.





The
      Company participated in the drilling of three development wells on a Canadian
      County, Oklahoma prospect. The first well (Company working interest 10.7%)
      was
      started in December 2005 and completed in February 2006. The second well (3.8%
      interest) was started in March 2006 and completed in April 2006. Both are
      commercial oil and gas wells. The third well (7.3% interest) was drilled in
      March 2006 and completed as a dry hole. Drilling costs totaled $246,899 as
      of
      December 31, 2006, of which $196,890 has been capitalized and $48,646 has been
      charged to exploration expense as dry hole costs.





The
      Company participated with its 16% working interest in the drilling of a step-out
      well on a Creek County, Oklahoma prospect. The well was started in December
      2005
      and completed in February 2006 as a commercial gas producer. Sales commenced
      in
      April 2006. Drilling costs of $86,131 have been capitalized as of December
      31,
      2006.





The
      Company participated with a 3% working interest in the drilling of three
      development wells and with a 4.6% working interest in the drilling of an
      exploratory well on a Stephens County, Oklahoma prospect. Two development wells
      were started in November 2005. One was completed in January 2006 as a commercial
      gas well but has since declined to marginal status. The other was completed
      in
      February 2006 as a marginal gas well. The exploratory well was started in
      December 2005 and completed in February 2006 as a marginal oil and gas producer.
      The third development well was started in March 2006 and completed in April
      2006
      as a marginal gas producer. No economic reserves were assigned to three of
      the
      four wells at December 31, 2006 and $161,976 has been charged to dry hole costs
      as of that same date. Capitalized drilling costs on the one well with economic
      reserves as of December 31, 2006 totaled $32,361.





The
      Company participated with a 17.3% working interest in the drilling of two
      step-out wells on a Woods County, Oklahoma prospect. One well was started in
      April 2006 and the other in May 2006. Both were completed in July 2006,
      producing oil and gas at commercial rates. A third step-out well (18% interest)
      was drilled in October 2006 and completed in November 2006 as a commercial
      oil
      and gas producer. At least one additional well will be drilled in 2007.
      Capitalized costs as of December 31,2006 were $339,191, including $10,074 in
      prepaid drilling costs.





In
      December 2005 the Company purchased a 14% interest in an Ellis County, Oklahoma
      prospect for $132,508. An exploratory well was started in January 2006 and
      completed in February 2006 as a dry hole. No further drilling is planned and
      the
      prospect has been fully impaired. Dry hole costs were $225,272 as of December
      31, 2006.





In
      December 2005 the Company purchased a 10% interest in a Grady County, Oklahoma
      prospect. A 3-D seismic survey was conducted and four prospective structures
      were identified. Additional acreage has been acquired and an exploratory well
      is
      scheduled to start in May or June 2007. Total leasehold and geological costs
      as
      of December 31, 2006 were $171,500.




17





In
      February 2006 the Company purchased a 15% interest in a Woods County, Oklahoma
      prospect for $15,600. A step-out well was started in February 2006 and completed
      in April 2006 as a commercial oil and gas producer. Sales commenced in May
      2006.
      Additional drilling is planned. Capitalized costs as of December 31, 2006 were
      $112,431.





The
      Company participated with its 15.7% working interest in the drilling of a
      horizontal development well on a Seminole County, Oklahoma prospect. The well
      was started in March 2006 and completed in April 2006. Artificial lift was
      installed in June 2006 and gas sales commenced at a commercial rate. Capitalized
      drilling costs were $272,803 as of December 31, 2006.





The
      Company participated with a 50% interest in the development of a Hughes County,
      Oklahoma prospect. The prospect was sold in September 2006 with the Company
      retaining an 8.75% interest in the prospect acreage. An exploratory horizontal
      well was started in January 2007 and a second in February 2007. Both are
      currently drilling. The Company has no working interest in these wells until
      payout when it will back in for its retained interest. Several additional wells
      are planned for 2007. All of the Company’s leasehold costs were recouped with
      the sale, and a $41,456 gain was realized and included in the December 31,
      2006
      operating results.





In
      September 2006 the Company purchased a 16% interest in a Woods County, Oklahoma
      prospect for $59,920. An exploratory well was started in October 2006 and
      completed in November 2006 as a commercial oil and gas producer. Two step-out
      wells in which the Company has a 10.1% working interest were started in October
      2006 and completed in December 2006 as commercial oil and gas producers.
      Additional development wells are planned. One (13% working interest) was started
      in March 2007 and is currently drilling and another (same interest) will start
      immediately after. Total costs to date are $262,319, including $19,820 in
      prepaid drilling costs.





In
      October 2006 the Company participated with a 16% working interest in the
      drilling of an exploratory well on a Cheyenne County, Kansas prospect. It was
      completed as a dry hole. Drilling costs expensed to dry hole costs were
      $25,769.





In
      March
      2007 the Company agreed to purchase a 16% interest in a Woods County, Oklahoma
      prospect for $73,600. An exploratory test well is planned for the second quarter
      of 2007.




**Depreciation,
      Depletion, Amortization and Valuation Provisions
      (DD&A).** Major
      components are the provision for impairment of undeveloped leaseholds, provision
      for impairment of long-lived assets, depletion of producing leaseholds and
      depreciation of tangible and intangible lease and well costs. Undeveloped
      leaseholds are amortized over the life of the leasehold (most are 3 years)
      using
      a straight line method except when the leasehold is impaired or condemned by
      drilling and/or geological interpretation of seismic data; if so, an adjustment
      to the provision is made at the time of impairment. The provision for impairment
      of undeveloped leaseholds was $82,414 in 2006 and $261,124 in 2005. The decrease
      in the provision for impairment is directly related to the exploration activity
      discussed under “Exploration Costs”, above. The 2006 provision for impairment
      was primarily due to the annual amortization of undeveloped leaseholds of
      approximately $74,000 and only about $8,000 due to specific leasehold
      impairments.





As
      discussed in Note 10 to the accompanying financial statements, accounting
      principles require the recognition of an impairment loss on long-lived assets
      used in operations when indicators of impairment are present and the
      undiscounted cash flows estimated to be generated by those assets are less
      than
      the assets carrying amount. Reviews were performed in both 2006 and 2005. The
      2006 provision of $597,751 was partly the result of reserve adjustments on
      wells
      which first produced in 2004 and 2005 and partly due to wells completed in
      2006
      for which the estimated fair market value of future production was less than
      the
      Company’s carrying amount in the well. The 2005 provision of $367,635 was to a
      great extent the result of similar declines in 2005.




18





The
      depletion and depreciation of oil and gas properties are computed by the
      units-of-production method. The amount expensed in any year will fluctuate
      with
      the change in estimated reserves of oil and gas, a change in the rate of
      production or a change in the basis of the assets. The provision for depletion
      and depreciation totaled $1,068,146 in 2006 and $723,980 in 2005. Most of the
      increase of $344,166 is due to increased oil and gas property additions in
      recent years.





**General,
      Administrative and Other Expenses (G&A).** G&A
      increased $202,199 (24%) to $1,056,818 in 2006 from $854,619 in 2005. The
      increase was partly due to an increase in employee salaries and benefits of
      approximately $51,000 and an increase in legal and professional fees of
      approximately $16,000. However, the increase was mostly due to an increase
      in
      franchise taxes of almost $33,000 (primarily Texas) and ad valorem taxes of
      almost $84,000. The ad valorem tax increase relates to the new wells in
      Robertson County, Texas.





**Equity
      Income (Loss) in Investees.** The
      following is an analysis of equity income (loss) in investees by entity for
      the
      years ended December 31, 2006 and 2005. See Note 7 to the accompanying financial
      statements included below in Item 7, for more information.


2006
                  Income (Loss)Net
                  Income (Loss)
              
              Over
                  (Under)2006
              
              2005
              
              2005Broadway
                  Sixty-Eight, Ltd.
              
              $
              10,785
              
              $
              17,407
              
              $
              (6,622
              )Millennium
                  Golf Properties, LLC
              
              
              (4,291
              )
              
              21,677
              
              
              (25,968
              )OKC
                  Industrial Properties, LC
              
              
              942
              
              
              66,662
              
              
              (65,720
              )JAR
                  Investment, LLC
              
              
              6,827
              
              
              82,952
              
              
              (76,125
              )Total
              
              $
              14,263
              
              $
              188,698
              
              $
              (174,435
              )


**Other
      Income (Loss), Net.** See Note
      11 to the accompanying financial statements for an analysis of the components
      of
      this line item for the years ended 2006 and 2005. Other income, net increased
      $349,300 (209%) to $516,556 in 2006 from $167,256 in 2005.





Realized
      and unrealized gain (loss) on trading securities increased $43,254 (450%) to
      $33,641 in 2006 from $(9,613) loss in 2005. Realized gains or losses result
      when
      a trading security which is owned is sold. Unrealized gains or losses result
      from adjusting the Company’s carrying amount in trading securities owned at the
      reporting date to estimated fair market value. In 2006, the Company had realized
      gains of $6,406 and unrealized gains of $27,235. In 2005, the Company had
      realized gains of $798 and unrealized losses of $10,411.





Accrual
      basis interest income increased $173,539 (113%) to $326,598 in 2006 from
      $153,059 in 2005. The increase was the result of an increase in the average
      rate
      of return on cash equivalents and available for sale securities from which
      most
      of interest income is derived. The average rate of return increased 1.5% to
      3.71% in 2006 from 2.21% in 2005, and the average balance outstanding of
      $7,590,730 increased $2,008,301 (36%) from $5,582,429 in 2005.





Most
      of
      the remaining increase in this line item was due to the increase in gains on
      asset sales of $142,057 to $148,886 in 2006 from $6,829 in 2005. The increase
      in
      the gains on asset sales was due primarily to a $95,644 gain on the sale of
      the
      Company’s working interest in a fully depreciated producing property in March
      2006, and a gain of $41,456 on the sale of the Hughes County leasehold prospect
      in September 2006. Other miscellaneous property disposals accounted for the
      remaining net gains of about $5,000. See the “Update of Oil and Gas Exploration
      and Development Activity” section above for additional information regarding the
      Hughes County, Oklahoma prospect and sale.





Provision
      for Income Taxes. See Note
      6, to the accompanying financial statements for an analysis of the various
      components of income taxes in 2006, the Company had an estimated provision
      for
      income taxes of $1,476,135 as the result of a current tax provision of
      $1,456,305 plus a deferred tax provision of $19,830. In 2005, the Company had
      an
      estimated provision for income taxes of $1,321,836 as the result of a current
      tax provision of $731,659 plus a deferred tax provision of $590,177.




19




**ITEM
      7. FINANCIAL STATEMENTS.**




Index
      to
      Financial Statements.




PageReport
                  of Independent Registered Public Accounting Firm - Murrell, Hall,
                  McIntosh
                  & Co., PLLP, 2006.
              
              
              21Balance
                  Sheets - December 31, 2006 and 2005
              
              
              22Statements
                  of Operations - Years Ended December 31, 2006 and 2005
              
              
              24Statement
                  of Stockholders’ Equity - Years Ended December 31, 2006 and
                  2005
              
              
              25Statements
                  of Cash Flows - Years Ended December 31, 2006 and 2005
              
              
              26Notes
                  to Financial Statements
              
              
              28Unaudited
                  Supplemental Financial Information
              
              
              37


20




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors and Stockholders


The
      Reserve Petroleum Company




We
      have audited the accompanying balance sheets of THE RESERVE PETROLEUM COMPANY
      as
      of December 31, 2006 and 2005, and the related statements of operations,
      stockholders’ equity, and cash flows for the years then ended. These financial
      statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement. The Company is not
      required to have, nor were we engaged to perform, an audit of its internal
      control over financial reporting. Our audits included consideration of internal
      control over financial reporting as a basis for designing audit procedures
      that
      are appropriate in the circumstances, but not for the purpose of expressing
      an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, assessing the accounting principles used and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.




In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of The Reserve Petroleum Company
      as of
      December 31, 2006 and 2005, and the results of its operations and cash flows
      for
      the years then ended, in conformity with accounting principles generally
      accepted in the United States of America.






/S/
      MURRELL, HALL, MCINTOSH & CO., PLLP




Oklahoma
      City, Oklahoma


March
      27,
      2007





21




THE
      RESERVE PETROLEUM COMPANY


BALANCE
      SHEETS




ASSETS


December
                  31,2006
              
              2005Current
                  Assets:Cash
                  and Cash Equivalents (Note 2)
              
              $
              1,321,707
              
              $
              704,121Available
                  for Sale Securities (Notes 2 & 5)
              
              
              7,473,252
              
              
              5,522,100Trading
                  Securities (Notes 2 & 5)
              
              
              289,729
              
              
              254,434Refundable
                  Income Taxes
              
              
              52,547
              
              
              —Receivables
                  (Note 2)
              
              
              2,616,395
              
              
              2,092,06711,753,630
              
              
              8,572,722Investments:Equity
                  Investments (Notes 2 & 7)
              
              
              440,480
              
              
              450,217Other
              
              
              15,298
              
              
              15,298455,778
              
              
              465,515Property,
                  Plant & Equipment (Notes 2, 8 & 10):Oil
                  & Gas Properties, at Cost Based on theSuccessful
                  Efforts Method of AccountingUnproved
                  Properties
              
              
              842,872
              
              
              1,133,077Proved
                  Properties
              
              
              10,752,832
              
              
              9,612,125Less
                  - Valuation Allowance and Accumulated
              
              
              11,595,704
              
              
              10,745,202Depreciation,
                  Depletion & Amortization
              
              
              6,630,682
              
              
              5,773,9924,965,022
              
              
              4,971,210Other
                  Property & Equipment, at Cost
              
              
              366,108
              
              
              404,726Less
                    - Accumulated Depreciation & Amortization
              
              
              203,219
              
              
              203,480162,889
              
              
              201,2465,127,911
              
              
              5,172,456Other
                  Assets
              
              
              312,758
              
              
              304,797$
              17,650,077
              
              $
              14,515,490




See
      Accompanying Notes




22




THE
      RESERVE PETROLEUM COMPANY


BALANCE
      SHEETS




LIABILITIES
      AND STOCKHOLDERS’ EQUITY


December
                  31,2006
              
              2005Current
                  Liabilities:Accounts
                  Payable (Note 2)
              
              $
              107,426
              
              $
              324,675Income
                  Taxes Payable
              
              
              —
              
              
              331,412Other
                  Current Liabilities -Deferred
                  Income Taxes and Other Revenues
              
              
              582,062
              
              
              465,108689,488
              
              
              1,121,195Long
                  Term Liabilities:Dividends
                  Payable (Note 3)
              
              
              230,879
              
              
              184,749Deferred
                  Tax Liability
              
              
              600,928
              
              
              655,470831,807
              
              
              840,219Commitments
                  & Contingencies (Notes 2 & 7)Stockholders’
                  Equity: (Notes 3 & 4)Common
                  Stock
              
              
              92,368
              
              
              92,368Additional
                  Paid-in Capital
              
              
              65,000
              
              
              65,000Retained
                  Earnings
              
              
              16,407,036
              
              
              12,786,65016,564,404
              
              
              12,944,018Less
                  - Treasury Stock, at Cost
              
              
              435,622
              
              
              389,94216,128,782
              
              
              12,554,076$
              17,650,077
              
              $
              14,515,490





See
      Accompanying Notes





23




THE
      RESERVE PETROLEUM COMPANY


STATEMENTS
      OF OPERATIONS


Year
                  Ended December 31,2006
              
              2005Operating
                  Revenues:Oil
                  & Gas Sales
              
              $
              9,719,183
              
              $
              8,067,949Lease
                  Bonuses & Other Revenues
              
              
              213,766
              
              
              455,3979,932,949
              
              
              8,523,346Operating
                  Costs and Expenses:Production
              
              
              1,061,304
              
              
              1,005,720Exploration
              
              
              803,860
              
              
              495,351Depreciation,
                  Depletion, Amortization&
                  Valuation Provisions
              
              
              1,790,730
              
              
              1,389,679General,
                  Administrative and Other
              
              
              1,056,818
              
              
              854,6194,712,712
              
              
              3,745,369Income
                  from Operations
              
              
              5,220,237
              
              
              4,777,977Equity
                  Income in Investees (Note 7)
              
              
              14,263
              
              
              188,698Other
                  Income, Net (Note 11)
              
              
              516,556
              
              
              167,256Income
                  before Income Taxes
              
              
              5,751,056
              
              
              5,133,931Provision
                  for Income Taxes (Notes 2 & 6)
              
              
              1,476,135
              
              
              1,321,836Net
                  Income
              
              $
              4,274,921
              
              $
              3,812,095Per
                  Share Data (Note 2):Net
                  Income, Basic and Diluted
              
              $
              26.14
              
              $
              23.17Cash
                  Dividends
              
              $
              4.00
              
              $
              2.00Weighted
                  Average Shares Outstanding, Basic and Diluted
              
              
              163,544
              
              
              164,531





See
      Accompanying Notes




24




THE
      RESERVE PETROLEUM COMPANY


STATEMENT
      OF STOCKHOLDERS’ EQUITY


FOR
      THE
      TWO YEARS ENDED DECEMBER 31, 2006


AdditionalCommon
              
              Paid-in
              
              Retained
              
              TreasuryStock
              
              Capital
              
              Earnings
              
              StockBalance
                  at January 1, 2005
              
              $
              92,368
              
              $
              65,000
              
              $
              9,303,963
              
              $
              (254,410
              )Net
                  Income
              
              
              —
              
              
              —
              
              
              3,812,095
              
              
              —Cash
                  Dividends on Common Stock
              
              
              —
              
              
              —
              
              
              (329,408
              )
              
              —Purchase
                  of Treasury Stock
              
              
              —
              
              
              —
              
              
              —
              
              
              (135,532
              )Balance
                  at December 31, 2005
              
              
              92,368
              
              
              65,000
              
              
              12,786,650
              
              
              (389,942
              )Net
                  Income
              
              
              —
              
              
              —
              
              
              4,274,921
              
              
              —Cash
                  Dividends on Common Stock
              
              
              —
              
              
              —
              
              
              (654,535
              )
              
              —Purchase
                  of Treasury Stock
              
              
              —
              
              
              —
              
              
              —
              
              
              (45,680
              )Balance
                  at December 31, 2006
              
              $
              92,368
              
              $
              65,000
              
              $
              16,407,036
              
              $
              (435,622
              )




See
      Accompanying Notes




25


THE
      RESERVE PETROLEUM COMPANY


STATEMENTS
      OF CASH FLOWS


Increase
      (Decrease) in Cash and Cash Equivalents


Year
                  Ended December 31,2006
              
              2005Cash
                  Flows from Operating Activities:Cash
                  Received-Oil
                  and Gas Sales
              
              $
              9,119,666
              
              $
              6,752,119Lease
                  Bonuses and Rentals
              
              
              301,301
              
              
              330,780Agricultural
                  Rentals & Other
              
              
              5,294
              
              
              5,303Cash
                  Paid-Production
                  Costs
              
              
              (1,049,288
              )
              
              (997,571
              )Exploration
                  Costs
              
              
              (582,426
              )
              
              (489,893
              )General
                  Suppliers, Employees and Taxes,Other
                  than Income
              
              
              (1,017,900
              )
              
              (874,000
              )Interest
                  Received
              
              
              281,548
              
              
              123,272Interest
                  Paid
              
              
              (3,968
              )
              
              (3,778
              )Settlement
                  of Class Action Lawsuits
              
              
              4,440
              
              
              13,775Dividends
                  Received on TradingSecurities
              
              
              1,665
              
              
              1,681Purchase
                  of Trading Securities
              
              
              (341,666
              )
              
              (609,393
              )Sale
                  of Trading Securities
              
              
              340,011
              
              
              607,239Income
                  Taxes Paid, net
              
              
              (1,840,264
              )
              
              (404,641
              )Net
                  Cash Provided by OperatingActivities
              
              
              5,218,413
              
              
              4,454,893Cash
                  Flows from Investing Activities:Maturity
                  of Available for Sale Securities
              
              
              12,141,847
              
              
              9,686,787Purchase
                  of Available for Sale Securities
              
              
              (14,092,999
              )
              
              (10,490,059
              )Property
                  Dispositions
              
              
              643,762
              
              
              50,705Property
                  Additions
              
              
              (2,663,354
              )
              
              (3,554,593
              )Cash
                  Distributions from Equity Investments
              
              
              24,000
              
              
              270,950Distribution
                  for Surrender of Life Insurance Policy
              
              
              —
              
              
              166,059Net
                  Cash Applied to Investing Activities
              
              $
              (3,946,744
              )
              $
              (3,870,151
              )




See
      Accompanying Notes




26




THE
      RESERVE PETROLEUM COMPANY


STATEMENTS
      OF CASH FLOWS


Increase
      (Decrease) in Cash and Cash Equivalents


Year
                  Ended December 31,2006
              
              2005Cash
                  Flows Applied to Financing Activities:Dividends
                  Paid to Shareholders
              
              $
              (608,403
              )
              $
              (315,586
              )Purchase
                  of Treasury Stock
              
              
              (45,680
              )
              
              (135,532
              )Total
                  Cash Applied to Financing Activities
              
              
              (654,083
              )
              
              (451,118
              )Net
                  Change in Cash and Cash Equivalents
              
              
              617,586
              
              
              133,624Cash
                  and Cash Equivalents at Beginning of Year
              
              
              704,121
              
              
              570,497Cash
                  and Cash Equivalents at End of Year
              
              $
              1,321,707
              
              $
              704,121Reconciliation
                  of Net Income to NetCash
                  Provided by Operating Activities:Net
                  Income
              
              $
              4,274,921
              
              $
              3,812,095Net
                  Income Increased (Decreased) by -Net
                  Change in -Unrealized
                  Holding (Gains) Losseson
                  Trading Securities
              
              
              (27,235
              )
              
              10,411Accounts
                  Receivable
              
              
              (479,326
              )
              
              (1,438,941
              )Interest
                  and Dividends Receivable
              
              
              (45,050
              )
              
              (29,787
              )Income
                  Taxes Refundable/Payable
              
              
              (383,959
              )
              
              327,018Accounts
                  Payable
              
              
              (21,773
              )
              
              3,582Trading
                  Securities
              
              
              (8,060
              )
              
              (2,952
              )Other
                  Assets
              
              
              (7,876
              )
              
              (9,097
              )Deferred
                  Taxes
              
              
              19,830
              
              
              590,177Other
                  Liabilities
              
              
              42,582
              
              
              (1,765
              )Equity
                  Income in Investees
              
              
              (14,263
              )
              
              (188,698
              )Disposition
                  of Property & Equipment
              
              
              77,893
              
              
              (6,828
              )Depreciation,
                  Depletion, Amortizationand
                  Valuation Provisions
              
              
              1,790,729
              
              
              1,389,678Net
                  Cash Provided by Operating Activities
              
              $
              5,218,413
              
              $
              4,454,893




See
      Accompanying Notes




27





THE
      RESERVE PETROLEUM COMPANY


NOTES
      TO
      FINANCIAL STATEMENTS





Note
      1
      - **** NATURE
      OF OPERATIONS





The
      Company is principally engaged in oil and natural gas exploration and
      development and minerals management with areas of concentration in Texas,
      Oklahoma, Kansas and South Dakota.





Note
      2 - SUMMARY
      OF ACCOUNTING POLICIES





Cash
      & Cash Equivalents




The
      Company considers all highly liquid debt instruments purchased with a maturity
      of three months or less to be cash equivalents. The Company maintains its cash
      in bank deposit accounts which at times may exceed federally insured limits.
      The
      Company believes it is not exposed to any significant credit risk on such
      accounts.





Investments




Available
      for sale securities, which consist entirely of US Government securities, are
      carried at fair value with unrealized gains and losses reported as a component
      of other comprehensive income, when material.





Trading
      securities, which consist primarily of equity securities, are carried at fair
      value with unrealized gains and losses reported in current
      earnings.





The
      Company accounts for its investments in a partnership and limited liability
      companies on the equity basis and adjusts the investment balance to agree with
      its equity in the underlying assets of the entities. See Note 7 for additional
      information.





Receivables
      and Revenue Recognition




Oil
      and
      gas sales and resulting receivables are recognized when the product is delivered
      to the purchaser and title has transferred. Sales are to credit-worthy major
      energy purchasers with payments generally received within 60 days of
      transportation from the well site. The Company has historically had little,
      if
      any, uncollectible receivables; therefore, an allowance for uncollectible
      accounts is not required.





Property
      and Equipment




Oil
      and
      gas properties are accounted for on the successful efforts method. The
      acquisition, exploration and development costs of producing properties are
      capitalized. The Company has not historically had any capitalized exploratory
      drilling costs that are pending determination of reserves for more than one
      year. All costs relating to unsuccessful exploration, geological and geophysical
      costs, delay rentals and abandoned properties are expensed. Lease costs related
      to unproved properties are amortized over the life of the lease and are assessed
      periodically. Any impairment of value is charged to expense.





Depreciation,
      depletion and amortization of producing properties is computed on the
      units-of-production method on a property-by-property basis. The
      units-of-production method is based primarily on estimates of proved reserve
      quantities. Due to uncertainties inherent in this estimation process, it is
      at
      least reasonably possible that reserve quantities will be revised in the near
      term.




28





Other
      property and equipment is depreciated on the straight-line, declining-balance
      or
      other accelerated methods.





The
      following estimated useful lives are used for the different types of
      property:


Office
                  furniture & fixtures
              5
                  to 10 yearsAutomotive
                  equipment
              5
                  to 8 years




Impairment
      losses are recorded on long-lived assets used in operations when indicators
      of
      impairment are present and the undiscounted cash flows estimated to be generated
      by those assets are less than the assets’ carrying amount. See Note 10 for
      discussion of impairment losses.





Income
      Taxes




Deferred
      income taxes are provided for significant carryforwards and temporary
      differences using the liability method. See Note 6 for additional
      information.





Net
      Income Per Share




Net
      income per share is calculated based on the weighted average of the number
      of
      shares outstanding during the year. There are no dilutive shares.





Concentrations
      of Credit Risk and Major Customers




The
      Company’s receivables relate primarily to sales of oil and natural gas to
      purchasers with operations in Texas, Oklahoma, Kansas and South Dakota. The
      Company had two purchasers in 2006 and two purchasers in 2005 whose purchases
      were in excess of 10% of total oil and gas sales. In 2006, XTO Energy purchases
      were $1,494,274, or 15.4% of total oil and gas sales and Burlington Resources
      purchases were $1,719,354, or 17.7% of total oil and gas sales. In 2005, XTO
      Energy purchases were $910,108, or 11.3% of total oil and gas sales and
      Burlington Resources purchases were $833,363 or 10.3% of total oil and gas
      sales.





Use
      of
      Estimates




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





Gas
      Balancing




Gas
      imbalances are accounted for under the sales method whereby revenues are
      recognized based on production sold. A liability is recorded when the Company’s
      excess takes of natural gas volumes exceed its estimated remaining recoverable
      reserves (over produced). No receivables are recorded for those wells where
      the
      Company has taken less than its ownership share of gas production (under
      produced).





Guarantees




In
      November 2002, FASB Interpretation 45, *Guarantor’s
      Accounting and Disclosure*  *Requirements
      for Guarantees, Including Indirect Guarantees of Indebtedness of
      Others* (FIN
      45), was issued. FIN 45 requires a guarantor entity, at the inception of a
      guarantee covered by the measurement provisions of the interpretation, to record
      a liability for the fair market value of the obligation undertaken in issuing
      the guarantee. The Company previously did not record a liability when
      guaranteeing obligations unless it became probable that the Company would have
      to perform under the guarantee. FIN 45 applied prospectively to guarantees
      the
      Company issues or modifies subsequent to December 31, 2002. The Company
      historically issues guarantees only on a limited basis but has issued such
      guarantees associated with the Company’s equity investments in Broadway
      Sixty-Eight, Ltd and JAR Investment, LLC. Disclosures required by FIN 45 and
      the
      effect of guarantees issued in 2002 are discussed in Note 7.




29





Asset
      Retirement Obligations




In
      June
      2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, *Accounting
      for Asset Retirement Obligations.* SFAS
      No.
      143 requires entities to record the fair value of a liability for an asset
      retirement obligation in the period in which it is incurred and a corresponding
      increase in the carrying amount of the related long-lived asset, unless such
      items are immaterial. Subsequently, the asset retirement cost should be
      allocated to expense using a systematic and rational method. The Company has
      assessed the impact of SFAS No. 143 and based on the results of the assessment
      believes the impact of this statement is immaterial to its financial position
      and results of operations.





Accounting
      Changes




During
      2006 the Financial Accounting Standards Board (FASB) issued Statement No. 155,
      “ *Accounting
      for Certain Hybrid Financial Instruments* ” *,* which
      amends FASB Statements No. 133 and 140; Statement No. 157, “ *Fair
      Value Measurements* ”;
      Statement No. 158, “ *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement
      Plans* ”,
      which
      amends FASB Statements No. 87, 88, 106 and 132(R); and Interpretation 48,
“ *Accounting
      for Uncertainty in Income Taxes* ”,
      an
      interpretation of FASB Statement No. 109, “ *Accounting
      for Income Taxes* ”.
      Additionally, the Securities Exchange Commission in September, issued Staff
      Accounting Bulletin No. 108 addressing how the effects of prior year uncorrected
      misstatements should be considered when quantifying misstatements in current
      year financial statements. All of these pronouncements have effective
      implementation date requirements ranging from 2006 to 2008.





Except
      for FASB Statement No. 157, “ *Fair
      Value Measurements* ”,
      none
      of the pronouncements have any current applicability to the Company’s financial
      statements. The Company has adopted or plans to adopt all of the pronouncements
      by the required dates using the retroactive application method. The Company’s
      investments in available for sale securities and trading securities are valued
      using current fair value accounting pronouncements and the new pronouncement
      will not change our valuations or current method. Accordingly, adoption of
      the
      above listed new accounting pronouncements has had and will have no impact
      on
      the Company’s financial statements.


30




Note
      3
      - **** DIVIDENDS
      PAYABLE





Dividends
      payable include amounts that are due to stockholders whom the Company has been
      unable to locate and uncashed dividend checks of other
      stockholders.





Note
      4 - COMMON
      STOCK




The
      following table summarizes the changes in common stock issued and
      outstanding:


Shares
                  ofShares
              
              Treasury
              
              SharesIssued
              
              Stock
              
              OutstandingJanuary
                  1, 2005, $.50par
                  value stock, 400,000shares
                  authorized
              
              
              184,735.28
              
              
              19,226.64
              
              
              165,508.64Purchase
                  of stock
              
              
              —
              
              
              1,875.00
              
              
              (1,875.00
              )December
                  31, 2005, $.50par
                  value stock, 400,000shares
                  authorized
              
              
              184,735.28
              
              
              21,101.64
              
              
              163,633.64Purchase
                  of stock
              
              
              —
              
              
              313.00
              
              
              (313.00
              )December
                  31, 2006, $.50par
                  value stock, 400,000shares
                  authorized
              
              
              184,735.28
              
              
              21,414.64
              
              
              163,320.64




Note
      5
      - **** INVESTMENTS
      IN DEBT AND EQUITY SECURITIES




At
      December 31, 2006 and 2005, the difference between the aggregate fair value
      and
      amortized cost basis of available for sale securities was immaterial; therefore,
      reporting of comprehensive income is not required. The available for sale
      securities by contractual maturity are as follows at December 31,
      2006:




Due
                  within one year or less
              
              $
              7,473,252





As
      to the
      trading securities held at year end, unrealized trading gains (losses) included
      in earnings were $27,235 for 2006 and $(10,411) for 2005.


31




Note
      6 - INCOME
      TAXES




Components
      of deferred taxes follow:


December
                  31,2006
              
              2005AssetsLeasehold
                  Costs
              
              $
              403,749
              
              $
              230,052Gas
                  Balancing Receivable
              
              
              52,379
              
              
              52,379Long-Lived
                  Asset Impairment
              
              
              442,968
              
              
              301,263Other
              
              
              33,906
              
              
              8,431Total
                  Assets
              
              
              933,002
              
              
              592,125LiabilitiesMarketable
                  Securities
              
              
              12,447
              
              
              3,335Receivables
              
              
              486,309
              
              
              421,048Intangible
                  Development Costs and Depreciation
              
              
              1,533,930
              
              
              1,247,595Total
                  Liabilities
              
              
              2,032,686
              
              
              1,671,978Net
                  Deferred Tax Liability
              
              $
              (1,099,684
              )
              $
              (1,079,853
              )


The
      following table summarizes the current and deferred portions of income tax
      expense.


Year
                  Ended December 31,2006
              
              2005Current
                  Tax Provision:Federal
              
              $
              1,442,705
              
              $
              727,162State
              
              
              13,600
              
              
              4,4971,456,305
              
              
              731,659Deferred
                  Provision
              
              
              19,830
              
              
              590,177Total
                  Provision
              
              $
              1,476,135
              
              $
              1,321,836


32




The
      total
      provision for income tax expressed as a percentage of income before income
      tax
      was 25% in 2006 and 26% in 2005. These amounts differ from the amounts computed
      by applying the statutory US Federal income tax rate of 35% for 2006 and 2005
      to
      income before income tax as summarized in the following
      reconciliation:


Year
                  Ended December 31,2006
              
              2005Computed
                  Federal TaxProvision
              
              $
              2,008,110
              
              $
              1,795,302Increase
                  (Decrease) in Tax From:Corporate
                  Graduated Tax RateStructure
              
              
              (57,511
              )
              
              (51,339
              )Allowable
                  Depletion in Excess of Basis
              
              
              (501,642
              )
              
              (439,533
              )Dividend
                  Received Deduction
              
              
              (408
              )
              
              (412
              )State
                  Income Tax Provision
              
              
              13,600
              
              
              4,497Other
              
              
              13,986
              
              
              13,321Provision
                  for Income Tax
              
              $
              1,476,135
              
              $
              1,321,836Effective
                  Tax Rate
              
              
              25%
              
              
              26%




Note
              7 -
            INVESTMENTS
                AND RELATED COMMITMENTS AND CONTINGENT LIABILITIESINCLUDING
                GUARANTEES





The
      carrying value of Equity Investments consist of the following at December
      31:


Ownership
                  %
              
              2006
              
              2005Broadway
                  Sixty-Eight, Ltd.
              
              
              33%
              
              
              336,476
              
              $
              325,691JAR
                  Investment, LLC
              
              
              25%
              
              
              (151
              )
              
              8,022Millennium
                  Golf Properties, LLC
              
              
              9%
              
              
              49,862
              
              
              63,153OKC
                  Industrial Properties, L.L.C.
              
              
              10%
              
              
              54,293
              
              
              53,351$
              440,480
              
              $
              450,217





Broadway
      Sixty-Eight, Ltd., an Oklahoma limited partnership (the Partnership), owns
      and
      operates an office building in Oklahoma City, Oklahoma. Although the Company
      invested as a limited partner, along with the other limited partners, it agreed
      jointly and severally with all other limited partners to reimburse the general
      partner for any losses suffered from operating the Partnership. The indemnity
      agreement provides no limitation to the maximum potential future payments.




The
      Company leases its corporate office from the Partnership. The operating lease
      under which the space was rented expired December 31, 1995, and the space is
      currently rented on a year-to-year basis under the terms of the expired lease.
      Rent expense for lease of the corporate office from the Partnership was
      approximately $27,000 for each of the years ended December 31, 2006 and
      2005.


33





JAR
      Investment, LLC, (JAR) an Oklahoma limited liability company, previously held
      Oklahoma City metropolitan area real estate that was sold in June 2005 (see
      below). JAR also owns a 70% management interest in Main-Eastern, LLC, (M-E)
      an
      Oklahoma limited liability company. M-E was formed in 2002 to establish a joint
      venture to develop a retail/commercial center on a portion of JAR’s real
      estate.





The
      Company has a guarantee agreement limited to 25% of JAR’s 70% interest in M-E’s
      outstanding loan plus all costs and expenses related to enforcement and
      collection, or $151,467 at December 31, 2006. This loan matures November 27,
      2008. Because the guarantee of the M-E loan has not been modified subsequent
      to
      December 31, 2002, no liability for the fair value of the obligation is required
      to be recorded by the Company. The maximum potential amount of future payments
      (undiscounted) the Company could be required to make under the M-E guarantee
      at
      December 31, 2006 (based on the original loan amount) is $169,750 plus costs
      and
      expenses related to enforcement and collection.





In
      late
      June 2005, JAR sold all real estate except the portion with the
      retail/commercial center developed by the M-E joint venture discussed above.
      At
      closing, the JAR bank loan secured by the property being sold was paid off
      and
      the Company’s guarantee agreement relating to this loan was terminated. The
      Company’s share of the gain on this sale was approximately $80,000 and in early
      July 2005, the Company received a cash distribution of $165,000 from
      JAR.




Millennium
      Golf Properties, LLC, an Oklahoma limited liability company, owns and operates
      two Oklahoma City area golf courses, Coffee Creek Golf Course and River Oaks
      Golf Course. It is also involved in real estate development around each golf
      course.





OKC
      Industrial Properties, L.L.C., an Oklahoma limited liability company, holds
      certain Oklahoma City metropolitan area real estate as an investment.





Note
              8 -
            COSTS
                INCURRED IN OIL AND GAS PROPERTY ACQUISITION,EXPLORATION,
                AND DEVELOPMENT ACTIVITIES





All
      of
      the Company’s oil and gas operations are within the continental United States.
      In connection with its oil and gas operations, the following costs were
      incurred:


Year
                  Ended December 31,2006
              
              2005Acquisition
                  of PropertiesUnproved
              
              $
              388,653
              
              $
              856,712Proved
              
              $
              —
              
              $
              —Exploration
                  Costs
              
              $
              2,006,234
              
              $
              1,649,796Development
                  Costs
              
              $
              806,886
              
              $
              1,640,879




Note
      9
      - FINANCIAL INSTRUMENTS





The
      following table includes various estimated fair value information as of December
      31, 2006 and 2005, which pertains to the Company's financial instruments and
      does not purport to represent the aggregate net fair value of the Company.
      The
      carrying amounts in the table below are the amounts at which  the
      financial instruments are reported in the financial
      statements.


34





All
      of
      the Company's financial instruments are held for purposes other than trading,
      except for trading securities.





The
      following methods and assumptions were used to estimate the fair value of each
      class of financial instruments for which it is practicable to estimate that
      value:





1.  Cash
      and Cash Equivalents




The
      carrying amount approximates fair value because of the short maturity and highly
      liquid nature of those instruments.





2.  Available
      for Sale Securities




The
      estimated fair values are based upon quoted market prices.




3.  Trading
      Securities




The
      estimated fair values are based upon quoted market prices.




4. Dividends
      Payable




The
      carrying amount approximates fair value. Fair value is the amount that will
      be
      paid on demand at the reporting date.





The
      carrying amounts and estimated fair values of the Company's financial
      instruments are as follows:


2006
              
              2005Carrying
              
              Estimated
              
              Carrying
              
              EstimatedAmount
              
              Fair
                  Value
              
              Amount
              
              Fair
                  ValueFinancial
                  AssetsCash
                  and Cash Equivalents
              
              $
              1,321,707
              
              $
              1,321,707
              
              $
              704,121
              
              $
              704,121Available
                  for Sale Securities
              
              
              7,473,252
              
              
              7,473,252
              
              
              5,522,100
              
              
              5,522,100Trading
                  Securities
              
              
              289,729
              
              
              289,729
              
              
              254,434
              
              
              254,434Financial
                  LiabilitiesDividends
                  Payable
              
              
              (230,879
              )
              
              (230,879
              )
              
              (184,749
              )
              
              (184,749
              )





Note
      10 - LONG-LIVED
      ASSETS IMPAIRMENT LOSS




Certain
      oil and gas producing properties have been deemed to be impaired because the
      assets, evaluated on a property-by-property basis, are not expected to recover
      their entire carrying value through future cash flows. Impairment losses
      totaling $597,751 for the year ended December 31, 2006 and $367,634 for the
      year
      ended December 31, 2005 are included in the Statements of Operations in the
      line
      item, Depreciation, Depletion, Amortization and Valuation Provisions.




35




Note
      11 - OTHER
      INCOME, NET




The
      following is an analysis of the components of Other Income, Net for the years
      ended 2006 and 2005:


2006
              
              2005Realized
                  and Unrealized Gain (Loss)On
                  Trading Securities
              
              $
              33,641
              
              $
              (9,613
              )Gain
                  on Asset Sales
              
              
              148,886
              
              
              6,829Interest
                  Income
              
              
              326,598
              
              
              153,059Settlements
                  of Class Action Lawsuits
              
              
              2,925
              
              
              13,775Agricultural
                  Rental Income
              
              
              5,600
              
              
              5,600Dividend
                  and Other Income
              
              
              3,193
              
              
              1,681Interest
                  and Other Expenses
              
              
              (4,287
              )
              
              (4,075
              )Other
                  Income, Net
              
              $
              516,556
              
              $
              167,256




Note
      12 - CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS.





The
      Company is affiliated by common management and ownership with Mesquite Minerals,
      Inc., (Mesquite), Mid-American Oil Company (Mid-American), Lochbuie Limited
      Partnership (LLTD) and Lochbuie Holding Company (LHC). The Company also owns
      interests in certain producing and non-producing oil and gas properties as
      tenants in common with Mesquite, Mid-American and LLTD.





Mesquite,
      Mid-American and LLTD share facilities and employees, including executive
      officers, with the Company. The Company has been reimbursed for services,
      facilities and miscellaneous business expenses incurred during 2006 by payment
      to the Company in the amount of $196,011 by Mesquite, $138,361 by Mid-American
      and $92,241 by LLTD. Reimbursements for 2005 were $182,013 by Mesquite, $128,480
      by Mid-American and $85,653 by LLTD. Included in the 2006 amounts, Mesquite
      paid
      $127,441, Mid-American $89,959 and LLTD $59,972 for their share of salaries.
      In
      2005, the share of salaries paid by Mesquite was $119,594, Mid-American $84,419,
      and LLTD $56,280.




36










**UNAUDITED
      SUPPLEMENTAL FINANCIAL INFORMATION**







37





SUPPLEMENTAL
      SCHEDULE 1




THE
      RESERVE PETROLEUM COMPANY


WORKING
      INTERESTS RESERVE QUANTITY INFORMATION


(Unaudited)


Year
                  Ended December 31,2006
              
              2005Oil
                  & Natural Gas Liquids (Bbls)Proved
                  Developed and Undeveloped ReservesBeginning
                  of Year
              
              
              112,639
              
              
              90,473Revisions
                  of Previous Estimates
              
              
              (4,831
              )
              
              1,063Extensions
                  and Discoveries
              
              
              93,250
              
              
              44,556Improved
                  Recovery
              
              
              58,315
              
              
              —Production
              
              
              (26,935
              )
              
              (23,453
              )End
                  of Year
              
              
              232,438
              
              
              112,639Proved
                  Developed ReservesBeginning
                  of Year
              
              
              112,639
              
              
              90,473End
                  of Year
              
              
              232,438
              
              
              112,639Gas
                  (MCF)Proved Developed and Undeveloped ReservesBeginning
                  of Year
              
              
              1,637,881
              
              
              1,329,700Revisions
                  of Previous Estimates
              
              
              50,425
              
              
              39,485Extensions
                  and Discoveries
              
              
              349,555
              
              
              553,830Production
              
              
              (327,285
              )
              
              (285,134
              )End
                  of Year
              
              
              1,710,576
              
              
              1,637,881Proved
                  Developed ReservesBeginning
                  of Year
              
              
              1,637,881
              
              
              1,329,700End
                  of Year
              
              
              1,710,576
              
              
              1,637,881





See
      notes
      on next page


38




SUPPLEMENTAL
      SCHEDULE 1




THE
      RESERVE PETROLEUM COMPANY


WORKING
      INTERESTS RESERVE QUANTITY INFORMATION


(Unaudited)




Notes
            1.
            Estimates
                of royalty interests’ reserves have not been included because the
                information required for the estimation of said reserves is not available.
                The Company’s share of production from its net royalty interests was
                15,418 Bbls of oil and 794,760 MCF of gas for the year ended December
                31,
                2006, and 12,797 Bbls of oil and 506,241 MCF of gas for the year
                ended
                December 31, 2005.




2.
            The
                preceding table sets forth estimates of the Company’s proved developed oil
                and gas reserves, together with the changes in those reserves as
                prepared
                by the Company’s engineer for the years ended December 31, 2006 and 2005.
                All reserves are located within the United
                States.





3.
              The
                  Company emphasizes that the reserve volumes shown are estimates
                  which by
                  their nature are subject to revision in the near term. The estimates
                  have
                  been made by utilizing geological and reservoir data, as well as
                  actual
                  production performance data available to the Company. These estimates
                  are
                  reviewed annually and are revised upward or downward, as warranted
                  by
                  additional performance data.





4.
            The
                oil reserves added in 2006 due to “Improved Recovery” represent reserves
                added as a result of a production response to secondary recovery
                efforts
                in a South Dakota waterflood unit.







39





SUPPLEMENTAL
      SCHEDULE 2




THE
      RESERVE PETROLEUM COMPANY


STANDARDIZED
      MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS


RELATING
      TO PROVED WORKING INTERESTS


OIL
      AND
      GAS RESERVES


(Unaudited)


At
                  December 31,2006
              
              2005Future
                  Cash Inflows
              
              $
              24,863,088
              
              $
              21,759,009Future
                  Production andDevelopment
                  Costs
              
              
              (7,264,337
              )
              
              (5,945,084
              )Future
                  Income Tax Expense
              
              
              (4,873,525
              )
              
              (4,411,695
              )Future
                  Net Cash Flows
              
              
              12,725,226
              
              
              11,402,23010%
                  Annual Discount forEstimated
                  Timing of Cash Flows
              
              
              (4,624,561
              )
              
              (3,820,779
              )Standardized
                  Measure of DiscountedFuture
                  Net Cash Flows
              
              $
              8,100,665
              
              $
              7,581,451





Estimates
      of future net cash flows from the Company’s proved working interests oil and gas
      reserves are shown in the table above. These estimates, which by their nature
      are subject to revision in the near term, are based on prices in effect at
      year
      end with no escalation. The development and production costs are based on
      year-end cost levels, assuming the continuation of existing economic conditions.
      Cash flows are further reduced by estimated future income tax expense calculated
      by applying the current statutory income tax rates to the pretax net cash flows
      less depreciation of the tax basis of the properties and depletion applicable
      to
      oil and gas production.


40




SUPPLEMENTAL
      SCHEDULE 3




THE
      RESERVE PETROLEUM COMPANY


CHANGES
      IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE


NET
      CASH
      FLOWS FROM PROVED WORKING INTERESTS RESERVE QUANTITIES


(Unaudited)


Year
                  Ended December 31,2006
              
              2005Standardized
                  Measure,Beginning
                  of Year
              
              $
              7,581,451
              
              $
              4,528,361Sales
                  and Transfers, Net ofProduction
                  Costs
              
              
              (2,976,797
              )
              
              (2,700,022
              )Net
                  Change in Sales and TransferPrices,
                  Net of Production Costs
              
              
              (2,151,180
              )
              
              2,237,750Extensions,
                  Discoveries and ImprovedRecoveries,
                  Net of Future Productionand
                  Development Costs
              
              
              5,248,422
              
              
              3,527,634Revisions
                  of Quantity Estimates
              
              
              86,611
              
              
              650,125Accretion
                  of Discount
              
              
              1,051,479
              
              
              628,402Net
                  Change in Income Taxes
              
              
              (169,150
              )
              
              (1,177,682
              )Changes
                  in Production Rates(Timing)
                  and Other
              
              
              (570,171
              )
              
              (113,117
              )Standardized
                  Measure,End
                  of Year
              
              $
              8,100,665
              
              $
              7,581,451




41




**ITEM
              8.**
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON****ACCOUNTING****AND****FINANCIAL
                DISCLOSURE.**




None.





**ITEM
              8A.**
            **CONTROLS
                AND PROCEDURES**





**Disclosure
      Controls and Procedures**





As
      defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
      1934
      (the "Exchange Act"), the term "disclosure controls and procedures" means
      controls and other procedures of an issuer that are designed to ensure that
      information required to be disclosed by the issuer in the reports that it files
      or submits under the Exchange Act is recorded, processed, summarized and
      reported, within the time periods specified in the SEC's rules and forms.
      Disclosure controls and procedures include, without limitation, controls and
      procedures designed to ensure that information required to be disclosed by
      an
      issuer in the reports that it files or submits under the Exchange Act is
      accumulated and communicated to the issuer's management, including its principal
      executive and principal financial officers, or persons performing similar
      functions, as appropriate to allow timely decisions regarding required
      disclosure.





The
      Company's Principal Executive Officer and Principal Financial Officer evaluated
      the effectiveness of the Company's disclosure controls and procedures and
      concluded that the Company's disclosure controls and procedures were effective
      as of December 31, 2006.





**Internal
      Control Over Financial Reporting**




As
      defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act, the term "internal
      control over financial reporting" means a process designed by, or under the
      supervision of, the issuer's principal executive and principal financial
      officers, or persons performing similar functions, and effected by the issuer's
      board of directors, management and other personnel, to provide reasonable
      assurance regarding the reliability of financial reporting and the preparation
      of financial statements for external purposes in accordance with generally
      accepted accounting principles and includes those policies and procedures
      that:




(1)
            Pertain
                to the maintenance of records that in reasonable detail accurately
                and
                fairly reflect the transactions and dispositions of the assets of
                the
                issuer;





(2)
            Provide
                reasonable assurance that transactions are recorded as necessary
                to permit
                preparation of financial statements in accordance with generally
                accepted
                accounting principles, and that receipts and expenditures of the
                issuer
                are being made only in accordance with authorizations of management
                and
                directors of the issuer; and




(3)
            Provide
                reasonable assurance regarding prevention or timely detection of
                unauthorized acquisition, use or disposition of the issuer's assets
                that
                could have a material adverse effect on the financial
                statements.




The
      Company's management is responsible for establishing and maintaining adequate
      internal control over financial reporting for the Company.  There were no
      changes in the Company’s internal control over financial reporting during the
      quarter ended December 31, 2006 that have materially affected, or are reasonably
      likely to materially affect, the Company's internal control over financial
      reporting.


42





**PART
      III**





**ITEM
              9.**
            **DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS, CONTROL****PERSONS
                AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
                ACT.**





Information
      regarding directors and executive officers, compliance with Section 16(a) of
      the
      Exchange Act, the Company's Code of Ethics, and Corporate Governance in the
      Proxy Statement is incorporated herein by reference.





**ITEM
              10.**
            **EXECUTIVE
                COMPENSATION.**





Information
      regarding executive compensation in the Proxy Statement is incorporated herein
      by reference.





**ITEM
              11.**
            **SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS.**





Information
      regarding security ownership of certain beneficial owners and management and
      related stockholder matters in the Proxy Statement is incorporated herein by
      reference.





**ITEM
              12.**
            **CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS.**





See
      Item
      6, “Management’s Discussion and Analysis or Plan of Operations” and Item 7, Note
      12 to Financial Statements.  Information regarding the independence of our
      directors in the Proxy Statement is incorporated herein by
      reference.





**ITEM
              13.**
            **EXHIBITS.**





The
      following documents are exhibits to this Form 10-KSB. Each document marked
      by an
      asterisk is filed electronically herewith.


**Exhibit****Number**
              
              **Description**3.1
              
              Restated
                  Certificate of Incorporation dated November 1, 1988 is incorporated
                  by
                  reference to Exhibit 3.1 of The Reserve Petroleum Company’s Annual Report
                  on Form 10-KSB (Commission File No. 0-8157) filed March 28,
                  1997.3.2
              
              Amended
                  By-Laws dated November 16, 2004 are incorporated by reference to
                  Exhibit
                  3.2 of The Reserve Petroleum Company’s Annual Report on Form 10-KSB
                  (Commission File No. 0-8157) filed March 30, 2006.14
              
              Code
                  of Ethics incorporated by reference to Exhibit 14 of The Reserve
                  Petroleum
                  Company’s Annual Report on Form 10-KSB (Commission File No. 0-8157) filed
                  March 30, 2006.31.1*
              
              Certification
                  of Principal Executive Officer Pursuant to Rules 13a-14(a) and
                  15d-14(a)
                  under the Securities Exchange Act of 1934, as amended.31.2*
              
              Certification
                  of Principal Financial Officer Pursuant to Rules 13a-14(a) and
                  15d-14(a)
                  under32*
              
              Certification
                  of Principal Executive Officer and Principal Financial Officer
                  Pursuant to
                  18 U.S.C. Section 1350.




**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**





Information
      regarding fees billed to the Company by its independent registered public
      accounting firms in the Proxy Statement is incorporated herein by
      reference.




43




SIGNATURES





In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




THE
                RESERVE PETROLEUM COMPANY
              (Registrant)By:
            /s/Mason
                W. McLainMason
              W. McLain, President(Principal
                Executive Officer)




By:
              /s/James
                    L. TylerBy:James
                  L. Tyler, 2nd Vice President(Principal
                    Financial Officer)


Date:
      March 28, 2006





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the Registrant and in the
      capacities and on the dates indicated:





/s/
                Mason McLain
            
            
            /s/
              Jerry L. CrowMason
              W. McLain (Director)
            
            
            Jerry
              L. Crow (Director)March
              28,
              2007
            
            
            March
              28,
              2007 
 /s/
                  Robert L. Savage
              
              
              /s/
                William M. SmithRobert
                L. Savage (Director)
              
              
              William
                M. Smith (Director)March
                28,
                2007
              
              
              March
                28,
                2007




44