UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-K







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




For
the year ended March
31, 2009




Or




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





For
the transition period from ___________ to ___________




Commission
File Number: 1-12850





AVALON
OIL & GAS, INC.


(Exact
Name of Small Business Issuer as specified in its charter)




Nevada
              
              84-1168832(State
      or other jurisdiction of incorporation or organization)
              
              (I.R.S.
      employer identification no.)




7808
Creekridge Circle, Suite 105


Minneapolis,
MN 55439


(Address
of principal executive offices) (Zip Code)





Registrant's
telephone number, including area code:


(952)
746-9652





Securities
registered pursuant to Section 12(b) of the Act: None





Securities
registered pursuant to section 12(g) of the Act: None.





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. r Yes         
xNo





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. r




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. xYes       rNo





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. r





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




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




Large
      accelerated filer  r
            Accelerated
      filer  rNon-accelerated
      filer    r   (Do
      not check if a smaller reporting company)
            Smaller
      reporting company  x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).  r Yes       xNo





99,412,193
shares of our common stock were issued and outstanding as of June 8,
2009.








Table of Contents




TABLE OF CONTENTS





PagePART
      IItem
      1.
                                    Description of
      Business
                                    3Item
      2.
                                    Description of
      Property
                                    6Item
      3.
                                    Legal
      Proceedings
                                    6Item
      4.
                                    Submission of
      Matters to a Vote of Security Holders
                                    6PART
      IIItem
      5.
                                    Market for
      Common Equity and 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
                                    11Item
      8.
                                    Changes In and
      Disagreements With Accountants on Accounting and Financial
      Disclosure
                                    11Item
      8A.
                                    Controls and
      Procedures
                                    11Item
      8B.
                                    Other
      Information
                                    11PART
      IIIItem
      9.
                                    Directors,
      Executive Officers, Promoters, Control Persons and Corporate Governance;
      Compliance With Section 16(a) of the Exchange
    Act
                                    12Item
      10.
                                    Executive
      Compensation
                                    13Item
      11.
                                    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                    15Item
      12.
                                    Certain
      Relationships and Related Transactions, and Director
      Independence
                                    16Item
      13.
                                    Exhibits
                                    17Item
      14.
                                    Principal
      Accountant Fees and Services
                                    17SIGNATURES
                                    18CERTIFICATIONS





Table of Contents




PART
I








References
in this document to "us," "we," the "Registrant," or the "Company" refer to
Avalon Oil & Gas, Inc., and its predecessors.





Statements
contained in this Form 10-K discuss future expectations and plans which are
considered forward-looking statements as defined by Section 27 (a) of the
Securities and Exchange Act of 1934, as amended. Sentences which incorporate
words such as "believes," "intends," expects," "predicts," "may," "will,"
"should," "contemplates," "anticipates," or similar statements are based on our
beliefs and expectations using the most current information available to us. In
view of the fact that our discussions in the Form 10-K are based on upon
estimates and beliefs concerning circumstances and events which have not yet
occurred, the anticipated results are subject to changes and variations as
future operations and events actually occur and could differ materially from
those discussed in forward-looking statements. Moreover, although we reasonably
expect, to the best of our knowledge and belief, that the results to be achieved
by us will be as set forth in the following discussion, the following discussion
is not a guarantee and there can be no assurance that any of the potential
results which are described will occur. Furthermore, there will usually be
differences between the forecasted and actual results because events and
circumstances frequently do not occur as expected, and the difference may be
material.





ITEM 1.DESCRIPTION OF BUSINESS





Business
Development





We were
originally incorporated in Colorado in April 1991 under the name Snow Runner
(USA), Inc. We were the general partner of Snow Runner (USA) Ltd., a Colorado
limited partnership to sell proprietary snow skates under the name "Sled Dogs"
which was dissolved in August 1992. In late 1993, we relocated our operations to
Minnesota and in January 1994 changed our name to Snow Runner, Inc. In November
1994 we changed our name to the Sled Dogs Company. On November 5, 1997, we filed
for protection under Chapter 11 of the U.S. Bankruptcy Code.





In
September 1998, we emerged from protection of Chapter 11 of the U.S. Bankruptcy
Code. In May, 1999, we changed our state of domicile to Nevada and our name to
XDOGS.COM, Inc. In August 2000, following our bankruptcy, we made a decision to
re-focus to a traditional wholesale to retail distributor, and obtained the
exclusive North American rights to distribute high-end European outdoor apparel
and equipment. We first intended to exploit these rights over the Internet under
the name XDOGS.COM, Inc. However, due to the general economic conditions and the
ensuing general downturn in e-commerce and internet-based businesses, we decided
that to best preserve our core assets we would need to adopt a more traditional
strategy. Thus, we abandoned this approach and to better reflect our new focus,
we changed our name to XDOGS, Inc. On July 22, 2005, the Board of Directors and
a majority of the Company's shareholders approved an amendment to our Articles
of Incorporation to change the Company's name to Avalon Oil & Gas, Inc.
("Avalon"), and to increase the authorized number of shares of our common stock
from 200,000,000 shares to 1,000,000,000 shares, par value of $0.001, and engage
in the acquisition of producing oil and gas properties.





Acquisition
Strategy





Our
strategy is to acquire oil and gas producing properties that have proven
reserves and established in-field drilling locations with a combination of cash,
debt, and equity. We believe that acquisition of such properties minimizes our
risk, allows us to generate immediate cash flow, and provides in-field drilling
locations to expand production within the proven oil and gas fields. We will
aggressively develop these low cost/low risk properties in order to enhance
shareholder value. In addition, Avalon's technology group acquires oil
production enhancing technologies. Through its strategic partnership with UTEK
Corporation, (UTK: ASE) a transfer technology company, Avalon is building an
asset portfolio of innovative technologies in the oil and gas industry to
maximize enhancement opportunities at its various oil and gas
properties.





In
furtherance of the foregoing strategy, we have engaged in the following
transactions during the last four years:





On August
29, 2005 we acquired a one hundred percent (100%) working interest,
seventy-eight percent (78%) net revenue interest, in 2,400 acres located in
Canadian County, Oklahoma ("The Oklahoma Properties"), from Sooner Trend Leasing
LLC, payable by delivering 48,000,000 authorized, but previously un-issued,
shares of the Company's common stock. On February 13, 2005, the Company returned
The Oklahoma Properties to Sooner Trend Leasing LLC, and sent a letter to our
transfer agent canceling the 48,000,000 shares of stock issued to Sooner Trend
Leasing LLC. On October 20, 2006, the District Court for the Fourth Judicial
District, State of Minnesota, issued a judgment canceling the 48,000,000 shares
issued to Sooner Trend Leasing, LLC. On May 4, 2007, the judgment issued by the
District Court for the Fourth Judicial District, State of Minnesota was filed
with the County Clerk in Tulsa County, Oklahoma.





On May
17, 2006, we signed a strategic alliance agreement with UTEK Corporation, a
technology transfer company to develop a portfolio of new technologies for the
oil and gas industry.





On June
15, 2006, we acquired a fifty percent (50%) working interest in the J.C. Kelly
wellbore, a 121.9 acre lease in Wood County, Texas, in addition to the E.A.
Chance #1 and #2 wellbores, a 40 acre lease in Camp County, Texas and all of the
surface equipment for the properties, from KROG Partners LLC. The J. C. Kelly
well produces from the Paluzy Interval and the Change # 1 and #2 wells produce
from the Sub-Clarksville zone, within an active waterflood area.





On July
17, 2006, we acquired Ultrasonic Mitigation Technologies, Inc., ("UMTI")a wholly
owned subsidiary of UTEK Corporation. UMTI holds the exclusive worldwide license
for the mitigation of paraffin wax deposition from crude oil using ultrasonic
waves. Varying ultrasonic transducers are positioned in production tubing walls
as a means to inhibit the wax from attaching to the pipes. The use of this
technology helps prevent precipitates from forming on pipes, and also breaks wax
bonds thereby increasing flow rates and production efficiency. This technology
was developed at the University of Wyoming by Dr. Brian Towler.





On August
11, 2006, we acquired a fifty percent (50%) working interest in the Dixon Heirs
#1, Deltic Farms & Timber #1 and the Gunn #1 wells and associated units and
leases, in Miller County, Arkansas. These are mature wells with stable
production, and were originally drilled in the early 1980's.




3
 Table of Contents




On
November 9, 2006, we acquired Intelli-Well Technologies, Inc., ("IWT") a wholly
owned subsidiary of UTEK Corporation. IWT holds a license for borehole casing
technology developed by researchers at Lawrence Livermore National Laboratory.
The technology uses a densely spaced network of sensors which are installed
along and outside of the oil well casings before they are grouted into place.
The sensors monitor critical parameters in the subsurface oil reservoir. Data
from multiple sensors provides real-time information regarding the status of the
reservoir and the primary and secondary oil recovery process. Sensors located
deep within the reservoir are much more sensitive than sensors located on the
surface. The type of sensors that can be installed include seismic sensors,
electrical resistance tomography electrodes, electromagnetic induction
tomography coils and thermocouples.





On
November 15, 2006, we acquired a ten percent (10%) working interest in 13
wellbores, which include six (6) producing oil wells, three (3) salt water
disposal wells, three (3) shut-in or marginally producing wells, and one (1)well
that has been plugged and abandoned since the effective date, located in Upshur
County, Texas. These wells produce from the Woodbine interval. Avalon is
currently working on  optimization/workover opportunities with the
goal of enhancing operations and production from the shut-in
wellbores.





On March
29, 2007, we acquired Leak Location Technologies, Inc.,("LLT") a wholly owned
subsidiary of UTEK Corporation. LLT owns an exclusive license to a system for
determining the presence and location of leaks in underground pipes. The
technology was developed by researchers at Rensselaer Polytechnic Institute. The
system uses a series of acoustic sensors to monitor changes in pipeline acoustic
emissions, and has been proven in field application with a large multinational
petroleum company. The lead scientist in charge of that project is currently
under contract to Avalon to manage the technology design refresh and prototype
development for commercialization.





On May
22, 2007, we acquired a fifteen percent (15%) working interest in the Janssen
#1A prospect in Karnes County, Texas. The Janssen Prospect will be re-completed
in the existing vertical wellbore by a sidetrack drilling procedure at a depth
of approximately 10,500 feet, and test the Wilcox sand. Total potential reserves
are estimated to be 75,000 to 100,000 barrels of condensate and 3 to 4 BCF
(billion cubic feet) of gas.





On May
31, 2007 we announced the purchase of a 15% stake in the oil wells in the
Janssen Prospect, Karnes County, Texas (the "Janssen Well").





On
October 17, 2007, we signed a non-binding letter of intent with Gran Tierra
Energy Colombia, Ltd. ("Gran Tierra"), a Colombian Energy company, expressing
our intent to acquire Gran Tierra's interest in the Mecaya Block and the Talora
Block. Pursuant to the non-binding letter of intent, we are required to pay
$1,500,000 in cash for Gran Tierra's interest in the Mecaya Block. However, at
this time our management does not believe that the terms of the non-binding
letter of intent will be complied with, or that we will enter into a definitive
agreement





On
October 31, 2007, we announced in a press release that we closed upon the
acquisition of non-operated production in the Lake Washington Field in
Plaquemines Parish, Louisiana. Since its discovery in the 1930, the Lake
Washington Field has produced approximately 350 million barrels of oil. We hold
approximately a .7% working interest in 3 units that are currently producing
over 1000 barrels of oil per day.





On April
7, 2008 we announced in a press release our acquisition in December 2007 of a 5%
working interest in the 1,280 Waters prospect. The first well is being drilled
between two gas wells that the produced over 500 million cubic feet of natural
gas in the two years they have been in production. Estimated recoverable
reserves from the Waters well are projected to exceed 1.3 billion cubic feet of
natural gas.





In June
2008, the Company entered into an agreement with Bedford Energy to acquire a
2.5% working interest in Grace Well #2 in East Chandler Field, Oklahoma, which
had been producing 350 thousand cubic feet of gas per day.  In August
2008, the Company entered into an additional agreement with
Bedford  Energy (the “Expanded Bedford Agreement”) to increase its
working interest in the Grace #2 from 2.5% to 7.5%; and to increase its net
revenue interest in the Grace #2 to 11.95%. In addition, the Company acquired a
10% working interest and a 13.825% net revenue interest in the Grace #1, Grace
#3, Grace #5A and Grace #6 wells.  In March,
2009 Avalon additionally increased its working interest in the Grace wells as
follows: in the Grace #1 to 42.125%; in the Grace # 2 to 30.5%; in the Grace #3
to 39.0%, in the Grace #5A to 40.0%, and in the Grace #6 to 34.0%.
The Hunton Lime Reserves from the Grace #1, the Grace #3 and the Grace #6 wells
are estimated to be 48,000 barrels of oil and 423 million cubic feet of
gas.  The Upper Red Fork Sand reserves for the Grace #5A are estimated
to be 30 million cubic feet of gas.





In
September 2008, the Company sold 15% of its recently acquired interest in
the Bedford Assets, for cash in the amount of $262,500.





The
Company also acquired an undivided fifty (50%) percent interest in a salt water
disposal well and offset and development acreage in the two quarter sections of
the East Chandler Field.  In addition, the Company acquired a fifty
(50%) percent interest in 540 acres adjoining the 320 acre East Chandler Field,
and total reserves of 90,000 barrels of oil and 559 million cubic feet of
gas.  In addition, the Company also acquired Prue Sand potential in
the Grace #3, Grace #5A and the Grace #6 wells.   Estimated Prue
Sand reserves for these three wells are 33,000 barrels of oil and 81 million
cubic feet of gas





As part
of the  Expanded Bedford Agreement, the Company also acquired the
right to operate Grace Wells #1, #2, #3, #5A, and #6 (the “Grace
Wells”).  The Company hired a third party to operate the Grace Wells
and to upgrade the operation of the Grace Wells
(“Workover”).   In February and March 2009, the Company made
formal buyout offers (the “Grace Wells Buyout Offer”) to the approximately 93
additional working interest holders in the Grace Wells (the “Additional Grace
Wells Owners”).  The Grace Wells Buyout Offer provided three options
to the Additional Grace Wells Owners:   (1) The Additional Grace
Wells Owners would continue to participate in the operation of the Grace Wells,
and would remit to the Company fund representing their pro rata portion of the
Workover costs; (2) The Additional Grace Wells Owners would sell their interests
in the Grace Wells to the Company for cash and stock in the Company; (3) The
Additional Grace Wells Owners could do nothing. If this option was chosen, the
Additional Grace Well Owner would retain their interest in the Grace Wells, but
their pro-rata portion of the costs would be subject to a 500% penalty; in
addition, their pro-rata portion of the revenue generated by the Grace Wells
would be applied to their portion of the costs, including the 500% penalty,
before they would receive any payment.  At March 31, 2009, the
approximately 93 Grace Wells investors had selected the following
options:  Approximately 22 selected option 1, continued participation;
29 selected option 2, the Company buyout; 17 were in Option 3, non-consent; and
25 were still pending and had not made a selection.





4
 Table of Contents








We plan
to raise additional capital during the coming fiscal year, but currently have
not identified additional funding sources. Our ability to continue operations is
highly dependent upon our ability to obtain additional financing, or generate
revenues from our acquired oil and gas leasehold interests, none of which can be
guaranteed.





Ultimately,
our success is dependent upon our ability to generate revenues from our acquired
oil and gas leasehold interests, and to achieve profitability, which is
dependent upon a number of factors, including general economic conditions and
the sustained profitability resulting from the operation of the acquired oil and
gas leaseholds. There is no assurance that even with adequate financing or
combined operations, we will generate revenues and be profitable.





PATENTS,
TRADEMARKS, AND PROPRIETARY RIGHTS





On May
17, 2006, The Company signed a strategic alliance agreement with UTEK
Corporation, a technology transfer company to develop a portfolio of new
technologies for the oil and gas industry.





On July
17, 2006, we acquired Ultrasonic Mitigation Technologies, Inc. ("UMTI"). UMTI
holds the exclusive worldwide license for the mitigation of paraffin wax
deposition from crude oil using ultrasonic waves. This technology was developed
at the University of Wyoming by Dr. Brian Towler.





On
November 9, 2006, we acquired Intelli-Well Technologies, Inc., ("IWT"). IWT
holds a license for borehole casing technology developed by researchers at
Lawrence Livermore National Laboratory.





On March
29, 2007, we acquired Leak Location Technologies, Inc., ("LLT"). LLT owns an
exclusive license to a system for determining the presence and location of leaks
in underground pipes.





On May
17, 2007, The Company renewed its strategic alliance agreement with UTEK
Corporation, a technology transfer company to develop a portfolio of new
technologies for the oil and gas industry.





On August
13, 2007, The Company received notice that the U.S. Patent and Trademark Offices
approved the patent application for Avalon's paraffin wax mitigation system,
being marketed as Ultrasonic Mitigation Solutions(TM) (the "Patent"). Currently
available solutions to paraffin wax deposits and build-up in oil production rely
upon chemical solvents, which not only require repeated mechanical pigging
operation and costly workovers to maintain production capacity,
but  can also result in environmental liabilities. In contrast, the
Patent utilizes ultrasonic waves to fragment current paraffin deposits in the
production's tubing and prevent future wax formation in an environmentally safe
process.





On August
16, 2007, Kent Rodriguez, the Company's President and CEO, presented a proposal
to the Board of Directors to spin-off Oiltek Inc. ("Oiltek"), which specializes
in oil and gas recovery technology to Avalon's shareholders. The oil and gas
technology include, but are not limited, to the Patent; a system to detect
hazardous gas leaks including small leaks in natural gas pipelines; and a system
for intelligent drilling and completion sensors to provide real-time oil reservoir
monitoring of subsurface information.





On
September 22, 2007 the Company entered into an agreement with respect to its
purchase of a 75.6% interest in Oiltek for $50,000 and the right of Oiltek to
market Avalon's intellectual property.




ENVIRONMENTAL MATTERS





During
the last three fiscal years, compliance with environmental laws and regulations
did not have a specific impact on the Company's operations. The Company does not
anticipate that it will incur any material capital expenditures for
environmental control facilities during the next fiscal year.





EMPLOYEES





As of
March 31, 2009 we had two full time employees consisting of our President, Mr.
Kent Rodriguez, and Vice President, Ms. Jill Allison. The Board has retained
William Anderson, Glen Harrod, Mark Oliver, William Graham, Thomas Bugbee, Gary
Browning and Bruce Merrifield, as advisors who have
been compensated by the issuance of securities. We do not have any part
time employees at this time.





RESEARCH AND DEVELOPMENT





During
the last three fiscal years, we did not incur research and development
expenses.




5
 Table of Contents




ITEM 2. DESCRIPTION OF PROPERTY





Our
corporate office is located at 7808 Creekridge Circle, Suite 105, Minneapolis,
MN 55439. This office space is leased from an unaffiliated third party on three
year lease, which ends on December 1, 2009, for a monthly rental of
$3,100.





On
October 17, 2007, we signed a non-binding letter of intent with Gran Tierra
Energy Colombia, Ltd. ("Gran Tierra"), a Colombian Energy company, expressing
our intent to acquire Gran Tierra's interest in the Mecaya Block and the Talora
Block. Pursuant to the non-binding letter of intent, we are required to pay
$1,500,000 in cash for Gran Tierra's interest in the Mecaya Block. However, at
this time our management does not believe that the terms of the non-binding
letter of intent will be complied with, or that we will enter into a definitive
agreement.





On July
2, 2008, we signed a letter agreement to acquire all of the oil and gas
producing assets owned by Bedford Energy, Inc. in the East Chandler Field,
Lincoln County, Oklahoma. We increased our current interest in the Grace #2 well
and acquire working interests in four other producing wells in the East Chandler
Field, the Grace #1, Grace #3, Grace #5A and Grace #6 wells, as
follows:





We increased
our working interest in the Grace #2 from 2.5% to 7.5%; and increasing our net
revenue interest in the Grace #2 to 11.95%. We initially acquired our working
interest in the Grace #2 well in June, 2008.





We are
acquiring a 10% working interest and 13.825% net revenue interest in the Grace
#1, Grace #3, Grace #5A and Grace #6 wells.





We are
acquiring a 50% working interest in a salt water disposal well and offset and
development acreage in the two quarter sections (320 acres)  adjoining
the Grace Wells in the East Chandler Field.





As of
March 2009, we have increased our working interests in the Grace Wells as shown
in the table below:





Well
                        
                        Working
      Interest AcquiredGrace
      #1
                        
                        
                        30
                        %Grace
      #2
                        
                        
                        21
                        %Grace
      #3
                        
                        
                        28
                        %Grace
      #5A
                        
                        
                        26
                        %Grace
      #6
                        
                        
                        24
                        %





As of
March 31, 2009, our working interests in the Grace Wells are shown in the table
below:





Well
                                        
                                        Working
      Interest AcquiredGrace
      #1
                                        
                                        
                                        38
                                        %Grace
      #2
                                        
                                        
                                        27
                                        %Grace
      #3
                                        
                                        
                                        34
                                        %Grace
      #5A
                                        
                                        
                                        34
                                        %Grace
      #6
                                        
                                        
                                        30
                                        %




ITEM 3.  LEGAL PROCEEDINGS





The
Company is not a party to any pending legal proceedings.





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





No matter
was submitted to a vote of security holders during the fourth quarter of the
fiscal year covered by this report.




6
 Table of Contents





PART
II





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





(a)
Principal Market or Markets





Effective
with the close of business on June 19, 1997, our Common Stock was delisted from
the NASDAQ Small Cap Market. In June of 1997, our Common Stock began trading on
the NASD Over-the-Counter Bulletin Board ("OTCBB"). Market makers and other
dealers provided bid and ask quotations of our Common Stock. We trade under the
symbol "AOGN.OB".





The table
below represents the range of high and low bid quotations of our Common Stock as
reported during the reporting period herein. The following bid price market
quotations represent prices between dealers and do not include retail markup,
markdown, or commissions; hence, they may not represent actual
transactions.





Per
      Share Common Stock Bid Prices by Quarter For the Fiscal Year Ended March
      31, 2009High
                          
                          LowQuarter
      Ended March 31, 2009
                          
                          $
                          0.035
                          
                          $
                          0.015Quarter
      Ended December 31, 2008
                          
                          $
                          0.040
                          
                          $
                          0.019Quarter
      Ended September 30, 2008
                          
                          $
                          0.175
                          
                          $
                          0.032Quarter
      Ended June 30, 2008
                          
                          $
                          0.220
                          
                          $
                          0.120





As of
June 8, 2009, 99,265,002 shares of our Common Stock were outstanding and the
number of holders of record of our Common Stock at that date was approximately
990. However, we estimate that there are a significantly greater number of
shareholders because a substantial number of our shares are held in nominee
names by brokerage firms.





(c)
Dividends





No
dividends on the Common Stock were paid by us during the fiscal year ended March
31, 2009, or the fiscal year ended 2008, nor do we anticipate paying dividends
on Common Stock in the foreseeable future. Holders of Common Stock are entitled
to receive such dividends as may be declared by our Board of
Directors.





(c)
Securities Authorized for Issuance Under Equity Compensation Plans.





We have
not established an Equity Compensation Plan and have not authorized the issuance
of any securities under such plan.





(d)
Preferred Stock.





Our
Articles of Incorporation authorize us to issue up to 1,000,000 shares of $0.10
par value preferred stock, with such classes, series and preferences as our
Board of Directors may determine from time to time. In June 2002, our Board of
Directors authorized the issuance of 100 shares of Series A Convertible
Preferred Stock (the "Series A Preferred Stock"). Our Board further agreed to
issue all of the Series A Preferred Stock to our Chairman and President, Kent
Rodriguez, in satisfaction of $500,000 in loans made by Mr.
Rodriguez.





The
Series A Preferred Stock accrues dividends at the rate of 8% per annum on the
original purchase price for the shares. If declared by the Board of Directors,
these dividends are payable quarterly, beginning in September 2002. We are
prohibited from paying any dividends on our Common Stock until all accrued
dividends are paid on our Series A Preferred Stock.





If we
liquidate or dissolve, and after payment of our debts, the holders of the Series
A Preferred Stock are entitled to a preference payment before we make any
distributions to our Common Stockholders. The preference amount is equal to the
original purchase price for the Series A Preferred shares plus accrued, but
unpaid dividends.





The
Series A Preferred Stock is convertible at anytime into 40% of the then
outstanding shares of Common Stock and securities convertible into Common Stock
on a fully diluted basis. However, conversion is limited to the number of shares
of Common Stock available for issuance under our articles of
incorporation.





Regardless
of whether or not the Series A Preferred Stock has been converted to our Common
Stock, the Series A Preferred Stockholder is entitled to vote, at all times, on
an as-if converted basis. The Preferred Stockholder, Mr. Rodriguez, has the
right to vote the Series A Preferred Stock together with his other holdings in
the Company.





Other
than the Series A Preferred Stock, no preferred stock has been issued. See Item
11, Security Ownership of Certain Beneficial Owners and Management.





SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS





The
Company does not have any securities authorized for issuance under equity
compensation plans.




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RECENT
SALES OF UNREGISTERED SECURITIES





The
Company sold the following unregistered securities between January 1, 2009 and
March 31, 2009:





During
the three months ended March 31, 2009, the Company issued 10,000 shares of
common stock for cash in the amount of $300.





During
the three months ended March 31, 2009, the Company issued 7,000,000 shares of
common stock to note holder valued at $158,000.  These shares are
considered discounts to the notes payable.





During
the three months ended March 31, 2009, the Company issued 4,200,000 shares of
common stock valued at $144,420 for consulting services.





During
the three months ended March 31, 2009, the Company issued 7,859,250 shares of
common stock valued at $188,622 to interest holders in the Grace
wells.





All other
unregistered securities sold by the Company during the past three years, but
prior to January 1, 2009, have been included in the Company's 10-Q
filings.





All of
the unregistered securities sold were issued directly by the Company, and no
commissions or fees were paid in connection with any of these transactions. The
transactions were private, and the Company endeavored to comply both with
Regulation D, and also Section 4(2) of the Securities Act of 1933, as amended,
as exemption(s) from registration. The Company exercised reasonable care to
assure that the purchasers of the securities are not underwriters and were
"accredited investors" under Regulation D and/or sophisticated
investors.





ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION





RESULTS
OF OPERATIONS AND PLAN OF OPERATION





The
following discussion and analysis should be read in conjunction with our
financial statements and notes related thereto. The discussion of results,
causes and trends should not be construed to infer conclusions that such
results, causes or trends necessarily will continue in the future.





For
the year ended March 31, 2009 compared to the year ended March 31,
2008





Revenues





Revenues
for the year ended March 31, 2009 were $320,712, an increase of approximately
28% compared to revenue of $249,856 for the year ended March 31,
2008.  Revenues from the sale of oil and gas increased as a result of
the acquisition of additional oil and gas properties.




Lease Operating
Expenses





During
the year ending March 31, 2009, our lease operating expenses were $71,970,
an decrease of $78,166 or approximately 52% compared to  $150,136 for
the year ended March 31, 2008.  This decrease was the result of
the lower workover costs and a reduction in lease operating
expenses





Selling, General, and
Administrative Expenses





Selling,
general and administrative expenses for the year ended March 31, 2009 were
$1,245,812 an increase of $20,606 or approximately 2%  compared to
selling, general and administrative expenses of $1,225,206 during the year ended
March 31, 2008.   Selling, general and administrative expenses
for 2009 consisted primarily of and related costs of
$212,768; legal and accounting fees in the amount of $377,151; payroll
consulting fees in the amount of $140,271; travel and entertainment expenses of
$147,608; licensing fees of $110,000; office expenses of $70,746; facilities
costs in the amount of $61,001; investor relations costs of $40,238;  
bad debt expense of $28,260; and insurance expense in the amount of
$24,314.   Selling,  general and administrative expenses in
the current period included an increase in legal expenses as we completed
acquisitions of oil and gas properties during the year ended March 31,
2009.
  Non-Cash
Compensation
  Non-cash
compensation for the year ended March 31, 2009 was $430,425, a decrease of
$1,317,440 or approximately 75% compared to non-cash compensation of $1,747,860
for the year ended March 31, 2008.  This decrease was the result of a
reduction of common stock issuances to consultants as payment and the reduction
of the use of outside consultants.




Acquisition
Costs





Acquisition
costs for the year ended March 31, 2009 were $122,500; there were no such costs
during the comparable period of the prior year. These costs represent the
commissions  paid for the acquisition of the Bedford Energy
assets.





Depreciation, Depletion, and
Amortization





Depreciation,
Depletion, and Amortization were $438,221 for the year ended March 31, 2009, an
increase of $108,858 or approximately 33% compared to $329,363 for the year
ended March 31, 2008.  The reason for the increase is due to the
acquisition of additional oil and gas producing properties.





Interest Expense, net of
Interest Income





Interest
expense, net of interest income of $43,472 for the year ended March 31, 2009, an
increase of $22,994  or approximately 112%  compared to
interest expense, net of $20,478 for the year ending March 31, 2008. This
increase is due to an increase in notes payable and the amortization of the
discount on the notes payable.




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Loss on Sale of
Property





During
the year ended March 31, 2009, the Company sold an oil and gas property for a
loss of $16,000;  there were no such losses during the year ended
March 31, 2008.





Loss on Sale of Minority
Interest





During
the year ended March 31, 2009, the Company sold a minority interest in an oil
and gas property  for a loss of $37,500; there were no such losses
during the year ended March 31, 2008.





Realized Gains on Marketable
Securities





There was
no loss on marketable securities during the current year, compared to a gain of
$11,523 during the prior year. The Company no longer has any marketable
securities.





Net Loss





For the
reasons stated above, our net loss for the year ended March 31, 2009, amounted
to $2,085,183, a decrease of $1,144,344 or approximately 35% compared to a
net loss of $3,229,527 during the prior period.





Liquidity and Capital
Resources





The March
31, 2009, financial statements have been prepared assuming the Company will
continue as a going concern. However, the Company has incurred a loss of
$24,601,101 from inception through March 31, 2009, and has a working capital
deficiency of $1,152,826,  and shareholder’s equity of
$2,762,090, respectively, at March 31, 2009. The Company currently has minimal
revenue generating operations and expects to incur substantial operating
expenses in order to expand its business. As a result, the Company expects to
incur operating losses for the foreseeable future.  The accompanying
consolidated financial statements do not include any adjustments that might
become necessary should the Company be unable to continue as a going
concern.




Our cash
and cash equivalents were $26,406 on March 31, 2009, compared to $108,688
on March 31, 2008. We met our liquidity needs through the issuance of our
common stock and notes payable for cash and the revenue derived from oil and gas
operations.





We need
to raise additional capital during the fiscal year, but currently have not
acquired sufficient additional funding. Our ability to continue
operations is highly dependent upon our ability to obtain immediate
additional financing, or generate revenues from our acquired oil and gas
leasehold interest, and to achieve profitability, none of which can be
guaranteed. Unless additional funding is located, it is highly unlikely
that we can continue to operate. There is no assurance that even with
adequate financing or combined operations, we will generate revenues and be
profitable.





Ultimately,
our success is dependent upon our ability to generate revenues from our
acquired oil and gas leasehold interests.





Operating
activities





Net cash
used by operating activities for the year ended March 31, 2009 was $1,045,969
compared to $1,081,401 provided in the year ended March 31, 2008.





The
Company had a net loss of $2,085,183 for the year ended March 31, 2009 compared
to a net loss of $3,234,710 for the year ended March 31, 2008. Net accounts
receivable for the year ended March 31, 2009 was $40,827 compared to $23,473 for
the year ended March 31, 2008.





Investing
activities





For the
twelve months ended March 31, 2009 we used $740,221 in investing activities
compared to $715,300 in the twelve months ended March 31, 2008.  The
primary use of cash for investing activities in the current year was $900,000
used for the acquisition of the Grace Wells assets from Bedford
Energy.





Financing
activities





Our
financing activities for the period ended March 31, 2009 provided cash of
$1,703,908 as compared to $1,003,852 for the period ended March 31, 2008. We
plan to raise additional capital during the coming fiscal year.  Cash
generated by financing activities consisted of $1,044,191 for the sale of common
stock and $660,000 from the issuance of notes payable.





Critical Accounting
Policies





The
consolidated  financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America.
As such, we are required to make certain estimates, judgments and
assumptions that we believe are reasonable based on information available.
These estimates and assumptions affect the reporting amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. A summary of
the significant accounting policies is described in Note 1 to the financial
statements.




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Off-Balance Sheet
Arrangements





We have
no off-balance sheet arrangements.





Material
Commitments





We have
no material commitments during the next twelve (12) months.





Purchase of Significant
Equipment





During
the twelve months ended March 31, 2009, we used $1,000 for the purchase of
equipment, compared to $10,672 in equipment for the year ended March 31,
2008.





Our
ability to continue operations is highly dependent upon our ability to obtain
immediate additional financing, or generate revenues from our acquired oil and
gas leasehold interests, and to achieve profitability, which is dependent upon a
number of factors, including general economic conditions and the sustained
profitability resulting from the operation of the acquired oil and gas
leaseholds.





There can
be no assurance that, even with adequate financing or combined operations, we
will generate sufficient revenues to be profitable.





Our
success is largely dependent upon our ability to generate revenues from our
acquired oil and gas leasehold interests and from the income from the oil and
gas enhancement technology we have acquired from UTEK, Inc.




RISK
FACTORS





Any
investment in our securities is highly speculative.  The
Company's business and ownership of shares of our common stock are subject to
numerous risks You should not purchase our shares if you
cannot afford to lose your entire investment. You should consider the following
risks before acquiring any of our shares.





We have never been, and may
never be, profitable.





During
the past several years, we have attempted, without success, to generate revenues
and profits. For the year ended March 31, 2009, we incurred a net loss of
$2,085,183. We cannot assure that we will ever be profitable.





We need additional
capital.





We need
additional financing to continue operations. The amount required depends upon
our business operations, and the capital needs of our acquisition of the certain
oil and gas leasehold interests. We may be unable to secure this additional
required financing on a timely basis, under terms acceptable to us, or at all.
To obtain additional financing, we will likely sell additional equity
securities, which will further dilute shareholders' ownership in us. Ultimately,
if we do not raise the required capital, we may need to cease
operations.





We are dependent upon our
key personnel.





We are
highly dependent upon the services of Kent A. Rodriguez, our President and Chief
Executive Officer. If he terminated his services with us, our business would
suffer.





There is only a limited
trading market for our securities.





Our
Common Stock is traded on the OTC Bulletin Board. The prices quoted may not
reflect the price at which you can resell your shares. Because of the low price
of our stock, we are subject to particular rules of the U.S. Securities and
Exchange Commission that make it difficult for stock brokers to solicit
customers to purchase our stock. This reduces the number of potential buyers of
our stock and may reduce the value of your shares. There can be no assurance
that a trading market for our stock will continue or that you will ever be able
to resell your shares at a profit, or at all.





Our management controls
us.





Our
current officers and directors own approximately 46% of our outstanding stock
and are able to affect the election of the members of our Board of Directors and
make corporate decisions. Mr. Rodriguez, by his ownership of Class A Preferred
Stock, has the right to vote 40% of our voting securities. Accordingly, even if
we issue additional shares to third parties, Mr. Rodriguez will continue to
control at least 40% of our voting securities. This voting concentration may
also have the effect of delaying or preventing a change in our management or
control or otherwise discourage potential acquirers from attempting to gain
control of us. If potential acquirers are deterred, you may lose an opportunity
to profit from a possible acquisition. See "Security  Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters" and
"Market for Common Equity and Related Stockholder Matters".




10
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A significant number of
shares will become eligible for public sale, potentially depressing our stock
price.





Under the
SEC's Rule 144, shares issued in issuances which are not registered with the SEC
generally first become eligible for public resale after six months. Shareholders
who are affliates of us generally may resell only a limited number of their
privately acquired shares after six months. After six months, stockholders who
are not affiliated with us may resell any number of their privately acquired
shares pursuant to Rule 144. The resale of the shares we have privately issued,
or the potential for their future public resale, may depress our stock
price.




Our governing documents and
Nevada law may discourage the potential acquisitions of our
business.





Our Board
of Directors may issue additional shares of capital stock and establish their
rights, preferences and classes, in most cases without stockholder approval. In
addition, we may become subject to anti-takeover provisions found in Section
89.378-78.379 of the Nevada Business Corporation Act which may deter changes in
control of our management which have not been approved by our Board of
Directors.





ITEM 7.  FINANCIAL STATEMENTS.





Our
audited Financial Statements begin on page F-1.





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





None.





ITEM 8A.  CONTROLS AND PROCEDURES





Our
principal executive and financial officers, after evaluating the effectiveness
of our "disclosure controls and procedures" (as defined in the Securities
Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the most recently
completed quarter covered by this report, have concluded that as of the end of
the most recently completed quarter, our disclosure controls and procedures were
effective to provide reasonable assurance that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act (i)
is accumulated and communicated to our management, including our Chief Executive
Officer, as appropriate to allow timely decisions regarding required disclosure,
and (ii) is recorded, processed, summarized and reported within the time periods
specified in the Commission's rules and forms.





There
have been no changes in our internal controls or in other factors that could
affect these controls during or subsequent to the end of the most recently
completed quarter.





ITEM8B.  OTHER INFORMATION





None.








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PART
III





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





Our
Directors and Executive Officers are shown below:


Name
                              
                              Age
                              
                              PositionKent
      Rodriguez
                              
                              
                              49
                              
                              Chief
      Executive Officer, President, Secretary, and Principal
      Financial OfficerJill
      Allison
                              
                              
                              41
                              
                              Vice
      PresidentDouglas
      Barton
                              
                              
                              68
                              
                              DirectorStephen
      Newton
                              
                              
                              59
                              
                              Director





Each
Director is serving a term of office, which will continue until the next annual
meeting of shareholders and until the election and qualification of his
respective successor.





KENT
A. RODRIGUEZ





Mr.
Rodriguez joined the Company as Chief Executive Officer, Secretary,
and Principal Financial Officerin May 2005. Since 1995, he has been the
Managing Partner of Weyer Capital Partners, a Minneapolis-based venture capital
corporation. From 1985 to 1995, he was employed by the First National Bank of
Elmore, Elmore, Minnesota, in various capacities. He has a B.A. degree from
Carleton College, and an Executive MBA from the Harvard Business
School.





JILL
ALLISON





Ms.
Allison joined the Company as Vice President and Director in June 2006. She has
over 20 years of diversified management experience in business development and
technology commercialization. Prior to joining Avalon, Ms. Allison managed a
technology strategy consulting practice with focus in the market convergence of
physical and IT security industries. Her venture development background includes
market leadership positions with Monsanto, Iridian Technologies, Pinkertons and
Cylink Corporation. She holds a B.A. in Economics from Gustavus Adolphus
College; a Master's in International Management (MIM) in Marketing from the
American Graduate School of International Management (Thunderbird), Glendale,
AZ; and an MBA in Strategic and Entrepreneurial Management from the Wharton
School of the University of Pennsylvania, where she focused on strategic
alliances and management of technology.





DOUGLAS
BARTON





Mr.
Barton has served as a Director of the Company since May 2005. From 1987 to the
present, he has been the President and sole owner of Venture Communications,
Inc., a private promotion, development, and marketing consulting firm. He has a
B.S. degree in Economics/History from the University of Minnesota.





STEPHEN
NEWTON





Mr.
Newton joined the Company as a director in October 2007. He has been working as
an Independent Energy Consultant, serving companies who wish to invest in Latin
America since March 2007. He received his Bachelors in Engineering in Mining and
Petroleum at the University of Queensland, Brisbane, Australia, and his Masters
of Science in Petroleum Engineering at the University of London, United Kingdom.
He is a member of the Society of Petroleum Engineers, and is the founding
President of the Colombian Petroleum Association (ACP). From 2004-2007, Mr.
Newton served as Chief Executive Officer and President of Solana Petroleum
Exploration Colombia, as well as serving as a Member of the Board of Directors.
He served as Vice President and Member of the Board of Directors for Solana
Petroleum Exploration from 2002-2004. Mr. Newton also worked as President and
General Manager of AEC Colombia and Ecuador. Prior to this position, Mr. Newton
served in various positions with Occidental Petroleum Corporation from
1974-1999, eventually becoming President of OXY Colombia and subsequently Vice
President of Worldwide Engineering and Technical Services.





The
Company's Directors will serve in such capacity until the next annual meeting of
the Company's shareholders and until their successors have been elected and
qualified. There are no family relationships among the Company's officers and
directors, nor are there any arrangements or understanding between any of the
directors or officers of the Company or any other person pursuant to which any
officer or director was or is to be selected as an officer or director. The
Directors took action eight (8) times by written consent during the fiscal year
ended March 31, 2008.





In 1999,
the Board of Directors established a Compensation Committee. It is currently
comprised of Messrs. Barton and Newton  The Compensation Committee
held one meeting in fiscal 2008.





In May
2000, the Board of Directors established an Audit Committee. It is currently
comprised of Messrs. Barton and Newton. The Audit Committee held one meeting in
fiscal 2008.





We have
adopted a Code of Ethics which is designed to ensure that our directors and
officers meet the highest standards of ethical conduct. The Code of Ethics
requires that our directors and officers comply with all laws and other legal
requirements, conduct business in an honest and ethical manner and otherwise act
with integrity and in our best interest.




12
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Involvement
in Legal Proceedings




We are
not aware that any of our officers and directors were, or have been involved in
any material legal proceedings which would have any effect upon the
Company.





Compliance with Section
16(a) of the Securities Exchange Act of 1934





Section
16(a) of the Securities Exchange Act of 1934 (the "34 Act") requires our
officers and directors and persons owning more than ten (10%) percent of our
Common Stock to file initial reports of ownership and changes in ownership with
the Securities and Exchange Commission ("SEC"). Additionally, Item 405 of
Regulation S-B under the 34 Act requires us to identify in our Form 10-KSB and
proxy statement those individuals for whom one of the above referenced reports
was not filed on a timely basis during the most recent fiscal year or prior
fiscal years. Given these requirements, we have the following report to make
under this section. None of our officers or directors, and all persons owning
more than ten percent of its shares have filed the subject reports, if required,
on a timely basis during the past fiscal year.


ITEM10.  EXECUTIVE COMPENSATION





The
following table sets forth information concerning the compensation for services
in all capacities rendered to us for the year ended March 31, 2009, of our Chief
Executive Officer and our other executive officers whose annual compensation
exceeded $100,000 in the fiscal year ended March 31, 2009, if any. We refer to
the Chief Executive Officer and these other officers as the named executive
officers.





SUMMARY
COMPENSATION TABLE




Name
      and
                                Principal
                                Position
                              
                              Year
                              
                              Salary
                                ($)
                              
                              Bonus
                                ($)
                              
                              
                              Stock
                                Awards
                                ($)
                              
                              
                              Option
                                Awards
                                ($)
                              
                              Non-Equity
                                Incentive
      Plan
                                Compensation
                                ($)
                              
                              
                              Nonqualified
                                Deferred
                                Compensation
                                Earnings
                                ($)
                              
                              
                              All
      Other
                                Compensation
                                ($)
      (2)
                              
                              
                              Total
                                ($)Kent
      Rodriguez
                              
                              2009
                              
                              $
                              120,000
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              40,000
                              
                              
                              $
                              160,000
                              (3)(4)CEO
      and President
                              
                              2008
                              
                              $
                              84,000
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              40,000
                              
                              
                              $
                              124,000
                              (1)(4)2007
                              
                              $
                              84,000
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              40,000
                              
                              
                              $
                              124,000
                              (1)(4)





(1) Effective on May
      31, 2005, Mr. Rodriguez became subject to an employment agreement pursuant
      to which he is paid $7,000 per month in
      wages.(2)
      Mr. Rodriguez owns the 100 shares of Preferred Stock
      outstanding.  These shares pay an 8%
dividend.(3) Effective On
      April 1, 2008, Mr. Rodriguez became subject to a new employment agreement
      pursuant
      to which he is paid $10,000 per month in
      wages.(4)
      We paid Mr. Rodriguez in 2007, in 2008 and in 2009 and accrued the
      balance.







Outstanding
Equity Awards at Fiscal Year-End as of March 31, 2009




Option
      Awards
                
                Stock
      Awards




Name
                                  
                                  Number
      of Securities Underlying Unexercised Options
                                    (#)
                                    Exercisable
                                  
                                  Number
      of Securities Underlying Unexercised Options
                                    (#)
                                    Unexercisable
                                  
                                  Equity
      Incentive Plan Awards: Number of Securities Underlying Unexercised
      Unearned Options
                                    (#)
                                  
                                  Option
      Exercise Price
                                    ($)
                                  
                                  Option
      Expiration Date
                                  
                                  Number
      of Shares or Units of Stock That Have Not Vested
                                    (#)
                                  
                                  Market
      Value of Shares or Units of Stock That Have Not Vested
                                    ($)
                                  
                                  Equity
      Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
      That Have Not Vested
                                    (#)
                                  
                                  Equity
      Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
      Other Rights That Have Not Vested
                                    ($)None
                                  
                                  -
                                  
                                  -
                                  
                                  -
                                  
                                  -
                                  
                                  -
                                  
                                  -
                                  
                                  -
                                  
                                  -
                                  
                                  -






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Director
Compensation




Name
                    
                    Fees
      Earned
                      or
      Paid in
                      Cash
                      ($)
                    
                    
                    Stock
                      Awards
                      ($)
      (2) (3)
                    
                    
                    Option
                      Awards
                      ($)
                    
                    
                    Non-Equity
                      Incentive
      Plan
                      Compensation
                      ($)
                    
                    
                    Nonqualified
                      Deferred
                      Compensation
                      Earnings
                      ($)
                    
                    
                    All
      Other
                      Compensation
                      ($)
                    
                    
                    Total
                      ($)Kent
      Rodriguez
                    
                    $
                    -
                    
                    
                    $
                    39,500
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    39,500Jill
      Allison
                    
                    $
                    -
                    
                    
                    $
                    39,500
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    39,500Douglas
      Barton
                    
                    $
                    -
                    
                    
                    $
                    39,500
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    39,500Stephen
      Newton
                    
                    $
                    -
                    
                    
                    $
                    39,500
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    39,500Menno
      Wiebe (1)
                    
                    $
                    -
                    
                    
                    $
                    39,500
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    39,500





(1)
      Menno Wiebe resigned from the Company’s Board of Directors on August 1,
      2008.(2)
      On April 14, 2008, the Company issued 200,000 shares of common stock to
      the 5 Directors of the Company. These shares were valued at $32,000
      each.(3)
      On October 8, 2008, the Company issued 250,000 shares of common stock to
      each of its 4 directors.  The shares were valued at $7,500
      each.




EMPLOYMENT
AGREEMENTS





The
Company has employment agreements with its two officers.  The
employment agreements provide for salaries and benefits and extend up to five
years.  In addition to salary and benefits provisions, the agreements
include defined commitments should the employer terminate the employee with or
without cause.





KENT
RODRIGUEZ





In 2009,
Mr. Rodriguez was under an employment agreement dated April 1, 2008 that expires
on March 31, 2013, pursuant to which he was compensated at an annual rate of
$120,000.  The agreement also provides for the increase of Mr.
Rodriguez’s base salary by 5% each year for the five year term of the
agreement.





JILL
ALLISON





In 2009,
Ms. Allison was under an employment agreement dated April 1, 2008 that expires
on March 31, 2011, pursuant to which she was compensated at a rate of $5,000 per
month, for an annual rate of $60,000.




14
 Table of Contents





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





The
following table sets forth certain information regarding ownership of our Common
Stock as of June 8, 2009 by (i) each person known by us to be the beneficial
owner of more than five (5%) percent of our outstanding Common Stock; (ii) each
director of our Company; and (iii) all executive officers and directors of our
Company as a group. As of June 8, 2009, we had a total of 99,265,002 common
shares issued and outstanding.





Amount
      and
                                                        %Nature
      of
                                                        of
      outstandingName
      of Beneficial Owner
                                                        
                                                        Beneficial
      ownership
                                                        Common stock (1)Kent
      Rodriguez7808
      Creekridge Circle, Suite 105Minneapolis,
      MN 55439
                                                        
                                                        68,286,768
                                                        46%Douglas
      Barton7808
      Creekridge Circle, Suite 105Minneapolis,
      MN 55439
                                                        
                                                        950,000
                                                        1%Jill
      Allison7808
      Creekridge Circle, Suite 105Minneapolis,
      MN 55439
                                                        
                                                        750,000
                                                        1%Menno
      Wiebe7808
      Creekridge Circle, Suite 105Minneapolis,
      MN 55439
                                                        (2)
                                                        500,000
                                                        1%Stephen
      Newton7808
      Creekridge Circle, Suite 105Minneapolis,
      MN 55439
                                                        
                                                        750,000
                                                        1%All
      directors and officers as a group
                                                        
                                                        71,236,768
                                                        48%Harry
      Carlson
                                                        
                                                        5,760,000
                                                        7%4
      Indian TrailLucas,
      TX 75002Orrie
      Lee Tawes
                                                        
                                                        6,425,000
                                                        8%100
      Wall Street, 8th FloorNew
      York, NY 10005Lorraine
      Dipaolo
                                                        
                                                        6,675,000
                                                        8%100
      Wall Street, 8th FloorNew
      York, NY 10005(1)
                                                        Includes
      10,100 shares of Common stock owned by Weyer Capital
      Corporation,an
      affiliate of Mr. Rodriguez, and 54,445,962 shares of Common Stock issuable
      uponthe
      conversion of 100 shares of Series A Preferred Stock.(2)
                                                        Mr.
      Wiebe resigned from the board of director effective as of August 1,
      2008.





15
 Table of Contents





ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS





Promissory
Notes





On
February 11, 2008, the Company borrowed $75,000 from an officer of the
corporation. The note carried a 10% interest rate and matured on March 31, 2008.
On April 18, 2008 the Company repaid $35,000 of the note plus accrued interest.
During the three months ended September 30, 2008, the Company made payments in
the amount of $40,000 to repay the remaining balance of  the note,
and  the Company also repaid accrued interest in the amount of $762.
The balance of the note at March 31, 2009 and 2008 was $0 and $75,000,
respectively.





Preferred
Stock





The 100
shares of Series A Preferred Stock, issued to an officer/director as payment for
$500,000 in promissory notes, are convertible into the number of shares of
common stock sufficient to represent 40 percent (40%) of the fully diluted
shares outstanding after their issuance. The Series A Preferred Stock pays an
eight percent (8%) dividend. The dividends are cumulative and payable quarterly.
The Series A Preferred Stock carries liquidating preference, over all other
classes of stock, equal to the amount paid for the stock plus any unpaid
dividends. The Series A Preferred Stock provides for voting rights on an "as
converted to common stock" basis.





During
the years ended March 31, 2009 and 2008, the Company incurred $40,000 in
preferred stock dividends, respectively.





The
Series A Preferred Stock is
convertible at any timeinto a sufficient number of shares of common
stock to equal 40% of the then fully-diluted shares outstanding. Fully diluted
shares outstanding is computed as the sum of the number of shares of common
stock outstanding plus the number of shares of common stock issuable upon
exerciser, conversion or exchange of outstanding options, warrants, or
convertible securities.





Employment
Agreements





KENT
RODRIGUEZ





In 2009,
Mr. Rodriguez employed pursuant to an employment agreement dated April
1, 2008 that expires on March 31, 2013, pursuant to which he was compensated at
an annual rate of $120,000.  The agreement also provides for the
increase of Mr. Rodriguez’s base salary by 5% each year for the five year term
of the agreement.





JILL
ALLISON





In 2009,
Ms. Allison employed pursuant to an employment agreement dated April
1, 2008 that expires on March 31, 2011, pursuant to which she was compensated at
a rate of $5,000 per month, for an annual rate of $60,000




16
 Table of Contents





ITEM13.  EXHIBITS AND REPORTS ON FORM
8-K




Exhibit
                                              Number
                                            
                                            Description3.1
                                            
                                            Restated
      Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to
      Registration Statement on Form SB-2, Registration No.
      33-74240C).*3.2
                                            
                                            Restated
      Bylaws (Incorporated by reference to Exhibit 3.2 to Registration Statement
      on Form SB-2, Registration No. 33-74240C). *3.3
                                            
                                            Articles
      of Incorporation for the State of Nevada. (Incorporated by reference to
      Exhibit 2.2 to Form 10-KSB filed February 2000) *3.4
                                            
                                            Articles
      of Merger for the Colorado Corporation and the Nevada Corporation
      (Incorporated by reference to Exhibit 3.4 to Form 10-KSB filed February
      2000) *3.5
                                            
                                            Bylaws
      of the Nevada Corporation (Incorporated by reference to Exhibit 3.5 to
      Form 10-KSB filed February 2000) *4.1
                                            
                                            Specimen
      of Common Stock (Incorporated by reference to Exhibit to Registration
      Statement on Form SB-2, Registration No. 33-74240C). *31.1
                                            
                                            Certification32.1
                                            
                                            Certification*
      Incorporated by reference to a previously filed exhibit or
      report.





ITEM14.  PRINCIPAL ACCOUNTANT FEES AND
SERVICES





1. AUDIT
FEES.




Our audit
fees for the years ended March 31, 2009 and 2008 were as follows:





2009
                              
                              
                              2008$
                              76,275
                              
                              
                              $
                              71,389





2. TAX
FEES.





Our tax
return fees for the years ended March 31, 2009 and 2008 were as
follows:





2009
                        
                        
                        2008$
                        15,000
                        
                        
                        $
                        -








3. ALL
OTHER FEES.





2009
                      
                      
                      2008$
                      -
                      
                      
                      $
                      -







17
 Table of Contents




SIGNATURES




In
accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto
duly authorized.




Avalon
      Oil & Gas, Inc.Date:
      July 14, 2009
            By:
            /s/ Kent
      RodriguezKent
      RodriguezChief
      Executive Officer, President,
                Secretary
      and Principal Financial Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed by the following persons on behalf of the Company in the capacities and
on the dates indicated.





Date:
      July 14, 2009
            By:
            /s/ Kent
      RodriguezKent
      RodriguezChief
      Executive Officer, President,
                Secretary
      and Principal Financial Officer





Date:
      July 14, 2009
            By:
            /s/ Jill
      AllisonJill
      AllisonVice
      President, Director





Date:
      July 14, 2009
            By:
            /s/ Douglas
      BartonDouglas
      BartonDirector





Date:
      July 14, 2009
            By:
            /s/ Stephen
      NewtonSteven
      NewtonDirector







18
 Table of Contents







REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the
Board of Directors and Stockholders of
 Avalon
Oil & Gas, Inc.
 
  We have
audited the accompanying consolidated balance sheets of Avalon Oil & Gas,
Inc. (“the Company”) and subsidiary as of March 31, 2009 and 2008 and the
related statements of operations, changes in stockholders’ equity and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
  We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit 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 audit 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 audit provides a
reasonable basis for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of March 31,
2009 and 2008 and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
  
  /s/
Bernstein & Pinchuk LLP
 
 New York,
New York
 July 14,
2009






F-1
 Table of Contents




AVALON
OIL & GAS, INC.


CONSOLIDATED
BALANCE SHEETS


AS
OF MARCH 31,





2009
                
                
                2008AssetsCurrent
      assetsCash
      and cash equivalents
                
                $
                26,406
                
                
                $
                108,688Accounts
      receivable
                
                
                40,827
                
                
                
                23,473Deposits
      and prepaid expenses
                
                
                43,340
                
                
                
                112,987Receivable
      from joint interests
                
                
                159,208Notes
      receivable
                
                
                -
                
                
                
                90,000Total
      current assets
                
                
                269,781
                
                
                
                335,148Property
      and equipment, net
                
                
                28,190
                
                
                
                41,105Unproven
      oil and gas properties
                
                
                339,417
                
                
                
                339,417Producing
      oil and gas properties, net
                
                
                2,652,591
                
                
                
                801,496Goodwill
                
                
                -
                
                
                
                33,943Intellectual
      property rights, net
                
                
                962,583
                
                
                
                1,183,392$
                4,252,562
                
                
                $
                2,734,501Liabilities
      and stockholders' equityCurrent
      liabilitiesAccounts
      payable and accrued liabilities
                
                $
                744,892
                
                
                $
                83,243Accrued
      liabilities – related parties
                
                
                34,468
                
                
                
                -Dividends payable to related party
                
                
                -
                
                
                
                12,404Accrued
      liabilities to joint interest
                
                
                42,265
                
                
                
                -Notes
      payable, net of discount
                
                
                600,982
                
                
                
                124,500Total
      current liabilities
                
                
                1,422,607
                
                
                
                220,147Accrued
      ARO liability
                
                
                67,865
                
                
                
                52,4581,490,472
                
                
                
                272,605Commitments
      and contingencies
                
                
                -Stockholders'
      equityPreferred
      stock, Series A, $0.10 par value, 1,000,000 sharesauthorized;
      100 shares issued and outstanding - stated at redemption
      value
                
                
                500,000
                
                
                
                500,000Common
      stock, $0.001 par value; 1,000,000,000 shares
      authorized;98,278,193
      and 31,767,463 shares issued and outstanding
                
                
                98,278
                
                
                
                31,768at
      March 31, 2009 and March 31, 2008, respectivelyAdditional
      paid-in capital - Common stock
                
                
                26,761,738
                
                
                
                24,446,046Common
      stock subscribed
                
                
                3,175
                
                
                
                -Accumulated
      deficit
                
                
                (24,601,101
                )
                
                
                (22,515,918
                )Total
      stockholder's equity
                
                
                2,762,090
                
                
                
                2,461,896$
                4,252,562
                
                
                $
                2,734,501




See notes
to consolidated financial statements.





F-2
 Table of Contents




AVALON
OIL & GAS, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)


FOR
THE YEARS ENDED MARCH 31,


(AUDITED)


2009
                
                
                2008Oil
      and gas sales
                
                $
                320,712
                
                
                $
                249,856Operating
      expenses:Lease
      operating expense, severance taxesand
      ARO accretion
                
                
                71,970
                
                
                
                150,136Selling,
      general and administrative expenses
                
                
                1,245,812
                
                
                
                1,225,206Stock-based
      compensation
                
                
                430,420
                
                
                
                1,747,860Acquisition
      costs
                
                
                122,500
                
                
                
                -Depreciation,
      depletion, and amortization
                
                
                438,221
                
                
                
                329,363Total
      operating expenses
                
                
                2,308,923
                
                
                
                3,452,565Operating
      loss
                
                
                (1,988,211
                )
                
                
                (3,202,709
                )Other
      expense:Interest
      (income) expense, net
                
                
                43,472
                
                
                
                20,478Loss
      on sale of minority interest
                
                
                37,500
                
                
                
                -Loss
      on the sale of property
                
                
                16,000
                
                
                
                -Realized
      losses on marketable securities
                
                
                -
                
                
                
                11,523Total
      other (income) expense
                
                
                96,972
                
                
                
                32,001Loss
      before  taxes
                
                
                (2,085,183
                )
                
                
                (3,234,710
                )Provision
      for taxes
                
                
                -
                
                
                
                -Loss
      before minority interest
                
                
                (2,085,183
                )
                
                
                (3,234,710
                )Minority
      interest in loss of subsidiary
                
                
                -
                
                
                
                5,183Net
      loss
                
                
                (2,085,183
                )
                
                
                (3,229,527
                )Dividends
      on preferred stock
                
                
                (40,000
                )
                
                
                (40,000
                )Net
      loss attributable to common stock after preferred stock
      dividends
                
                $
                (2,125,183
                )
                
                $
                (3,269,527
                )Net
      loss per share - basic and diluted
                
                $
                (0.04
                )
                
                $
                (0.15
                )Weighted
      average shares outstanding - basic and diluted
                
                
                57,636,261
                
                
                
                22,020,104




See notes
to consolidated financial statements.




F-3
 Table of Contents




AVALON
OIL & GAS, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
THE YEARS ENDED MARCH 31,


(AUDITED)





2009
                    
                    
                    2008Cash
      flows from operating activities:Net
      loss
                    
                    $
                    (2,085,183
                    )
                    
                    $
                    (3,234,710
                    )Adjustments
      to reconcile net loss to netcash
      used in operating activities:Loss
      on sale of minority interest in Bedford Energy
assets
                    
                    
                    37,500
                    
                    
                    
                    -Loss
      on sale of oil and gas properties
                    
                    
                    16,000
                    
                    
                    
                    -Write-off
      note receivable
                    
                    
                    25,000
                    
                    
                    
                    -Non-cash
      compensation
                    
                    
                    430,420
                    
                    
                    
                    1,820,410Impairment
      of goodwill
                    
                    
                    33,943
                    
                    
                    
                    -Depreciation
                    
                    
                    13,915
                    
                    
                    
                    6,529Depletion
                    
                    
                    192,794
                    
                    
                    
                    102,012Depreciation
      of ARO liability
                    
                    
                    2,898
                    
                    
                    
                    -Amortization
      of discount on notes payable to interest expense
                    
                    
                    7,792
                    
                    
                    
                    -Amortization
      of intangible assets
                    
                    
                    220,822
                    
                    
                    
                    220,822Net
      change in operating assets and liabilities:Marketable
      securities
                    
                    
                    -
                    
                    
                    
                    35,506Accounts
      receivable
                    
                    
                    (17,354
                    )
                    
                    
                    (11,830
                    )Joint
      Interest receivable
                    
                    
                    (159,208
                    )
                    
                    
                    -Prepaid
      expenses
                    
                    
                    69,647
                    
                    
                    
                    (55,002
                    )Accounts
      payable and other accrued expenses
                    
                    
                    121,985
                    
                    
                    
                    32,470Due
      to related party
                    
                    
                    42,265
                    
                    
                    
                    -Asset
      retirement obligation
                    
                    
                    5,795
                    
                    
                    
                    3,392Net
      cash used in operating activities
                    
                    
                    (1,040,969
                    )
                    
                    
                    (1,080,401
                    )Cash
      flows from investing activities:Purchase
      of Leak Location Technologies
                    
                    
                    -
                    
                    
                    
                    (5,000
                    )Purchase
      of BIO-CAT license
                    
                    
                    -
                    
                    
                    
                    (10,000
                    )Purchase
      of Oiltek
                    
                    
                    -
                    
                    
                    
                    (13,593
                    )Purchase
      of Bedford Energy assets
                    
                    
                    (900,000
                    )
                    
                    
                    -Purchase
      of interests in Grace Wells
                    
                    
                    (45,194
                    )
                    
                    
                    -Sale
      of a minority interest in Bedford Energy assets
                    
                    
                    262,500
                    
                    
                    
                    -Principal
      payment received on note receivable
                    
                    
                    65,000
                    
                    
                    
                    10,000Issuance
      of notes receivable
                    
                    
                    -
                    
                    
                    
                    (35,000
                    )Purchase
      of fixed assets
                    
                    
                    (1,000
                    )
                    
                    
                    (10,672
                    )Disposal
      of fixed assets
                    
                    
                    -
                    
                    
                    
                    194Disposal of oil and gas properties
                    
                    
                    10,000
                    
                    
                    
                    35,000Additions to oil and gas properties
                    
                    
                    (131,527
                    )
                    
                    
                    (686,229
                    )Net cash used in investing activities
                    
                    
                    (740,221
                    )
                    
                    
                    (715,300
                    )Cash
      flows from financing activities:Proceeds
      from sale of common stock, net of costs
                    
                    
                    1,044,191
                    
                    
                    
                    965,417Proceeds
      from notes payable
                    
                    
                    660,000
                    
                    
                    
                    75,000Syndication
      fees paid
                    
                    
                    -
                    
                    
                    
                    (6,565
                    )Issuance
      of common stock for finders fee
                    
                    
                    122,217
                    
                    
                    
                    -Issuance
      of common stock for equity financing, net of fees
                    
                    
                    32,500
                    
                    
                    
                    -Payment
      of preferred stock dividend
                    
                    
                    -
                    
                    
                    
                    (30,000
                    )Payments
      on note payable
                    
                    
                    (95,000
                    )
                    
                    
                    -Net cash provided by financing activities
                    
                    
                    1,698,908
                    
                    
                    
                    1,003,852Net
      decrease in cash and cash equivalents
                    
                    
                    (82,282
                    )
                    
                    
                    (791,849
                    )Cash
      and cash equivalents at beginning of period
                    
                    
                    108,688
                    
                    
                    
                    900,537Cash
      and cash equivalents at end of period
                    
                    $
                    26,406
                    
                    
                    $
                    108,688




See notes
to consolidated financial statements.




F-4
 Table of Contents




AVALON
OIL & GAS, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
THE YEARS ENDED MARCH 31, 2009 AND 2008


(AUDITED)


(Continued)




2009
              
              
              2008Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
              
              $
              2,524
              
              
              $
              -Taxes
              
              $
              -
              
              
              $
              -Non-cash
      transactions:Common
      stock issued in exchange for consulting services
              
              $
              240,420
              
              
              $
              1,570,085Preferential
      conversion feature of loan
              
              $
              -
              
              
              $
              25,852Common
      stock issued for directors fees
              
              $
              190,000
              
              
              $
              220,000Common
      stock issued for fees attributable to equity
    financing
              
              $
              120,000
              
              
              $
              -Common
      stock issued in error
              
              $
              27
              
              
              $
              -Common
      stock issued for conversion of note payable and accrued
      interest
              
              $
              36,966
              
              
              $
              63,000Warrants
      issued as a discount to notes payable
              
              $
              11,310
              
              
              $
              -Common
      stock issued as a discount on notes payable
              
              $
              458,000
              
              
              $
              -Warrants
      issued in exchange for services
              
              $
              -
              
              
              $
              30,325Common
      stock issued for technologies acquired
              
              $
              -
              
              
              $
              20,000Common
      stock issued for acquisition
              
              $
              428,425
              
              
              $
              -




See notes
to consolidated financial statements.





F-5
 Table of Contents


AVALON
OIL & GAS, INC.


STATEMENT
OF CHANGES IN SHAREHOLDERS’ DEFICIT


FOR
THE TWO YEARS ENDED MARCH 31, 2009


Stock
                          
                          
                          Common
                          
                          
                          Additional
                          
                          
                          OtherPreferred
      Stock, Series A
                          
                          
                          Common
      Stock
                          
                          
                          Subscription
                          
                          
                          Stock
                          
                          
                          Paid-in
                          
                          
                          Comprehensive
                          
                          
                          AccumulatedShares
                          
                          
                          Par
      Value
                          
                          
                          Shares
                          
                          
                          Par
      Value
                          
                          
                          Receivable
                          
                          
                          Subscribed
                          
                          
                          Capital
                          
                          
                          Income
                          
                          
                          Deficit
                          
                          
                          TotalBalance,
      March 31, 2007
                          
                          
                          100
                          
                          
                          
                          500,000
                          
                          
                          
                          17,037,706
                          
                          
                          
                          17,038
                          
                          
                          
                          (34,500
                          )
                          
                          
                          -
                          
                          
                          
                          21,529,910
                          
                          
                          
                          (4,459
                          )
                          
                          
                          (19,246,391
                          )
                          
                          
                          2,761,597Stock
      subscription received
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          34,500
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          34,500Common
      stock issued in exchange for consulting services
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          2,813,320
                          
                          
                          
                          2,813
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,567,271
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,570,084Common
      stock issued in exchange for director services
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          400,000
                          
                          
                          
                          400
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          219,600
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          220,000Common
      stock issued for cash
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          4,994,739
                          
                          
                          
                          4,995
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          960,423
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          965,418Common
      stock issued for property acquisitions
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          250,000
                          
                          
                          
                          250
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          45,750
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          46,000Common
      stock issued in exchange for conversion of notes payable and accrued
      interest
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          6,050,000
                          
                          
                          
                          6,050
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          73,702
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          79,752Warrants
      issued in exchange for services
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          30,325
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          30,325Warrants
      exercised
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          221,698
                          
                          
                          
                          222
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (222
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Syndication
      fees
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (6,565
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (6,565
                          )Beneficial
      conversion feature of loan
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          25,852
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          25,852Realized
      loss on investments held for resale
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          4,459
                          
                          
                          
                          -
                          
                          
                          
                          4,459Dividends
      on preferred stock
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (40,000
                          )
                          
                          
                          (40,000
                          )Net
      Loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (3,229,527
                          )
                          
                          
                          (3,229,527
                          )Balance
      as of March 31, 2008
                          
                          
                          100
                          
                          
                          $
                          500,000
                          
                          
                          
                          31,767,463
                          
                          
                          $
                          31,768
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          24,446,046
                          
                          
                          $
                          -
                          
                          
                          $
                          (22,515,919
                          )
                          
                          $
                          2,461,894Common
      stock issued for cash
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          13,349,317
                          
                          
                          
                          13,346
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,030,942
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,044,289Common
      stock issued for directors fees
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          2,000,000
                          
                          
                          
                          2,000
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          188,000
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          190,000Common
      stock issued for consulting services
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          5,700,000
                          
                          
                          
                          5,700
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          189,720
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          195,420Common
      stock issued for equity commission
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,100,000
                          
                          
                          
                          1,100
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          43,900
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          45,000Common
      stock issued for conversion of note payable
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          8,350,000
                          
                          
                          
                          8,350
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          28,616
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          36,966Common
      stock issued for asset acquisition
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          3,500,000
                          
                          
                          
                          3,500
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          424,926
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          428,426Common
      stock issued for property interest
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          7,859,250
                          
                          
                          
                          7,862
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          180,763
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          188,625Common
      stock issued for finders fee
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          3,000,000
                          
                          
                          
                          3,000
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          117,000
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          120,000Common
      stock issued in error
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          27,163
                          
                          
                          
                          27
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (27
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Common
      stock shares cancelled
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (375,000
                          )
                          
                          
                          (375
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          375
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Common
      stock issued as a discount to notes payable
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          22,000,000
                          
                          
                          
                          22,000
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          436,000
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          458,000Common
      stock to be issued for conversion of note payable
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          2,167
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          2,167Common
      stock to be issued for property interest
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,008
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,008Value
      of warrants issued
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          11,310
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          11,310Syndication
      fees
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (335,833
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (335,833
                          )Net
      loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (2,085,183
                          )
                          
                          
                          (2,085,183
                          )Balance
      as of March 31, 2009
                          
                          
                          100
                          
                          
                          $
                          500,000
                          
                          
                          
                          98,278,193
                          
                          
                          $
                          98,278
                          
                          
                          $
                          -
                          
                          
                          $
                          3,175
                          
                          
                          $
                          26,761,738
                          
                          
                          $
                          -
                          
                          
                          $
                          (24,601,101
                          )
                          
                          $
                          2,762,090





See notes
to consolidated financial statements.




F-6
 Table of Contents




AVALON
OIL & GAS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED MARCH 31, 2009 AND 2008





NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Nature of
Operations





Avalon
Oil & Gas, Inc. (the "Company") was originally incorporated in Colorado in
April 1991 under the name Snow Runner (USA), Inc. The Company was the general
partner of Snow Runner (USA) Ltd.; a Colorado limited partnership to sell
proprietary snow skates under the name "Sled Dogs" which was dissolved in August
1992. In late 1993, the Company relocated its operations to Minnesota and in
January 1994 changed our name to Snow Runner, Inc. In November 1994 we changed
our name to the Sled Dogs Company. On November 5, 1997, we filed for protection
under Chapter 11 of the U.S. Bankruptcy Code. In September 1998, we emerged from
protection of Chapter 11 of the U.S. Bankruptcy Code. In May, 1999, we changed
our state of domicile to Nevada and our name to XDOGS.COM, Inc. On July 22,
2005, the Board of Directors and a majority of the Company's shareholders
approved an amendment to our Articles of Incorporation to change the Company's
name to Avalon Oil & Gas, Inc., and to increase the authorized number of
shares of our common stock from 200,000,000 shares to 1,000,000,000
shares,  par value of $0.001, and engage in the acquisition of
producing oil and gas properties.





The
Company is currently in the process of raising funds to acquire oil and gas
properties and related oilfield technologies, which the Company plans to develop
into commercial applications.





On July
17, 2006, the Company purchased all the outstanding shares of Ultrasonic
Mitigation Technologies, Inc. (UMTI) from UTEK Corporation for 16,250,000 shares
of the Company's Common Stock valued at $695,500. The shares were valued at the
average sales price received in private placements for sales of restricted
common stock for cash. UMTI became a wholly owned subsidiary of the Company as
of the date of acquisition. UMTI holds the technology license of a patented
process for paraffin wax mitigation from crude oil using ultrasonic waves
developed by the University of Wyoming.





On
November 9, 2006, the Company purchased all the outstanding shares of
Intelli-Well Technologies, Inc. (IWTI) from UTEK Corporation for 20,000,000
shares of the Company's common stock valued at $594,000. The shares were valued
at the average sales price received in private placements for sales of
restricted common stock for cash. ITWI became a wholly owned subsidiary of the
Company as of the date of acquisition. IWTI holds a non-exclusive license in the
United States for a borehole casing technology developed by the Regents of the
University of California (the "Regents") through its researchers at Lawrence
Livermore National Laboratory.





On March
28, 2007, the Company purchased all the outstanding shares of Leak Location
Technologies, Inc. (LLTI) from UTEK Corporation for 36,710,526 shares of the
Company's common stock valued at $1,090,303. The shares were valued at the
average sales price received in private placements for sales of restricted
common stock for cash. LLTI became a wholly owned subsidiary of the Company as
of the date of acquisition. LLTI holds a non-exclusive license in the United
States for a leak detection and location technology developed by the Rensselaer
Polytechnic Institute ("Rensselaer") through its researcher Michael
Savic.





On
September 22, 2007 the Company entered into an agreement with respect to its
purchase of a 75.6% interest in Oiltek, Inc. (Oiltek) for $50,000 and the right
of Oiltek to market Avalon's intellectual property. Oiltek is consolidated in
these financial statements with a minority interest shown.





In June
2008, the Company entered into an agreement with Bedford Energy to acquire a
2.5% working interest in Grace Well #2 in East Chandler Field, Oklahoma, which
had been producing 350 thousand cubic feet of gas per day.  In August
2008, the Company entered into an additional agreement with
Bedford  Energy (the “Expanded Bedford Agreement”) to increase its
working interest in the Grace #2 from 2.5% to 7.5%; and to increase its net
revenue interest in the Grace #2 to 11.95%. In addition, the Company acquired a
10% working interest and a 13.825% net revenue interest in the Grace #1, Grace
#3, Grace #5A and Grace #6 wells.  The Hunton Lime Reserves from the
Grace #1, the Grace #3 and the Grace #6 wells are estimated to be 48,000 barrels
of oil and 423 million cubic feet of gas.  The Upper Red Fork Sand
reserves for the Grace #5A are estimated to be 30 million cubic feet of
gas.  The Company also acquired the right to operate the Grace Wells,
and is attempting to increase its ownership in these wells. See note
2.





In
September 2008, the Company sold a 15% of its recently acquired interest in the
Bedford Assets, for cash in the amount of $262,500.





The
Company also acquired an undivided fifty (50%) percent interest in a salt water
disposal well and offset and development acreage in the two quarter sections of
the East Chandler Field.  In addition, the Company acquired a fifty
(50%) percent interest in 540 acres adjoining the 320 acre East Chandler Field,
and total reserves of 90,000 barrels of oil and 559 million cubic feet of
gas.  In addition, the Company also acquired Prue Sand potential in
the Grace #3, Grace #5A and the Grace #6 wells.   Estimated Prue
Sand reserves for these three wells are 33,000 barrels of oil and 81 million
cubic feet of gas.





Basis of
consolidation





The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Ultrasonic Mitigation Technologies, Inc.;
Intelli-Well Technologies, Inc. and Leak Location Technologies, Inc. along
with  75.6 % owned Oiltek, Inc. All significant inter-company items
have been eliminated in consolidation.




F-7
 Table of Contents




AVALON
OIL & GAS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED MARCH 31, 2009 AND 2008


Going
Concern





The March
31, 2009, financial statements have been prepared assuming the Company will
continue as a going concern. However, the Company has incurred a loss of
$24,601,101  from inception through March 31, 2009, and has a working
capital deficiency  of $1,152,826   and shareholder’s equity
of $2,762,090, respectively, at March 31, 2009. The Company currently has
minimal revenue generating operations and expects to incur substantial operating
expenses in order to expand its business. As a result, the Company expects to
incur operating losses for the foreseeable future.  The accompanying
consolidated financial statements do not include any adjustments that might
become necessary should the Company be unable to continue as a going
concern.




Use
of Estimates





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





Basis of
Accounting





The
Company's financial statements are prepared using the accrual method of
accounting. Revenues are recognized when earned and expenses when
incurred.




Cash
Equivalents





Cash and
cash equivalents consist primarily of cash on deposit, certificates of deposit,
money market accounts, and investment grade commercial paper that are readily
convertible into cash and purchased with original maturities of three months or
less. The Company maintains its cash balances at several financial institutions.
Accounts at the institutions are insured by the Federal Deposit Insurance
Corporation up to $250,000.





Investments





The
Company classifies its debt and marketable securities into held-to-maturity,
trading, or available-for-sale categories. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Debt securities for which the Company does not have
the intent or ability to hold to maturity are classified as available for sale.
Held-to-maturity securities are recorded as either short-term or long-term on
the balance sheet based on contractual maturity date and are stated at amortized
cost. Marketable securities that are bought and held principally for the purpose
of selling them in the near term are classified as trading securities and are
reported at fair value, with unrealized gains and losses recognized in earnings.
Debt and marketable equity securities are classified as available-for-sale and
are carried at fair market value, with the unrealized gains and losses, net of
tax, included in the determination of comprehensive income and reported in
shareholder's equity.





The fair
value of substantially all securities is determined by quoted market prices.
Gains or losses on securities sold are based on the specific identification
method. As of March 31, 2009, all investments are considered to be
available-for-sale for financial reporting purposes.





Fair Value of Financial
Instruments





The
Company's financial instruments are cash and cash equivalents, accounts
receivable, accounts payable, notes payable, and long-term debt. The recorded
values of cash and cash equivalents, accounts receivable, and accounts payable
approximate their fair values based on their short-term nature. The recorded
values of notes payable and long-term debt approximate their fair values, as
interest approximates market rates.





Accounts
Receivable





Management
periodically assesses the collectability of the Company's accounts receivable.
Accounts determined to be uncollectible are charged to operations when that
determination is made. All of the Company's accounts receivable are concentrated
in the oil industry and are believed to be fully collectable.





Oil and Natural Gas
Properties





The
Company follows the full cost method of accounting for natural gas and oil
properties, prescribed by the Securities and Exchange Commission ("SEC".) Under
the full cost method, all acquisition, exploration, and development costs are
capitalized. The Company capitalizes all internal costs, including: salaries and
related fringe benefits of employees directly engaged in the acquisition,
exploration and development of natural gas and oil properties, as well as
other  identifiable general and administrative costs associated with
such activities.




F-8
 Table of Contents




AVALON
OIL & GAS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED MARCH 31, 2009 AND 2008




All
capitalized costs of natural gas and oil properties, including the estimated
future costs to develop reserves, are amortized (depleted) on the
units-of-production method using estimates of proved reserves. Investments in
unproved reserves and major development projects are not amortized until proved
reserves associated with the projects can be determined or until impairment
occurs. If the results of an assessment indicate that the properties
are  impaired, the amount of the impairment is added to the
capitalized costs to be amortized. Abandonment of natural gas and oil properties
are accounted for as adjustments of capitalized costs; that is, the cost of
abandoned properties is charged to the full cost pool and
amortized.





Under the
full cost method, the net book value of natural gas and oil properties, less
related deferred income taxes, may not exceed a calculated "ceiling". The
ceiling is the estimated after-tax future net revenue from proved natural gas
and oil properties, discounted at ten percent (10%) per annum, plus the lower of
cost or fair market value of unproved properties adjusted for the present value
of all future oil and gas hedges. In calculating future net revenues, prices and
costs in effect at the time of the calculation are held constant indefinitely,
except for changes that are fixed and determinable by existing contracts. The
net book value is compared to the ceiling on a quarterly basis. The excess, if
any, of the net book value above the ceiling is required to be written off as an
expense. During the years ended March 31, 2009 and 2008, the Company did not
recognize any impairment expense.  Acquisition costs are expensed as
incurred.




Other Property and
Equipment





Other
property and equipment is reviewed on an annual basis for impairment and as of
March 31, 2009, the Company had not identified any such impairment. Repairs and
maintenance are charged to operations when incurred and improvements and
renewals are capitalized.





Other
property and equipment are stated at cost. Depreciation is calculated using the
straight-line method for financial reporting purposes and accelerated methods
for tax purposes.





Their
estimated useful lives are as follows:





Office
Equipment:  5-7 Years





Asset Retirement
Obligations





In
accordance with the provisions of SFAS No. 143, Accounting for Asset Retirement
Obligations, the Company records the fair value of its liability for asset
retirement obligations in the period in which it is incurred and a corresponding
increase in the carrying amount of the related long live assets. Over time, the
liability is accreted to its present value at the end of each reporting period,
and the capitalized cost is depreciated over the useful life of the related
assets. Upon settlement of the liability, the Company will either settle the
obligation for its recorded amount or incur a gain or loss upon settlement. The
Company's asset retirement obligations relate to the plugging and abandonment of
its oil properties.





Intangible
Assets





The cost
of licensed technologies acquired is capitalized and will be amortized over the
shorter of the term of the licensing agreement or the remaining life of the
underlying patents.





The
Company evaluates recoverability of identifiable intangible assets whenever
events or changes in circumstances indicate that intangible assets carrying
amount may not be recoverable. Such circumstances include, but are not limited
to: (1) a significant decrease in the market value of an asset, (2) a
significant adverse change in the extent or manner in which an asset is used, or
(3) an accumulation of cost significantly in excess of the amount originally
expected for the acquisition of an asset. The Company measures the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with it.





Should
the sum of the expected cash flows be less than the carrying amount of assets
being evaluated, an impairment loss would be recognized. The impairment loss
would be calculated as the amount by which the carrying amount of the assets,
exceed fair value. For the year ended March 31, 2007, the Company recognized an
impairment loss of $371,925 related to Intelli-Well Technologies, there was no
such impairment for the years ended March 31, 2009 and 2008.





Estimated
amortization of intangible assets over the next five years is as
follows:





March
31,2010
                      
                      $
                      220,8222011
                      
                      
                      220,8222012
                      
                      
                      220,8222013
                      
                      
                      220,8222014
                      
                      
                      79,295$
                      962,583




F-9
 Table of Contents




AVALON
OIL & GAS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED MARCH 31, 2009 AND 2008


Stock Based
Compensation





In
December 2004, the Financial Accounting Standards Board Issued Statement of
Financial Accounting Standards No. 123R (FAS-123R), Share Based Payment, which
is a revision of Statement of Financial Accounting Standards No. 123 (FAS-123),
Accounting for Stock-Based Compensation.





FAS-123R
eliminates accounting for share-based compensation transaction using the
intrinsic value method prescribed in Accounting Principles Board Opinion No.25
(APB-25, Accounting for Stock Issued to Employees), and requires instead that
such transactions be accounted for using a fair-value-based method. The Company
has elected to adopt the provisions of FAS-123R effective January 1, 2006, under
the modified prospective transition method, in which compensation cost was
recognized beginning with the effective date (a) based on the requirements of
FAS-123R for all share-based payments granted after the effective date and (b)
based on the requirements of FAS 123-R for all awards granted to employees prior
to the effective date of FAS-123R that remain unvested on the effective
date.





As
permitted under FAS-123, the Company elected to follow Accounting Principles
Board Opinion No.25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for stock-based awards to employees through
December 31, 2005. Accordingly, compensation cost for stock options and
non-vested stock grants was measured as the excess, if any, of the market price
of the Company's common stock at the date of the grant over the exercise
price.





With the
adoption of FAS-123R, the Company elected to amortize stock-based compensation
for awards granted on or after the adoption of FAS-123R on January 1, 2006, on a
straight-line basis over the requisite service (vesting) period for the entire
award. For awards granted prior to January 1, 2006, compensation costs are
amortized in a manner consistent with Financial Accounting Standards Boards
Interpretation No. 28 (FIN-28), Accounting for Stock Appreciation Rights and
Other Variable Stock Option of Award Plans. This is the same manner applied in
the pro-forma disclosures under FAS-123.




Warrants





The value
of warrants issued is recorded at their fair values as determined by use of a
Black Scholes Model at such time or over such periods as the warrants
vest.





Earnings per Common
Share





Statement
of Financial Accounting Standards ("SFAS") 128, Earnings Per Share, requires
presentation of "basic" and "diluted" earnings per share on the face of the
statements of operations for all entities with complex capital structures. Basic
earnings per share are computed by dividing net income by the weighted average
number of common shares outstanding for the period. Diluted earnings per share
reflect the potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted during the period. Dilutive
securities having an antidilutive effect on diluted earnings per share are
excluded from the calculation.





Income
Taxes





Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial   statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets, including tax loss and credit carryforwards, and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred income tax expense represents the change during the
period in the deferred tax assets and deferred tax liabilities. The components
of the deferred tax assets and liabilities are individually classified as
current and non-current based on their characteristics. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.





In July
2006, the Financial Accounting Standards Board (FASB) issued Interpretation No.
48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB
Statement No. 109 (FIN 48). FIN 48 is intended to clarify the accounting for
uncertainty in income taxes recognized in a company's financial statements and
prescribes the recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.





Under FIN
48, evaluation of a tax position is a two-step process. The first step is to
determine whether it is more-likely-than-not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement.





Tax
positions that previously failed to meet the more-likely-than-not recognition
threshold should be recognized in the first subsequent  period in
which the threshold is met. Previously recognized tax positions that no longer
meet the more-likely-than-not criteria should be de-recognized in the first
subsequent financial reporting period in which the threshold is no longer
met.





The
adoption of FIN 48 at January 1, 2007 did not have a material effect on the
Company's financial position.




F-10
 Table of Contents




AVALON
OIL & GAS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED MARCH 31, 2009 AND 2008


Reclassifications





Certain
reclassifications have been made to the prior years' financial statements to
conform to the current year presentation. These reclassifications had no effect
on previously reported results of operations or retained earnings.




Revenue
Recognition





In
accordance with the requirements of SEC Staff Accounting Bulletin Topic 13A
"Revenue Recognition", revenues are recognized at such time as (1) persuasive
evidence of an arrangement exists, (2) delivery has occurred or services have
been rendered, (3) the seller's price to the buyer is fixed or determinable and
(4) collectibility is reasonably assured. Specifically, oil and gas sales are
recognized as income at such time as the oil and gas are delivered to a viable
third party purchaser at an agreed price. Interest income is recognized as it is
earned.




Long-Lived
Assets
  Equipment
is stated at acquired cost less accumulated depreciation.  Laboratory
and office equipment are depreciated on the straight-line basis over the
estimated useful lives (three to seven years).
  Impairment
of long-lived assets is recognized when events or changes in circumstances
indicate that the carrying amount of the asset or related group of assets may
not be recoverable.  If the expected future undiscounted cash flows
are less than the carrying amount of the asset, an impairment loss is recognized
at that time.  Measurement of impairment may be based upon appraisal,
market value of similar assets or discounted cash flows. During the year ended
March 31, 2009, the Company recognized an impairment expense on goodwill in the
amount of $33,943, there is no such expense in the comparable
period.


Recently Issued Accounting
Standards





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities--an amendment of FASB Statement No. 133 (FAS 161). FAS 161
changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity's financial position, financial performance, and cash flows.
The guidance in FAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged. This Statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. The Company is
currently assessing the impact of FAS 161.




NOTE
2:   RECEIVABLE FROM JOINT INTERESTS





The
Company is the operator of certain wells acquired in the Expanded Bedford
Agreement (see note 6).  Pursuant to a joint interest operating
agreement (the “Joint Interest Agreement”), the Company  bills the
other owners of the Grace Wells for their pro-rata share of operating and
workover expenses.  These receivables are carried on the Company’s
balance sheet as Receivable from Joint Interests   At March 31,
2009, the amount of these receivables is $159,208.





NOTE  3:
NOTES RECEIVABLE





On
December 11, 2006 the Company loaned $65,000 to an individual, which was due on
April 1, 2007 with an interest rate of 13%. The Company received a promissory
note evidencing the loan. The note is secured by real property. An interest only
payment of $3,163 was made on the note and it was extended until October 1,
2007. The principal and interest of this loan was repaid on October 14,
2008.





On
September 12, 2007 the Company loaned $25,000 to a company, which was due on
November 5, 2007 with an interest rate of 10%. The Company received a promissory
note evidencing the loan. The note is unsecured. The loan is now past due.
  This note receivable and interest receivable was impaired during the
year ended March 31, 2009, as the Company no longer believes that collectability
is likely.





NOTE 4:
PROPERTY AND EQUIPMENT





A summary
of property and equipment at March 31, 2009 and 2008, is as
follows:





March
      31, 2009
                        
                        
                        March
      31, 2008Office
      Equipment
                        
                        $
                        41,778
                        
                        
                        $
                        41,778Leasehold
      improvements
                        
                        
                        7,989
                        
                        
                        
                        6,98949,767
                        
                        
                        
                        48,767Less:
      Accumulated depreciation
                        
                        
                        (21,577
                        )
                        
                        
                        (7,662
                        )Total
                        
                        $
                        28,190
                        
                        
                        $
                        41,105




Depreciation
expense for the years ended March 31, 2009 and 2008 was $13,915 and $6,529,
respectively.


F-11
 Table of Contents




AVALON
OIL & GAS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED MARCH 31, 2009 AND 2008




NOTE 5:
INTELLECTUAL PROPERTY RIGHTS





A summary
of the intellectual property rights at March 31, 2009 and 2008, are as
follows:





March
      31, 2009
                        
                        
                        March
      31, 2008Ultrasonic
      Mitigation Technology
                        
                        $
                        425,850
                        
                        
                        $
                        425,850Intelli-Well
      Technologies
                        
                        
                        391,500
                        
                        
                        
                        391,500Leak
      Location Technology
                        
                        
                        980,303
                        
                        
                        
                        980,303BIO-CAT
      Well and pipeline
                        
                        
                        30,000
                        
                        
                        
                        30,0001,827,653
                        
                        
                        
                        1,827,653Less:
      accumulated amortization
                        
                        
                        (865,070
                        )
                        
                        
                        (644,261
                        )Total
                        
                        $
                        962,583
                        
                        
                        $
                        1,183,392





Amortization
expense for the years ended March 31, 2009 and 2008 was
$220,822.





NOTE 6:
OIL AND GAS PROPERTY ACTIVITY





In April
2008, the Company increased its working interest in the Janssen #1A well to 7.5%
for $37,500.





In June
2008, the Company acquired a 2.5% working interest in the Grace #2 well in the
East Chandler Field in Oklahoma for $40,000.





In June
2008, the Company entered into an agreement with Bedford Energy to acquire a
2.5% working interest in Grace Well #2 in East Chandler Field, Oklahoma, which
had been producing 350 thousand cubic feet of gas per day.  In August
2008, the Company entered into an additional agreement with
Bedford  Energy (the “Expanded Bedford Agreement”) to increase its
working interest in the Grace #2 from 2.5% to 7.5%; and to increase its net
revenue interest in the Grace #2 to 11.95%. In addition, the Company acquired a
10% working interest and a 13.825% net revenue interest in the Grace #1, Grace
#3, Grace #5A and Grace #6 wells.  The Hunton Lime Reserves from the
Grace #1, the Grace #3 and the Grace #6 wells are estimated to be 48,000 barrels
of oil and 423 million cubic feet of gas.  The Upper Red Fork Sand
reserves for the Grace #5A are estimated to be 30 million cubic feet of
gas.




In
September 2008, the Company sold a 15% of its recently acquired interest in the
Bedford Assets, for cash in the amount of $262,500, resulting in a loss of
$37,500.





In
December 2008, the Company and Bedford Energy, Inc. agreed to amend the Original
Bedford Agreement, and on December 8, 2008, the Company entered into an amended
agreement with Bedford Energy.  Pursuant to the terms of the Amended
Bedford Agreement, The
Company would pay a total of $900,000 in cash (reduced from $1,000,000 in the
Original Bedford Agreement), and  provide a note in the amount of
$400,000 (reduced from $750,000 in the Original Bedford Agreement and
subsequently cancelled when the Company agreed to assume accounts payable in the
amount of $222,273 (increased from $0 in the original agreement)
and  issue a total of 3,500,000 shares of its common stock (increased
from 2,500,000 in the original agreement).The Company closed
this transaction on December 22, 2008.





The
Company also acquired an undivided fifty (50%) percent interest in a salt water
disposal well and offset and development acreage in the two quarter sections of
the East Chandler Field.  In addition, the Company acquired a fifty
(50%) percent interest in 540 acres adjoining the 320 acre East Chandler Field,
and total reserves of 90,000 barrels of oil and 559 million cubic feet of
gas.  In addition, the Company also acquired Prue Sand potential in
the Grace #3, Grace #5A and the Grace #6 wells.   Estimated Prue
Sand reserves for these three wells are 33,000 barrels of oil and 81 million
cubic feet of gas





As part
of the  Expanded Bedford Agreement, the Company also acquired the
right to operate Grace Wells #1, #2, #3, #5A, and #6 (the “Grace
Wells”).  The Company hired a third party to operate the Grace Wells
and to upgrade the operation of the Grace Wells
(“Workover”).   In February and March 2009, the Company made for
mal buyout offers (the “Grace Wells Buyout Offer”) to the approximately 93
additional working interest holders in the Grace Wells (the “Additional Grace
Wells Owners”).  The Grace Wells Buyout Offer provided three options
to the Additional Grace Wells Owners:   (1) The Additional Grace
Wells Owners would continue to participate in the operation of the Grace Wells,
and would remit to the Company fund representing their pro rata portion of the
Workover costs; (2) The Additional Grace Wells Owners would sell their interests
in the Grace Wells to the Company for cash and stock in the Company; (3) The
Additional Grace Wells Owners could do nothing. If this option was chosen, the
Additional Grace Well Owner would retain their interest in the Grace Wells, but
their pro-rata portion of the costs would be subject to a 500% penalty; in
addition, their pro-rata portion of the revenue generated by the Grace Wells
would be applied to their portion of the costs, including the 500% penalty,
before they would receive any payment.  At March 31, 2009, the
approximately 93 Grace Wells investors had selected the following
options:  Approximately 22 selected option 1, continued participation;
29 selected option 2, the Company buyout; 17 were in Option 3, non-consent; and
25 were still pending and had not made a selection.




F-12
 Table of Contents




AVALON
OIL & GAS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED MARCH 31, 2009 AND 2008





The table
below shows the Company’s working interests in the Grace Wells as of March 31,
2009:




Well
                                          
                                          Working
      Interest AcquiredGrace
      #1
                                          
                                          
                                          38
                                          %Grace
      #2
                                          
                                          
                                          27
                                          %Grace
      #3
                                          
                                          
                                          34
                                          %Grace
      #5A
                                          
                                          
                                          34
                                          %Grace
      #6
                                          
                                          
                                          30
                                          %




Producing
oil and gas properties consist of the following:





March
      31, 2009
                      
                      
                      March
      31, 2008Lincoln
      County, Oklahoma
                      
                      $
                      1,972,606
                      
                      
                      $
                      -Other
      properties, net
                      
                      
                      999,285
                      
                      
                      
                      927,043Less:
      Depletion
                      
                      
                      (319,300
                      )
                      
                      
                      (125,547
                      )Net
                      
                      $
                      2,652,591
                      
                      
                      $
                      801,496





NOTE 7:
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES





Accounts
payable and accrued liabilities consisted of the following:





March
      31, 2009
                      
                      
                      March
      31, 2008Accounts
      payable
                      
                      $
                      706,961
                      
                      
                      $
                      81,869Accrued
      interest
                      
                      
                      37,931
                      
                      
                      
                      1,374Total
                      
                      $
                      744,892
                      
                      
                      $
                      83,243




NOTE 8:
NOTES PAYABLE





March
      31, 2009
                
                March  31,
      2008On
      May 8, 2005, the Company entered into a convertible note payable agreement
      with a shareholder in the amount of $100,000.  The note carries
      an interest rate of 10% per annum and matures of November 8,
      2006.  The note holder has the right to convert the note and
      accrued interest at a rate of $0.01 per share.  The value of
      this conversion feature was treated as a loan discount for the full
      $100,000 of the loan and was amortized to interest expense over the life
      of the loan.   On May 8, 2007 the note was extended for one
      year.  The conversion feature of the note was valued at $25,852
      and was treated as a prepaid loan costs.  The prepaid loan costs
      have been amortized over the life of the new note. On October 19, 2007,
      the note holder converted $30,000 of principal plus accrued interest of
      $16,152 for 1,350,000 shares of common stock. On November 30, 2007, the
      note holder converted $10,000 of principal for 950,000 shares of common
      stock. On January 31, 2008, the note holder converted $10,000 of principal
      and accrued interest of $600 for 1,250,000 shares of common stock. On
      February 29, 2008, the note holder converted $8,000 of principal for
      1,250,000 shares of common stock. On March 31, 2008, the note holder
      converted $5,000 of principal for 1,250,000 shares of common stock. On
      March 31, 2008, the note holder converted $5,000 of principal for
      1,250,000 shares of common stock. On June 6, 2008, the note holder
      converted $7,000 of principal and $1,372 of accrued interest for 1,550,000
      shares of common stock. On June 23, 2008, the note holder converted
      $10,000 of principal and $395 of accrued interest for 1,500,000 shares of
      common stock. On October 15, 2008, the note holder converted $5,000 of
      principal and $10,000 of interest for 3,300,000 shares of common stock. On
      December 3, 2008, the note holder converted $3,000 of principal and $201
      of interest for 2,000,000 shares of common stock. On February 24, 2009,
      the note holder converted $2,000 of principal and $167 of accrued interest
      into 4,000,000 shares of common stock.  Interest in the amount
      of $1,264 and $1,911 was accrued on this note during the twelve months
      ended March 31, 2009 and 2008, respectively.  As of March 31,
      2009 this note is in default. As of March 31, 2009, the 4,000,000 shares
      for the conversion on February 24, 2009 have not been
    issued.
                
                $
                10,000
                $
                37,000


F-13
 Table of Contents
  AVALON
OIL & GAS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED MARCH 31, 2009 AND 2008


On
      February 11, 2008, the Company entered in to a note payable agreement with
      an officer of the Company in the amount of $75,000.  The note
      carried an interest rate of 10% per annum and matured on March 31,
      2008.  On April 18, 2008 the Company repaid $35,000 of the
      principal and $1,762 of accrued interest.  On July 7, 2008, the
      Company repaid $17,000 of the principal of the note.  On August
      19, 2008, the Company repaid $23,000 of the principal and $762 of accrued
      interest. Interest in the amount of $1,007 and $1,518 was accrued on this
      note during the twelve months ended March 31, 2009 and 2008,
      respectively.
            
            
            -
            
            75,000On
      August 13, 2008, the Company issued a promissory note to Bedford Energy,
      Inc. as part of the asset acquisition in the amount of
      $750,000.  This note carries an interest rate of 5% per annum
      and matures on December 13, 2008.  On December 8, 2008, the
      Company and Bedford Energy, Inc., entered into an amended acquisition
      agreement (see note 2). As a result the note payable in the amount of
      $750,000 was cancelled and a new payable was issued in the amount of
      $400,000 with an interest rate of 5% per annum and was payable as follows,
      (i) $10,000 per month beginning on February 1, 2009; and (ii) accrued
      interest shall be payable on the first day of each quarter beginning on
      January 1, 2009.  Interest in the amount of $21,927 was accrued
      on this note during the twelve months ended March 31, 2009.
            
            
            390,000
            
            -On
      November 11, 2008, the Company issued a convertible promissory note to an
      investor in the amount of $50,000.  The note carries an interest
      rate of 10% per annum and matures on October 1, 2009.  The note
      holder has the right to convert the note and accrued interest into shares
      of the Company’s common stock at a rate of $0.10 per share.  In
      addition to the note, the investor received three-year warrants to
      purchase 500,000 shares of the Company’s common stock at a price of $0.10
      per share.  The Company valued these warrants using the
      Black-Sholes valuation model, and charged the fair value of the warrants
      in the amount of $11,310 as a discount on notes payable.  The
      discount is being amortized to interest expense over the life of the note
      via the effective interest method.  Interest in the amount of
      $1,918 was accrued on this note during the twelve months ended March 31,
      2009.  During the year ended March 31, 2009 the Company
      amortized $459 of the discount on the note payable to interest
      expense.
            
            
            50,000
            
            -





On
      December 22, 2008, the Company issued a promissory note to an investor in
      the amount of $150,000.  This note carries an interest rate of
      10% per annum and matures of December 15, 2009.  In addition to
      the note payable, the Company issued 7,500,000 shares of common stock to
      the note holder.  The shares are considered a discount to the
      note payable. At the time of the issuance of the shares to the note
      holder, the market price of the shares exceeded the fair value of the note
      payable; as a result the value of the discount was capped at the face
      value of the note, $150,000.  The discount will be amortized to
      interest expense over the life of the note, 1 year, via the effective
      interest method.  Interest in the amount of $4,068 was accrued
      on this note during the twelve months ended March 31,
      2009.  During the year ended March 31, 2009 the Company
      amortized $3,225 of the discount on the note payable to interest
      expense.
            
            
            150,000
            
            -On
      December 31, 2008, the Company received a cash advance from an investor in
      the amount of $100,000.  On January 1, 2009, the Company
      received an additional $50,000 and the Company entered into a note payable
      agreement in the amount of $150,000.  The note bears interest at
      a rate of 10% per annum and matures on December 15, 2009.  In
      additional to the note payable, the Company issued 7,500,000 shares of
      common stock to the note holder.  The shares are considered a
      discount to the note payable.  At the time of issuance of the
      shares to the note holders, the market price of the shares exceeded the
      fair value of the note payable; as a result the value of the discount was
      capped at the face value of the note, $150,000.  The discount
      will be amortized over the life of the note via the effective interest
      method. Interest in the amount of $3,082 was accrued on this note during
      the twelve months ended March 31, 2009.  During the year ended
      March 31, 2009 the Company amortized $1,971 of the discount on the note
      payable to interest expense.
            
            
            150,000
            
            -On
      January 2, 2009, the Company issued a promissory note to an investor in
      the amount of $50,000.  The note carries an interest rate of 10%
      per annum and matures on December 15, 2009.  In additional to
      the note payable, the Company issued 1,000,000 shares of common stock to
      the note holder.  The shares are considered a discount to the
      note payable.  The shares are valued using the closing market
      price on the date the note payable was signed and have a value of
      $23,000.  The discount will be amortized over the life of the
      note payable via the effective interest method.  Interest in the
      amount of $1,205 was accrued on this note during the twelve months ended
      March 31, 2009.  During the year ended March 31, 2009 the
      Company amortized $302 of the discount on the note payable to interest
      expense.
            
            
            50,000
            
            -


F-14
 Table of Contents
  AVALON
OIL & GAS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED MARCH 31, 2009 AND 2008


On
      January 8, 2009, the Company issued a promissory note to an investor in
      the amount of $50,000.  The note carries an interest rate of 10%
      per annum and matures on December 15, 2009.  In addition to the
      note payable, the Company issued 2,000,000 shares of common stock to the
      note holder.  The shares are considered a discount to the note
      payable.  The shares are valued using the closing market price
      on the day the note was signed and have a value of $50,000.  The
      discount will be amortized over the life of the note payable via the
      effective interest method.  Interest in the amount of $1,123 was
      accrued on this note during the twelve months ended March 31,
      2009.  During the year ended March 31, 2009 the Company
      amortized $657 of the discount on the note payable to interest
      expense.
            
            
            50,000
            
            -On
      January 27, 2009, the Company issued a promissory note to an investor in
      the amount of $50,000.  The note carries an interest rate of 10%
      per annum and matures on December 15, 2009.  In addition to the
      note payable, the Company issued 1,000,000 shares of common stock to the
      note holder.  The shares are considered a discount to the note
      payable.  The shares are value using the closing market price on
      the date the note was signed and have a value of $25,000.  The
      discount will be amortized over the life of the note via the effective
      interest method.  Interest in the amount of $863 was accrued on
      this note during the twelve months ended March 31, 2009.  During
      the year ended March 31, 2009 the Company amortized $328 of the discount
      on the note payable to interest expense.
            
            
            50,000
            
            -On
      February 25, 2009, the Company issued a promissory note to an investor in
      the amount of $150,000.  The note carries an interest rate of
      10% per annum and matures on December 15, 2009. In addition to the note
      payable, the Company issued 3,000,000 shares of common stock to the note
      holder.  The shares are considered a discount to the note
      payable.  The shares are valued using the closing market price
      on the date the note was signed and have a value of
      $60,000.  The discount will be amortized over the life of the
      note via the effective interest method.  Interest in the amount
      of $1,397 was accrued on this note during the twelve months ended March
      31, 2009.  During the year ended March 31, 2009 the Company
      amortized $788 of the discount on the note payable to interest
      expense.
            
            
            150,000
            
            -On
      November 28, 2006, Oiltek, of which the Company has a majority interest
      in, issued a convertible note payable in the amount of
      $2,500.  This note bears interest at a rate of 8% per annum and
      matures on October 1, 2007.  The principal amount of the note
      and accrued interest are convertible into shares of the Company’s common
      stock at a price of $0.01 per share.  A beneficial conversion
      feature in the amount of $2,500 was recoded as a discount to the note and
      was amortized to interest expense during the period ended December 31,
      2006.  In December 2008, this note extended its maturity date
      until December 31, 2010. Interest in the amount of $200 and $200 was
      accrued on this note during the twelve months ended March 31, 2009 and
      2008, respectively.
            
            
            2,500
            
            2,500





On
      November 28, 2006, Oiltek, of which the Company has a majority interest
      in, issued a convertible note payable in the amount of
      $5,000.  This note bears interest at a rate of 8% per annum and
      matures on October 1, 2007.  The principal amount of the note
      and accrued interest are convertible into shares of the Company’s common
      stock at a price of $0.01 per share.  A beneficial conversion
      feature in the amount of $5,000 was recoded as a discount to the note and
      was amortized to interest expense during the period ended December 31,
      2006.  In December 2008, this note extended its maturity date
      until December 31, 2010. Interest in the amount of $400 and $400 was
      accrued on this note during the twelve months ended March 31, 2009 and
      2008, respectively.
                
                
                5,000
                
                5,000On
      December 10, 2006, Oiltek, of which the Company has a majority interest
      in, issued a convertible note payable in the amount of
      $5,000.  This note bears interest at a rate of 8% per annum and
      matures on October 1, 2007.  The principal amount of the note
      and accrued interest are convertible into shares of the Company’s common
      stock at a price of $0.01 per share.  A beneficial conversion
      feature in the amount of $5,000 was recoded as a discount to the note and
      was amortized to interest expense during the period ended December 31,
      2006.  In December 2008, this note extended its maturity date
      until December 31, 2010. Interest in the amount of $400 and $400 was
      accrued on this note during the twelve months ended March 31, 2009 and
      2008, respectively.
                
                
                5,000
                
                5,000Total
      outstanding
                
                
                $1,062,500
                
                $124,500





Note
                    
                    
                    Unamortized
                    
                    
                    Net
      ofMarch
      31, 2009:
                    
                    Amount
                    
                    
                    Discounts
                    
                    
                    DiscountNotes
      payable - current portion
                    
                    $
                    1,050,000
                    
                    
                    $
                    (461,518
                    )
                    
                    $
                    588,482Notes
      payable – current portion (Oiltek)
                    
                    
                    12,500
                    
                    
                    
                    -
                    
                    
                    
                    12,500Total
                    
                    $
                    1,062,000
                    
                    
                    $
                    (461,518
                    )
                    
                    $
                    600,982





Twelve
      months ended March 31,2009
                                  
                                  
                                  2008Discount
      on Notes Payable amortized to interest expense
                                  
                                  $
                                  7,792
                                  
                                  
                                  $
                                  -




F-15
 Table of Contents




AVALON
OIL & GAS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED MARCH 31, 2009 AND 2008


NOTE 9:
RELATED PARTY TRANSACTIONS





Promissory
Notes





On
February 11, 2008, the Company borrowed $75,000 from an officer of the
corporation. The note carried a 10% interest rate and matured on March 31, 2008.
On April 18, 2008 the Company repaid $35,000 of the note plus accrued interest.
During the three months ended September 30, 2008, the Company made payments in
the amount of $40,000 to repay the remaining balance of  the note,
and  the Company also repaid accrued interest in the amount of $762.
The balance of the note at March 31, 2009 and 2008 was $0 and $75,000,
respectively.





Preferred
Stock





The 100
shares of Series A Preferred Stock, issued to an officer/director as payment for
$500,000 in promissory notes, are convertible into the number of shares of
common stock sufficient to represent 40 percent (40%) of the fully diluted
shares outstanding after their issuance. The Series A Preferred Stock pays an
eight percent (8%) dividend. The dividends are cumulative and payable quarterly.
The Series A Preferred Stock carries liquidating preference, over all other
classes of stock, equal to the amount paid for the stock plus any unpaid
dividends. The Series A Preferred Stock provides for voting rights on an "as
converted to common stock" basis.





During
the years ended March 31, 2009 and 2008, the Company incurred $40,000 in
preferred stock dividends, respectively.





The
holders of the Series A Preferred Stock have the right to convert each share of
preferred stock into a sufficient number of shares of common stock to equal 40%
of the then fully-diluted shares outstanding. Fully diluted shares outstanding
is computed as the sum of the number of shares of common stock outstanding plus
the number of shares of common stock issuable upon exerciser, conversion or
exchange of outstanding options, warrants, or convertible
securities.





Employment
Agreements





KENT
RODRIGUEZ





In 2009,
Mr. Rodriguez was under an employment agreement dated April 1, 2008 that expires
on March 31, 2013, pursuant to which he was compensated at an annual rate of
$120,000.  The agreement also provides for the increase of Mr.
Rodriguez’s base salary by 5% each year for the five year term of the
agreement.




JILL
ALLISON





In 2009,
Ms. Allison was under an employment agreement dated April 1, 2008 that expires
on March 31, 2011, pursuant to which she was compensated at a rate of $5,000 per
month, for an annual rate of $60,000.





NOTE 10:
INCOME TAXES





Deferred
income taxes result from the temporary difference arising from the use of
accelerated depreciation methods for income tax purposes and the straight-line
method for financial statement purposes, and an accumulation of New Operating
Loss carryforwards for income tax purposes with a valuation allowance against
the carryforwards for book purposes.





In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized.  Included in deferred tax assets are Federal
State net operating loss carryforwards of approximately $3,200,000, which will
expire beginning in 2028.  The ultimate realization of deferred tax
assets is dependent upon the generating of future taxable income during the
periods in which those temporary differences become
deductible.  Management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income, and tax planning strategies in
making this assessment.  Based upon our cumulative losses through
March 31, 2009, we have provided a valuation allowance reducing the net
realizable benefits of these deductible differences to $0 at March 31,
2009.  The amount of the deferred tax asset considered realizable
could change in the near term if projected taxable income is
realized.





The
income tax provision (benefit) for the twelve months ended March 31, 2009 and
2008 consist of the following:





March
      31, 2009
                  
                  
                  March
      31, 2008Current
                  
                  $
                  -
                  
                  
                  $
                  -Federal
                  
                  
                  -
                  
                  
                  
                  -State
                  
                  
                  -
                  
                  
                  
                  --
                  
                  
                  
                  -Deferred
                  
                  
                  -
                  
                  
                  
                  -Federal
                  
                  
                  -
                  
                  
                  
                  -State
                  
                  
                  -
                  
                  
                  
                  --
                  
                  
                  
                  -$
                  -
                  
                  
                  $
                  -




F-16
 Table of Contents




AVALON
OIL & GAS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED MARCH 31, 2009 AND 2008


A
reconciliation between the actual income tax expense and income taxes computed
by applying the statutory Federal and state income tax rates to income to
continuing operations before income taxes is as follows:





Twelve
      Months Ended March 31, 2009
                    
                    
                    Twelve
      Months Ended March 31, 2008Computed
      “expected” income tax expense atapproximately
      34%
                    
                    $
                    (655,000
                    )
                    
                    $
                    (1,100,000
                    )Increase
      (decrease) in NOL carryforwards
                    
                    
                    655,000
                    
                    
                    
                    1,100,000




Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of our deferred
tax assets and liabilities as of March 31, 2009 and 2008 are as
follows:





March
      31, 2009
                        
                        
                        March 31,
      2008Deferred
      tax assets:Net
      operating loss
                        
                        $
                        2,064,000
                        
                        
                        $
                        1,294,000Allowance
      and accruals not recognized for    income tax
      purposes
                        
                        
                        -
                        
                        
                        
                        -Total
      gross deferred tax assets
                        
                        
                        2,064,000
                        
                        
                        
                        1,294,000Less
      : Valuation allowance
                        
                        
                        (2,064,000
                        )
                        
                        
                        (1,294,000
                        )Net
      deferred tax assets
                        
                        $
                        -
                        
                        
                        $
                        0Deferred
      tax liabilities:Total
      gross deferred tax liabilities:Depreciation
      and amortization, net
                        
                        
                        (1,000
                        )
                        
                        
                        (1,000
                        )Deferred
      state tax liability
                        
                        
                        -
                        
                        
                        
                        -Total
      net deferred tax liabilities
                        
                        $
                        (1,000
                        )
                        
                        $
                        (1,000
                        )




These
amounts have been presented in the consolidated balance sheets as
follows:





March
      31, 2009
                          
                          
                          March
      31, 2008Current
      deferred tax asset
                          
                          $
                          -
                          
                          
                          $
                          -Non
      current deferred tax asset
                          
                          
                          -Non
      current deferred tax liability
                          
                          
                          -
                          
                          
                          
                          -Total
      net deferred tax asset
                          
                          $
                          -
                          
                          
                          $







F-17
 Table of Contents




AVALON
OIL & GAS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED MARCH 31, 2009 AND 2008


NOTE 10:
SHAREHOLDERS' EQUITY





Preferred
Stock





The
Company is authorized to issue 1,000,000 shares of preferred stock, par value
$0.10 per share.  As of December 31, 2008, the Company has 100 shares
of preferred stock issued and outstanding.





The 100
shares of Series A Preferred Stock, issued to an officer/director as payment for
$500,000 in promissory notes, are convertible into the number of shares of
common stock sufficient to represent 40 percent (40%) of the fully diluted
shares outstanding after their issuance. The Series A Preferred Stock pays an
eight percent (8%) dividend. The dividends are cumulative and payable quarterly.
The Series A Preferred Stock carries liquidating preference, over all other
classes of stock, equal to the amount paid for the stock plus any unpaid
dividends. The Series A Preferred Stock provides for voting rights on an "as
converted to common stock" basis.





During
the years ended March 31, 2009 and 2008, the Company incurred $40,000 in
preferred stock dividends, respectively.





The
holders of the Series A Preferred Stock have the right to convert the preferred
stock into shares of common stock such that if converted simultaneously, they
shall represent 40 percent (40%) of the fully diluted shares outstanding after
their issuance. Fully diluted shares outstanding is computed as the sum of the
number of shares of common stock outstanding plus the number of shares of common
stock issuable upon exercise, conversion or exchange of outstanding options,
warrants, or convertible securities.





Common
Stock





The
Company has authorized 1,000,000,000 shares of common stock with a par value of
$0.001 per share.  As of March 31, 2009, the Company has
98,278,193  shares of common stock issued and
outstanding.





Common
stock issuances during the year ended March 31, 2009:





The
Company issued 2,000,000 shares of common stock to directors of the Company for
director’s fees.  The value of these shares in the amount of $190,000
was charged to operations.




The
Company issued 6,800,000 shares of common stock to a consultant for
services.  The value of these shares in the amount of $240,420 was
charged to operations.




The
Company issue 8,350,000 shares of common stock for the conversion of a note
payable.  The value of these shares in the amount of $36,966 was been
credited to the note payable.





The
Company issued 13,349,317 shares of common stock for cash in the amount of
$1,044,190.




The
Company issued 3,500,000 shares of common stock to Bedford Energy, Inc., valued
at $477,727 for an asset acquisition.  During the period ended March
31, 2009, the Company discovered an additional $49,301 which was payable by
Bedford Energy, Inc, which the Company assumed in the acquisition.  As
a result, the value of the payable in the amount of $49,301 was debited to
additional paid-in capital.





The
Company issued 3,000,000 shares of common stock as a finder’s fee for the
Bedford Energy, Inc. acquisition.  The value of these shares in the
amount of $120,000 was been charged to operations.





The
Company cancelled 375,000 shares of common stock which had previously been
issued, and credited  the par value of $375 to additional paid-in
capital.





During
the three months ended September 30, 2008, the Company issued 27,163 shares of
common stock in error to an investor.  The par value of $27 was
charged to additional paid-in capital.





The
Company issued 22,000,000 shares of common stock pursuant to a note payable
agreements entered into during the year ended March 31, 2009.  These
shares are considered discount to the notes payable. This amount was charged to
discount on notes payable and to additional paid-in capital during the
period.




F-18
 Table of Contents





AVALON
OIL & GAS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED MARCH 31, 2009 AND 2008








The
Company issued 7,859,250 shares of common stock to interest holders in the Grace
Wells pursuant to the buyout agreement.  The value of these shares in
the amount of $188,622 was charged to Oil and Gas properties
account.





Warrants





During
the year ended March 31, 2009, the Company issued 500,000 warrants to purchase
additional shares of common stock.  The value of these warrants in the
amount of $11,310 was charged to discount on notes payable  during the
three months ended December 31, 2008.  The warrants are convertible
into shares of common stock at a price of $0.10 per share, and have a 3 year
term.





The
following table summarizes the warrants outstanding and the related prices for
the shares of the Company’s common stock issued to non-employees of the Company
at March 31, 2009:





Warrants
      Outstanding
                                      
                                      
                                      Warrants
      ExercisableWeighted
      Average
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      Weighted
      AverageExercise
                                      
                                      
                                      Number
                                      
                                      
                                      Remaining
      Contractual
                                      
                                      
                                      Weighted
      Average
                                      
                                      
                                      Number
                                      
                                      Remaining
      ContractualPrices
                                      
                                      
                                      Outstanding
                                      
                                      
                                      Life
      (years)
                                      
                                      
                                      ExercisePrice
                                      
                                      
                                      Exercisable
                                      
                                      Life
      (years)$
                                      0.10
                                      
                                      
                                      
                                      500,000
                                      
                                      
                                      
                                      2.62
                                      
                                      
                                      $
                                      0.10
                                      
                                      
                                      
                                      500,000
                                      
                                      2.620.20
                                      
                                      
                                      
                                      125,000
                                      
                                      
                                      
                                      3.69
                                      
                                      
                                      
                                      0.20
                                      
                                      
                                      
                                      125,000
                                      
                                      3.690.60
                                      
                                      
                                      
                                      150,000
                                      
                                      
                                      
                                      3.96
                                      
                                      
                                      
                                      0.60
                                      
                                      
                                      
                                      150,000
                                      
                                      3.96775,000
                                      
                                      
                                      
                                      3.05
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      775,000
                                      
                                      3.05







Transactions
involving warrants are summarized as follows:




Number
      of Shares
                              
                              Weighted
      Average
                                Price
      Per ShareOutstanding
      at March 31, 2008
                              
                              
                              275,000
                              
                              $
                              0.42Granted
                              
                              
                              500,000
                              
                              
                              0.10Exercised
                              
                              
                              -
                              
                              
                              -Cancelled
      or expired
                              
                              
                              -
                              
                              
                              -Outstanding
      at March 31, 2009
                              
                              
                              775,000
                              
                              $
                              0.21





The
estimated value of the  warrants granted during the
period  was determined using the Black-Scholes pricing model and the
following assumptions:




2009Significant
      assumptions (weighted-average):Risk-free
      interest rate at grant date
                    
                    
                    2.50
                    %Expected
      stock price volatility
                    
                    139.25
                    %Expected
      dividend payout
                    
                    
                    -Expected
      warrant life-years
                    
                    3





NOTE 11:
TECHNOLOGY LICENSE AGREEMENTS





On July
12, 2006 UMTI entered into a technology license of a patented process for
paraffin wax mitigation from crude oil using ultrasonic waves from the
University of Wyoming. This license calls for an earned royalty of five percent
on net sales of licensed technologies and services; twenty-five percent of all
sublicense fees and revenues with an escalating minimum annual royalty which
will be credited toward the total royalties due.





On March
27, 2007 LLTI entered into non-exclusive license in the United States for a leak
detection and location technology developed by the Rensselaer Polytechnic
Institute ("Rensselaer") through its researcher Michael Savic. The agreement
calls for a milestone license fee of $10,000 sixteen months following the
effective date of the agreement or the first production introduction which ever
is sooner. A royalty fee of four and one-half percent (4.5%) of gross sales of
licensed products required with annual minimum royalty payments. As of March 31,
2009, the Company has accrued the $10,000 milestone license fee.




F-19
 Table of Contents





AVALON
OIL & GAS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED MARCH 31, 2009 AND 2008








On
February 11, 2008 the Company entered into a technology license of a patented
process for enzyme based technology for the improvement and increase of the
extraction of hydrocarbons from underground. The original terms of the agreement
called for a payment of $75,000, however the agreement was modified for a
payment of $10,000 in cash and 200,000 shares of common stock which were valued
at $20,000. Terms of the agreement call for an annual renew fee of $100,000 on
the anniversary date of the agreement. The license calls for royalties of six
percent of the net sale of licensed products or services. All royalties earned
during the first 365 days of the agreement shall be forgiven until such amount
equals $100,000.  As of March 31, 2009, the Company has accrued the
annual license renewal fee of $100,000.





Minimum
obligations under license agreements for the next five years:





3/31/2010
                    
                    $
                    100,0003/31/2011
                    
                    
                    100,0003/31/2012
                    
                    
                    100,0003/31/2013
                    
                    
                    100,0003/31/2014
                    
                    
                    100,000$
                    500,000





NOTE 12:
REVENUE RECOGNITION




During
the year ended March 31, 20098, the Company entered into a contractual dispute
with a well operator (the “Operator”) which currently operates three of the
Company’s producing leaseholds.  As a result of this dispute, in
beginning in July 2008 the Company stopped payment to the Operator on the lease
operating expenses associated with these producing leaseholds.  The
Operator has withheld payment of revenue from these wells from the Company, and
has applied this revenue against the lease operating expenses.  As of
March 31, 2009, the Company is current on all of the lease operating
expenses. We have accrued all of the operating expenses at March 31, 2009,
but we believe that the operator of these wells has significantly overcharged us
for the operating costs of these three leaseholds.  We have initiated
an audit of the operator to determine the extent of these excess
charges.





NOTE 13:
EARNINGS PER SHARE





SFAS 128
requires a reconciliation of the numerator and denominator of the basic and
diluted earnings per share (EPS) computations. The following securities were not
included in the calculation of diluted earnings per share because their effect
was anti-dilutive.




Anti-dilutive
shares at March 31, 2009:





The
following warrants were not included in fully-diluted earnings per share because
the effect would have been anti-dilutive:   125,000 warrants at
an exercise price of $0.20 per share; 150,000 shares at an exercise price of
$0.60 per shares; and 500,000 shares at an exercise price of $0.10 per
shares.





Diluted
shares does not include shares issuable to the preferred shareholders pursuant
to their right to convert preferred stock into sufficient common shares
sufficient to equal 40% of the post conversion outstanding shares as the effect
would be anti-dilutive.





Anti-dilutive
shares at March 31, 2008:





The
following warrants were not included in fully-diluted earnings per share because
the exercise prices of the warrants were greater than the average market price
of the Company’s common stock: 125,000 warrants at an exercise price of $0.20
per share; and 150,000 shares at an exercise price of $0.60 per
shares.





Diluted
shares does not include shares issuable to the preferred shareholders pursuant
to their right to convert preferred stock into sufficient common shares
sufficient to equal 40% of the post conversion outstanding shares as the effect
would be anti-dilutive.




F-20
 Table of Contents




AVALON
OIL & GAS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED MARCH 31, 2009 AND 2008


NOTE
14:  SFAS 69 SUPPLEMENTAL DISCLOSURES (Unaudited)





Net Capitalized
Costs





The
Company's aggregate capitalized costs related to natural gas and oil producing
activities are summarized as follows:





March
      31, 2009
                      
                      
                      March
      31, 2008Natural
      gas and oil properties and related equipment:Proven
                      
                      $
                      3,065,890
                      
                      
                      $
                      1,020,843Unproven
                      
                      
                      339,417
                      
                      
                      
                      339,417Accumulated
      depreciation, depletion, and impairment
                      
                      
                      (413,299
                      )
                      
                      
                      (219,346
                      )Net
      capitalized costs
                      
                      $
                      2,992,008
                      
                      
                      $
                      1,140,914




Costs
Incurred





Costs
incurred in natural gas and oil property acquisition, exploration and
development activities that have been capitalized are summarized as
follows:





March
      31, 2009
                    
                    
                    March
      31, 2008Acquisition
      of properties
                    
                    $
                    2,038,333
                    
                    
                    $
                    620,717Development
      costs
                    
                    
                    6,714
                    
                    
                    
                    91,513Total
      costs incurred
                    
                    $
                    2,045,047
                    
                    
                    $
                    713,230




Results of Operations for
Natural Gas and Oil Producing Activities





The
Company's results of operations from natural gas and oil producing activities
are presented below for the fiscal years ended March 31, 2009 and 2008. The
following table includes revenues and expenses associated directly with the
Company's natural gas and oil producing activities. It does not include any
interest costs and general and administrative costs and, therefore, is not
necessarily indicative of the contribution to consolidated net operating results
of the Company's natural gas and oil operations.





March
      31, 2009
                    
                    
                    March
      31, 2008Production
      revenues
                    
                    $
                    320,712
                    
                    
                    $
                    249,856Production
      costs
                    
                    
                    (71,970
                    )
                    
                    
                    (150,136
                    )Impairment
      of property
                    
                    
                    -
                    
                    
                    
                    -Depletion
      expense
                    
                    
                    (193,753
                    )
                    
                    
                    (102,012
                    )$
                    54,989
                    
                    
                    $
                    (2,292
                    )Imputed
      income tax provision (1)
                    
                    
                    -
                    
                    
                    
                    -Results
      of operation for natural gas / oil producing activity
                    
                    $
                    54,989
                    
                    
                    $
                    (2,292
                    )





(1)  The
imputed income tax provision is hypothetical (at the statutory rate) and
determined without regard to the Company's deduction for general and
administrative expenses, interest costs and other income tax credits and
deductions, nor whether the hypothetical tax provision will be
payable.




F-21
 Table of Contents




AVALON
OIL & GAS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED MARCH 31, 2009 AND 2008


Natural Gas and Oil Reserve
Quantities





The
following schedule contains estimates of proved natural gas and oil reserves
attributable to the Company. Proved reserves are estimated quantities of natural
gas and oil that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions. Proved developed reserves are those which are
expected to be recovered through existing wells with existing equipment and
operating methods. Reserves are stated in thousand cubic feet (mcf) of natural
gas and barrels (bbl) of oil. Geological and engineering estimates of proved
natural gas and oil reserves at one point in time are highly interpretive,
inherently imprecise and subject to ongoing revisions that may be substantial in
amount. Although every reasonable effort is made to ensure that the reserve
estimates are accurate, due to their nature reserve estimates are generally less
precise than other estimates presented in connection with financial statement
disclosures.





Oil
      - bblsProved
      reserves:Balance
      as of March 31, 2006
                  
                  
                  -Purchase
      of reserves-in-place
                  
                  
                  29,815Extensions
      and discoveries
                  
                  
                  -Production
                  
                  
                  (1,043
                  )Balance
      as of March 31, 2007
                  
                  
                  28,772Purchase
      of reserves-in-place
                  
                  
                  11,560Extensions
      and discoveries
                  
                  
                  4,216Change
      in estimates
                  
                  
                  (11,911
                  )Production
                  
                  
                  (3,504
                  )Balance
      as of March 31, 2008
                  
                  
                  29,133Purchase
      of reserves-in-place
                  
                  
                  22,282Extensions
      and discoveries
                  
                  
                  -Change
      in estimates
                  
                  
                  -Production
                  
                  
                  (5,768
                  )Balance
      as of March 31, 2009
                  
                  
                  45,647




F-22
 Table of Contents





AVALON
OIL & GAS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED MARCH 31, 2009 AND 2008





Proved
      Developed reserves:Balance,
      March 31, 2008
                  
                  
                  29,133Balance,
      March 31, 2009
                  
                  
                  45,647





Standardized Measure of
Discounted Future Net Cash Flows





The
following schedule presents the standardized measure of estimated discounted
future net cash flows from the Company's proved reserves for the fiscal years
ended March 31, 2009 and 2008. Estimated future cash flows are based on
independent reserve data. Because the standardized measure of future net cash
flows was prepared using the prevailing economic conditions existing at March
31, 2009 and 2008, it should be emphasized that such conditions continually
change. Accordingly, such information should not serve as a basis in making any
judgment on the potential value of the Company's recoverable reserves or in
estimating future results of operations.





March
      31, 2009
                    
                    
                    March
      31, 2008Future
      production revenue
                    
                    $
                    1,700,616
                    
                    
                    $
                    2,727,073Future
      production costs
                    
                    
                    (997,417
                    )
                    
                    
                    (752,597
                    )Future
      development costs
                    
                    
                    -
                    
                    
                    
                    -Future
      cash flows before income taxes
                    
                    
                    703,199
                    
                    
                    
                    1,975,073Future
      income tax
                    
                    
                    662,793
                    
                    
                    
                    (399,016
                    )Future
      net cash flows
                    
                    
                    1,365,992
                    
                    
                    
                    1,576,057Effect
      of discounting future annual cash flows at 10%
                    
                    
                    (547,328
                    )
                    
                    
                    (685,752
                    )Standard
      measure of discounted net cash flows
                    
                    $
                    818,664
                    
                    
                    $
                    890,305





(1)  The
weighted average oil wellhead price used in computing the Company's reserves
were $49.64 per bbl and $101.58 per bbl at March 31, 2009 and 2008,
respectively. The weighted average gas wellhead price used in computing the
Company's reserves were $3.78 and $9.86/mmbtu at March 31, 2009 and 2008,
respectively.





The
following schedule contains a comparison of the standardized measure of
discounted future net cash flows to the net carrying value of proved natural gas
and oil properties at March 31, 2009 and 2008:





March
      31, 2009
                    
                    
                    March
      31, 2008Standardized
      measure of discount future net cash flows
                    
                    $
                    818,664
                    
                    
                    $
                    890,305Proved
      natural oil and gas property, net of accumulateddepreciation,
      depletion, and amortization, includingimpairment
      of $93,999
                    
                    
                    2,652,591
                    
                    
                    
                    801,496Standardized
      measure of discount future net cash flows inexcess
      of net carrying value of proved natural oil andgas
      properties
                    
                    $
                    (1,833,927
                    )
                    
                    $
                    88,809





NOTE
15:  SUBSEQUENT EVENTS





As of
June 8, 2009, the Company has issued an additional 1,134,000 shares of common
stock to investors for their interest in the Grace Wells.








F-23