UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-KSB





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


For
the Fiscal Year Ended March 31, 2008


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


Commission
file number: 0-7914





BASIC
EARTH SCIENCE SYSTEMS, INC.





633
17th
Street, Suite 1645


Denver,
Colorado 80202-3625


Telephone
(303) 296-3076





Incorporated
      in Delaware
            
            IRS
      ID# 84-0592823





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


Securities
registered under Section 12(g) of the Act: Common Stock, $.001 par
value





Check
whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. Yes o No þ





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





Check if
disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. o





Check
whether the issuer is a shell Company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ





Issuer’s
revenues for its most recent fiscal year: $7,447,000





As of
July 10, 2008 17,465,585 shares of the registrant’s common stock were
outstanding and the aggregate market value of such common stock held by
non-affiliates was approximately $23,781,000.





Table of Contents





Basic Earth Science Systems, Inc.


Form 10-KSB


March 31,
2008


Table of
Contents





Part
      I
            PageItem
      1
            Description of
      Business
            1Item
      2
            Description of
      Property
            7Item
      3
            Legal
      Proceedings
            9Item
      4
            Submission of
      Matters to a Vote of Security Holders
            9Part
      IIItem
      5
            Market for
      Common Equity and Related Stockholder Matters
            10Item
      6
            Management's
      Discussion and Analysis or Plan of Operation
            10Item
      7
            Financial
      Statements
            18Item
      8
            Changes In and
      Disagreements With Accountants on Accounting and Financial
      Disclosure
            53Item
      8A
            Controls and
      Procedures
            53Item
      8B
            Other
      Information
            56Part
      IIIItem
      9
            Directors,
      Executive Officers, Promoters and Control Persons and Corporate
      Governance; Compliance with Section 16(a) of the Exchange
      Act
            57Item
      10
            Executive
      Compensation
            60Item
      11
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            63Item
      12
            Certain
      Relationships, Related Transactions, and Director
      Independence
            64Item
      13
            Exhibits and
      Reports on Form 8-K
            64Item
      14
            Principal
      Accountant Fees and Services
            65Signatures
            66





Explanatory
Note


During
the preparation and review of our 2008 income tax provision, we discovered
errors in calculating the GAAP cost basis of our oil and gas properties in
determining deferred tax liability and the estimated deferred tax asset for
percentage depletion carryforward for fiscal years ended March 31, 2007 and 2006
under SFAS 109– Accounting for Income Taxes. During this review, we also
determined that it would be appropriate to correct what we considered to be
immaterial differences to properly reconcile accounting for stock option
compensation for purposes of determining deferred tax liability for the fiscal
year ended March 31, 2007 under SFAS 109 – Accounting for Income
Taxes.





In
accordance with the provisions of SFAS 154 – Accounting Changes and Error
Corrections, we have restated, to the earliest period practical, our previously
filed financial statements. See Note 2 – Restatement of Financial Statements in
Notes to Consolidated Financial Statements in Item 7 – Financial Statements of
this Annual Report on Form 10-KSB, for the effect of the restatements on fiscal
years 2007 and 2006, and Note 13 – Quarterly Financial Data (Unaudited) in Notes
to Consolidated Financial Statements in Item 7 – Financial Statements of this
Annual Report on Form 10-KSB, for the effect of the restatements on the interim
condensed financial information for the first three quarters of fiscal year 2008
and all four quarters of fiscal years 2007 and 2006.  We have not
amended and do not intend to amend any of our previously filed Annual Reports on
Form 10-KSB or Quarterly Reports on Form 10-QSB for the periods affected by
these restatements.







Table of Contents







Part
I


ITEM
1


DESCRIPTION
OF BUSINESS





Overview





Basic
Earth Science Systems, Inc. (“Basic” or “the Company” or “we” or “our” or “us”)
is an independent oil and gas exploration company focusing on the fundamentals
of company growth and profitability in an effort to enhance shareholder wealth.
We are engaged in the exploration, acquisition, development, operation,
production and sale of crude oil and natural gas. We have an established
production base that generates positive cash flow and profits. Our activities
are focused in the North Dakota and Montana portions of the Williston basin, the
Denver-Julesburg basin of Colorado, the southern portions of Texas, and along
the onshore portions of the Gulf Coast.





Strategy





The three
components of our growth strategy are:





•
            
            Cost
      effective implementation of internally and externally generated
      exploration and development drilling projects.•
            
            Identification
      and acquisition of strategic producing properties; strategic and
      significant in that they are either synergistic to our existing production
      or will provide a dramatic increase to the Company’s existing production
      base.•
            
            Boosting
      cash flows from existing oil and gas production through a combination of
      cost control and the exploitation of behind-pipe
  potential.





Our
primary exploration focus is in the Montana and North Dakota portions of the
Williston basin. We have been involved in the Williston basin since the early
1980’s and only in south Texas does the Company have a longer history. As such,
we have significant understanding of and exposure to both geology and operations
in the area. However, both the Williston basin and our south Texas waterfloods
are primarily oil productive. Sensitive to the need to increase our natural gas
output and balance our product base, our efforts in other areas, notably
Colorado and on-shore portions of the Gulf Coast, are simply to increase
our exposure to natural gas projects.





Areas
of Focus





WillistonBasin.  The Williston
basin continues to be our primary area of focus, both in terms of future cash
flow from existing properties and future expenditures. In the coming year, we
intend to increase our efforts to acquire properties in the Williston basin
(especially in the northern portion of the basin) while we continue to exploit
ongoing drilling prospects. From a drilling perspective, we have three major
areas within the Williston basin where we expect drilling operations to commence
or continue during the current fiscal year. These areas are our on-going Banks
prospect in McKenzie County, North Dakota, the on-going horizontal Madison
drilling efforts in the TR Madison unit in Billings County, North Dakota and our
South Flat Lake prospect in Sheridan County, Montana. We caution that
the following expectations may be altered by subsequent events or other, more
attractive opportunities that may present themselves in the future.





1
 Table of Contents







Banks Prospect —McKenzie
County,North
Dakota.   In
the June 2005 quarter, we acquired a 20% interest in 13,000 acres in our
Banks prospect in McKenzie County, North Dakota primarily to position the
Company in the developing, though unproven, extension of the Bakken horizontal
play into North Dakota. Following discouraging results, we elected to pursue
development of the Rival formation. In the intervening period, the success of
new techniques by various companies has given new life to the horizontal Bakken
play in North Dakota. As these ventures have expanded from their core discovery
wells, they have neared the eastern boundary of our Banks
prospect.  The success of these offset wells has dramatically enhanced
the viability of the Bakken formation in our Banks Prospect.  As a
result, we and our partners have been approached by several companies wishing to
acquire part of our interest in exchange for cash and a carried working interest
in several new horizontal wells that these companies would be required to
drill.  Following the completion of “carried wells,” we would have 35%
to 40% of our original working interest (or 7% to 8% working interest,
proportionately reduced) in wells subsequently drilled on the
acreage.   While attractive, details of such an agreement have
not been acceptable and no agreement has been finalized.  Furthermore,
there are no assurances that such an agreement will be finalized.  If
an agreement can be reached, we expect drilling operations to commence within 30
to 60 days.





TR Madison Unit
Prospect —Billings
County,North
Dakota.In May 2003 the
North Dakota Industrial Commission created the TR Madison Unit for the purpose
of enhancing the ultimate recovery from the Madison formation in the TR Field.
Approximately nineteen existing wells were originally included in the Unit. By
virtue of its interest in one of these wells we acquired a 1.075% working
interest (0.833% net revenue interest) in the Unit. During the previous four
years, six new horizontal wells have been drilled and four originally vertical
wells have had horizontal laterals added. Three of these new horizontal wells
were drilled in the year ended March 31, 2008.  Following the end
of the fiscal year one additional well has been drilled but not yet
completed.  While our interest in this effort is relatively small,
this property has now become our 7th largest producer in terms of
cash flow, up from 10th
last year. More importantly these gains have been made with relatively low risk
and low cost (relative to our cash position).





SouthFlatLakeProspect —Sheridan
County,Montana.We have
acquired leases on approximately 4,200 gross acres (1,900 net) in northern
Sheridan County near the Flat Lake Field. Developed by a geologist on
retainer by us, South Flat Lake represents the first exploration
prospect we have generated in more than a decade. To defray the cost of this
effort, land, legal and geologic costs were funded equally by us and our 50%
partner in this venture, an unrelated, non-public company. Our partner expects
to sell a portion of this prospect to others to help defray their share of the
cost of drilling. As an exploratory venture, this prospect is considered high
risk and no assurance of its ultimate success can be offered. Presently, the
Montana Oil & Gas Commission has granted a drilling permit and the surface
location has been prepared for drilling operations.  We expect to
commence drilling operations before the end of the calendar year.





Other
Areas





The
following areas are primarily gas productive and provide us exposure to natural
gas projects.





Denver-JulesbergBasin—Weld
County,Colorado.We
have previously disclosed our project to drill sixteen down-spaced wells on its
Antenna federal property in Weld County, Colorado.  At March 31, 2008
all sixteen new wells had been drilled.  Of the now 32 total wells,
eight of the new wells and eight of the original sixteen old wells were
producing.  The eight remaining new wells and eight remaining original
wells were not producing in that they were awaiting completion of newly designed
and refurbished production facilities.  We were impacted in our fourth
quarter and a portion of its third quarter because all of the original wells
were shut-in to allow these new production facilities to be built.  We
expect to have a 2% to 52.5% revenue interest in Codell/Niobrara production and
a 13.125% to 52.5% revenue interest in J-Sand production (depending on actual
well location).  However, initially, all new wells will produce from
the Codell/Niobrara formation alone.  We expect to spend a total of
$2.5 million for our share of the cost of drilling and completing these
wells.  Kerr-McGee Oil & Gas Onshore, LP will be the Operator of
the project.





2
 Table of Contents








OnshoreGulfCoast.During
the past few years, we participated in five wells in this area; primarily
pursuing “3-D Bright Spots.” We intend to look at and evaluate additional
ventures in this area for possible future participation. However, our future
involvement in this area will depend on the quality of prospects we review, the
operational record of designated operators and the risk associated with specific
ventures.





Christmas Meadows
Prospect — Summit County, Utah.In fiscal 2007, we participated with
Double Eagle Petroleum Company (“Double Eagle”) in one of the more exciting,
true wildcat projects in the Rocky Mountain region, Christmas Meadows. Christmas
Meadows is a structural dome in the southwest corner of the prolific Green River
Basin, in Summit County, Utah. The dome is overlain by the Wyoming Overthrust
Belt and the North Flank Thrust of the Uinta Mountains. During the first quarter
of 2007, drilling at the Table Top Unit #1 well reached the originally planned
depth of 15,760 feet. The drill cuttings did not reveal reservoir rocks (due to
either insufficient hydraulics to bring those cuttings to surface undamaged and
intact or because they did not exist).  Operations were suspended to
assess alternative approaches to completing the project. The wellbore was sealed
at 11,000 feet (the base of the intermediate casing) in order to prevent any
abnormal pressure from migrating to surface.  The Table Top Unit, as
originally formed, was dissolved, and, having met the governmental permitting
obligation for the Unit test, the time-frame has been extended for drilling the
newly formed Main Fork Unit until at least April 2009. We are in the
process of evaluating potential alternatives, including drilling or farming out
the drilling of the Table Top Unit #1 to drill deeper to the Nugget Sandstone at
approximately 18,000 feet. Double Eagle has disclosed that it is in discussions
with several larger or major companies to take over this venture and deepen this
wellbore down to the deeper Nugget formation. While Double Eagle’s personnel
have expressed excitement about this situation, given the recent premature and
unexpected departure of Double Eagle’s long-time management, the possibility
exists that little, or no, progress could occur.  If this does occur,
this leasehold may expire of its own terms and we, Double Eagle, and our
partners would be required to plug this well and reclaim the access road. We
have a 1.5% interest in all future operations in this wellbore and in any future
operations on the Christmas Meadows prospect.





Contemplated
Activities





We are
continually evaluating other drilling and acquisition opportunities for possible
participation. Typically, at any one time, several opportunities are in various
stages of due diligence. Our policy is to not disclose the specifics of a
project or prospect, nor to speculate on such ventures, until such time as those
various opportunities are finalized and undertaken. We caution that the absence
of news and/or press releases should not be interpreted as a lack of development
or activity.





We may
alter or vary, all or part of, these contemplated activities based upon changes
in circumstances, unforeseen opportunities, inability to negotiate favorable
acquisition, farmout, joint venture or loan terms, lack of cash flow, lack of
funding and/or other events which we are not able to anticipate.





Segment
Information and Major Customers





Industry segment.We are engaged only in the upstream segment of the oil and gas industry,
which comprises exploration, production, operations and development. We have no
gathering, transportation, refining or marketing functions.





Markets.Our oil and natural gas is sold to various purchasers in the geographic
area of its properties. We are a small company and, as such, have no impact on
the market for our goods and little control over the price received. The market
for, and the value of, oil and natural gas are dependent upon a number of
factors including other sources of production, competitive fuels, and proximity
and capacity of pipelines or other means of transportation, all of which are
beyond our control. For more information see Note 1 - Major Customers and
Concentration of Credit Risk in the Notes to Consolidated Financial
Statements.





3
 Table of Contents








Competition





The oil
and gas industry is a highly competitive and speculative business. We encounter
strong competition from major and independent oil companies in all phases of our
operations. In this arena, we must compete with many companies having financial
resources and technical staffs significantly larger than our own. Furthermore,
having pursued an acquisition strategy for over a decade, we did not develop an
in-house geologic or geophysical infrastructure, as have many of our
competitors. Rather than incur the time and expense to develop in-house
capability, we chose to enter joint ventures with other companies to accelerate
our efforts.





With
respect to acquisitions, competition is intense for the purchase of large
producing properties. Because of the limited capital resources available to us,
we have historically focused on smaller and/or marginal properties with
behind-pipe potential in our acquisition efforts.





Regulations





General.Our operations are affected in varying degrees by federal, state,
regional and local laws and regulations, including, but not limited to, laws
governing well spacing, air emissions, water discharges, reporting requirements,
endangered species, marketing, prices, taxes, allowable rates of production and
the plugging and abandonment of wells and the subsequent rehabilitation of the
wellsite locations. We are further affected by changes in such laws and by
constantly changing administrative regulations. To the best of our knowledge, we
are in compliance with all such regulations and are not aware of any claims that
could have a material impact upon our financial condition, results of
operations, or cash flows.





Environmental
matters.We are subject to various federal, state, regional and local
laws and regulations related to the discharge of materials into, and the
protection of, the environment. These laws and regulations, among other things,
may impose liability on the owner or the lessee for the cost of pollution
cleanup resulting from operations, subject the owner or lessee to liability for
pollution damages, require the suspension or cessation of operations in affected
areas and impose restrictions on injection into subsurface formations in order
to prevent the contamination of ground water. All but three of the disposal
wells that we utilize are owned and operated by third parties whose disposal
practices are outside of our control. With respect to the three disposal wells
that we own and operates, we currently use these facilities only for the
disposal of produced water from other Company-operated properties. Although
environmental requirements do have a substantial impact upon the energy
industry, these requirements do not appear to affect us any differently than
other companies in this industry who operate in a given geographic area. We are
not aware of any environmental claims which could have a material impact upon
our financial condition, results of operations, or cash flows.





Such
regulations have increased the resources required and costs associated with
planning, designing, drilling, operating and both installing and abandoning oil
and natural gas wells and facilities. As yet, we have not had to hire any new
employees to comply with these regulations. We will continue to make
expenditures in our efforts to comply with these requirements, which are
unavoidable business costs in the oil and gas industry.





Although
we are not fully insured against all environmental and other risks, we maintain
insurance coverage that we believe is customary in the industry.





4
 Table of Contents











Risk
Factors





Volatility of oil
and gas prices.Our revenues, operating results, profitability, future
rate of growth and the carrying value of our oil and gas properties are highly
dependent upon prevailing market prices for oil and gas. Historically, the
markets for oil and gas have been volatile and in certain periods have been
depressed by excess domestic and imported supplies. Such volatility can be
expected to reoccur in the future. Various factors beyond our control will
affect prices of oil and gas, including worldwide and domestic supplies of oil
and gas, the ability of the members of the Organization of Petroleum Exporting
Countries to agree to maintain oil price and production controls, political
instability or armed conflict in oil and gas producing regions, the price and
level of foreign imports, the level of consumer demand, the price, availability
and acceptance of alternative fuels and weather conditions. In addition to
market factors, actions of state and local agencies and the United States and
foreign governments affect oil and gas prices. These external factors and the
volatile nature of the energy markets make it difficult to estimate future
prices of oil and gas. Any substantial or extended decline in the price of oil
would have a material adverse effect on our financial condition and results of
operations. Such decline would reduce our cash flow and borrowing capacity and
both the value and the amount of our existing oil and gas reserves.





We
believe that substantially all of our domestic oil produced can be readily sold
at prevailing market prices. For March 2008 the price differential ranged
from $2.50 to $14.00 below the U.S. crude spot price. There are several factors
leading to this continuing price differential. The Williston basin has seen an
increase in production due to a surge in new Bakken horizontal wells which has
led to pipeline capacity shortages in the area. The situation is further
compounded by limited refinery capacity and reduced refinery intake during times
of equipment repair and facility upgrades.





Substantially
all of our gas production is sold at prevailing wellhead gas prices, subject to
additional charges customary to an area. We do not own or operate any gas
gathering or processing plant facilities nor do we possess sufficient volume on
any pipeline to market our product to end users.





Uncertainty of
reserve information and future net revenue estimates.There are numerous
uncertainties inherent in estimating quantities of proved and unproved oil and
gas reserves and their values, including many factors beyond our control. The
reserve information set forth in this Form 10-KSB (see Note 12 to the
Consolidated Financial Statements) represents estimates only. Reserve estimates
are imprecise and may materially change as additional information becomes
available.





Estimates
of oil and natural gas reserves, by necessity, are projections based on geologic
and engineering data, and there are uncertainties in the interpretation of such
data as well as the projection of future rates of production and the timing of
development expenditures. Reserve engineering is a subjective process of
estimating the future recovery of underground accumulations of oil and natural
gas that are difficult to measure. The accuracy of any estimate is a function of
the quality of available data, engineering, and geological interpretation and
judgment. Estimates of economically recoverable oil and gas reserves and future
net cash flows necessarily depend upon a number of variable factors and
assumptions, such as future operating costs, severance and excise taxes,
development costs, workover costs, remedial costs and the assumed effects of
regulations by governmental agencies, all of which may in fact vary considerably
from actual results. Other variables, especially oil and gas prices, are fixed
at the prices existing on March 31, the last day of the fiscal year, whether
such prices are reasonable; and which may vary considerably from actual prices
received over any given period of time in the past or in the future. For these
reasons, estimates of the economically recoverable quantities of oil and gas
attributable to any property or any group of properties, classifications of such
reserves based upon risk of recovery, and estimates of the expected future net
cash flows may vary substantially. Any significant variance in the assumptions
could materially affect the estimated quantity and value of the reserves. Actual
production, revenues and expenditures with respect to our reserves will likely
vary from estimates, and such variances may be material.





5
 Table of Contents





Reserves,
as calculated according to SEC regulations and referred to in this Form 10-KSB,
should not be construed as the current market value of the estimated oil and gas
attributable to our properties. The timing of actual future net cash flows from
proved reserves, and thus their actual present value, will be affected by the
timing of both the production and incidence of expenses in connection with both
extraction costs and development costs. In addition, the 10% discount factor,
which is required to be used for reporting purposes, is not necessarily the most
appropriate discount factor based on interest rates in effect at the time of
calculation.





Reserve
replacement.Our future success is highly dependent on our ability to
find, develop and/or acquire additional oil and gas reserves that are
economically recoverable. Without continued successful exploitation, exploration
or acquisition projects, our current oil and gas reserves will decline as they
are depleted by production.





Operating
hazards.The oil and gas business involves certain operating hazards such
as well blowouts, craterings, explosions, uncontrollable flows of oil, natural
gas or well fluids, fires, formations with abnormal pressures, pipeline ruptures
or spills, pollution, releases of toxic gas and other environmental hazards and
risks, any of which could result in substantial losses. In addition, we may be
liable for environmental damage caused by previous owners of properties
purchased or leased by us. As a result, substantial liabilities to third parties
or governmental agencies may be incurred, the payment of which could reduce or
eliminate the funds available for acquisitions, development, and exploration, or
result in losses to the Company. Although we are not fully insured against all
environmental and other risks, we maintain insurance coverage which we believe
is customary in the industry.





Other





The oil
and gas business is not generally seasonal in nature, although unusual weather
extremes for extended periods may increase or decrease demand for oil and
natural gas products temporarily.  Additionally, catastrophic events,
such as hurricanes or other supply disruptions, may also temporarily increase
the demand for oil and gas supplies. Such events and their impacts on oil and
gas commodity prices may cause fluctuations in quarterly or even annual revenues
and earnings. Also, because of the location of many of our properties in Montana
and North Dakota, severe weather conditions, especially in the winter months,
could have a material adverse effect on our operations and cash
flow.





At
March 31, 2008 we had eight full-time and two part-time employees: four
full time and two part-time at its main office in Denver and four field laborers
at a subsidiary’s field office in Bruni, Texas, located forty-five miles east,
southeast of Laredo, Texas. In addition to eleven contract field workers on
retainer, at times we hire up to five contract technical/professional personnel
in our main office on a project-by-project basis.





Forward-Looking
Statements





This Form
10-KSB includes “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this Form 10-KSB including, without
limitation, the statements under Item 1. “Description of Business” and
Item 6. “Management’s Discussion and Analysis and Plan of Operation” and
the statements located elsewhere herein regarding our financial position and
liquidity, the amount of and our ability to make debt service payments should we
utilize some or all of our available borrowing capacity, our strategies, either
existing or anticipated, financial instruments, and other matters, are
forward-looking statements. Although we believe that the expectations reflected
in such forward-looking statements are reasonable, we can give no assurance that
such expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from our expectations are disclosed in
this Form 10-KSB in conjunction with the forward-looking statements included in
this Form 10-KSB.





6
 Table of Contents








Our
intentions and expectations described in this Form 10-KSB with respect to
possible exploration and development activities concerning properties in which
we hold interests may be deemed to be forward-looking statements. These
statements are made based on our current assessment of the exploratory and
development merits of the particular property in light of the geological
information available at the time and based on our relative interest in the
property and our estimate of our share of the exploration and development cost.
Subsequently obtained information concerning the merits of any property, as well
as changes in estimated exploration and development costs and ownership
interest, may result in revisions to our expectations and intentions and, thus,
we may alter our plans regarding these exploration and development activities.
Furthermore, circumstances beyond our control may cause such prospects to be
eliminated from further consideration as exploration and/or development
prospects.





ITEM 2


DESCRIPTION
OF PROPERTY





Producing
Properties: Location and Impact





At
March 31, 2008, we owned a working interest in 90 producing oil wells and
14 producing gas wells. We currently operate 54 of these wells in five states:
North Dakota, Montana, Colorado, Texas and Wyoming. These operated wells
contributed approximately 57% of both our total liquid hydrocarbon sales and
total natural gas sales in fiscal 2008. A significant portion of our production
is encumbered and used to secure bank debt.





Producing
Property





Gross
      Wells
            
            
            Net
      WellsOil
            
            
            Gas
            
            
            Oil
            
            
            GasColorado
            
            
            —
            
            
            
            12
            
            
            
            —
            
            
            
            5.40Louisiana
            
            
            1
            
            
            
            1
            
            
            
            0.01
            
            
            
            0.10Montana
            
            
            19
            
            
            
            —
            
            
            
            9.51
            
            
            
            —North
      Dakota
            
            
            46
            
            
            
            —
            
            
            
            9.28
            
            
            
            —Texas
            
            
            23
            
            
            
            1
            
            
            
            20.66
            
            
            
            0.11Wyoming
            
            
            1
            
            
            
            —
            
            
            
            0.47
            
            
            
            —Total
            
            
            90
            
            
            
            14
            
            
            
            39.9
            
            
            
            5.6





Production





Specific
production data relative to our oil and gas producing properties can be found in
the Selected Financial Information table in Item 6 “Management’s Discussion
and Analysis and Plan of Operation.”





Reserves





At
March 31, 2008, our estimated proved developed oil and gas reserves in
barrels of oil equivalent (BOE) was 1,229,000, a 3.7% increase over the
prior year’s estimated proved developed oil and gas reserves of 1,185,000 BOE.
However, due to increases in oil and gas prices, our standardized measure of
discounted future net cash flows was $24,960,000, a 70.7% increase from the
prior year’s standardized measure of discounted future net cash flows of
$14,624,000. Further discussion of our estimated oil and gas reserves can be
found in Note 12 to the Consolidated Financial Statements.





7
 Table of Contents







Geographically,
our reserves are located in three primary areas: the Williston basin in North
Dakota and Montana, the Denver-Julesburg (D-J) basin in Colorado and on-shore
south Texas. The following table summarizes the estimated proved developed oil
and gas reserves divided between operated and non-operated properties for these
three areas as of March 31, 2008:




Net
      Oil
            
            
            Net
      Gas(Bbls)
            
            
            (Mcf)
            
            
            BOE
            
            
            %Williston
      BasinOperated
            
            
            323,000
            
            
            
            40,000
            
            
            
            329,667
            
            
            
            26.2Non-Operated
            
            
            323,000
            
            
            
            203,000
            
            
            
            356,833
            
            
            
            28.3646,000
            
            
            
            243,000
            
            
            
            686,500
            
            
            
            54.5South
      Texas/Onshore Gulf CoastOperated
            
            
            394,000
            
            
            
            5,000
            
            
            
            394,833
            
            
            
            31.3Non-Operated
            
            
            —
            
            
            
            188,000
            
            
            
            31,359
            
            
            
            2.5394,000
            
            
            
            193,000
            
            
            
            426,192
            
            
            
            33.8D-J
      BasinOperated
            
            
            11,000
            
            
            
            537,000
            
            
            
            100,500
            
            
            
            8.0Non-Operated
            
            
            18,000
            
            
            
            146,000
            
            
            
            42,333
            
            
            
            3.329,000
            
            
            
            683,000
            
            
            
            142,833
            
            
            
            11.3Other
      AreasOperated
            
            
            5,000
            
            
            
            —
            
            
            
            5,000
            
            
            
            0.4Non-Operated
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —5,000
            
            
            
            —
            
            
            
            5,000
            
            
            
            0.4Total
            
            
            1,074,000
            
            
            
            1,119,000
            
            
            
            1,260,526
            
            
            
            100





Leasehold
Acreage





We lease
the rights to explore for and produce oil and gas from mineral owners. Leases
(quantified in acres) expire after their primary term unless oil or gas
production is established. Prior to establishing production, leases are
considered undeveloped. After production is established, leases are considered
developed or “held-by-production.” Our acreage is comprised of developed and
undeveloped acreage. As we have shifted to a growth strategy that is more
focused on adding reserves through exploration and development drilling, we have
begun to acquire various developed and undeveloped leasehold interests. To-date,
our largest acreage acquisition has been a 20% interest in 13,000 gross acres in
the Banks prospect in McKenzie County, North Dakota.





8
 Table of Contents







Developed
      Acreage
            
            
            Undeveloped
      AcreageGross
            
            
            Net
            
            
            Gross
            
            
            NetColorado
            
            
            640
            
            
            
            384
            
            
            
            —
            
            
            
            —Louisiana
            
            
            687
            
            
            
            51
            
            
            
            —
            
            
            
            —Montana
            
            
            6,330
            
            
            
            3,126
            
            
            
            5,662
            
            
            
            3,127North
      Dakota
            
            
            13,733
            
            
            
            2,289
            
            
            
            26,506
            
            
            
            4,623Texas
            
            
            3,080
            
            
            
            2,486
            
            
            
            —
            
            
            
            —Utah
            
            
            —
            
            
            
            —
            
            
            
            35,945
            
            
            
            719Wyoming
            
            
            1,555
            
            
            
            329
            
            
            
            40
            
            
            
            1Total
            
            
            26,025
            
            
            
            8,665
            
            
            
            68,153
            
            
            
            8,470





Field
Service Equipment





At
March 31, 2008, one of our subsidiaries, Basic Petroleum Services, Inc.
located in Bruni, Texas, owned a trailer house/field office, a shallow pulling
rig, a large winch truck, a skid-mounted cementing unit, four pickup trucks and
various ancillary service vehicles. None of the vehicles are
encumbered.





Office
Lease





We
currently lease approximately 4,000 square feet of office space in downtown
Denver, Colorado from an independent third party for approximately $5,500 per
month escalating at a rate of approximately $170 at the end of each year. The
lease term is for a five-year period ending April 30, 2013. For additional
information see Note 7 to the Consolidated Financial Statements.




ITEM 3


LEGAL
PROCEEDINGS





None.





ITEM 4


SUBMISSION
OF MATTERS TO A VOTE


OF
SECURITY HOLDERS





On
January 21, 2008, we held our Annual Meeting of Shareholders to elect four
directors to its Board of Directors. In the election of directors, each nominee
was elected by a vote of the shareholders as follows:





Director
            
            For
            
            
            Against
            
            AbstainRay
      Singleton
            
            
            9,855,265
            
            
            
            —
            
            
            
            1,156,016David
      Flake
            
            
            9,834,525
            
            
            
            —
            
            
            
            1,176,756Richard
      Rodgers
            
            
            9,841,327
            
            
            
            —
            
            
            
            1,169,954Monroe
      W. Robertson
            
            
            9,841,063
            
            
            
            —
            
            
            
            1,170,218





There
were no other matters submitted to a vote at the Annual Meeting of
Shareholders.





9
 Table of Contents








Part
II


ITEM
5


MARKET
FOR COMMON EQUITY


AND
RELATED STOCKHOLDER MATTERS





Our
common stock is traded in the over-the-counter market. The following table sets
forth the range of high and low closing bid prices for each quarter of the last
two fiscal years.





High
            
            
            LowYear
      Ended March 31, 2007First
      Quarter
            
            $
            2.85
            
            
            $
            2.00Second
      Quarter
            
            
            2.29
            
            
            
            1.66Third
      Quarter
            
            
            2.22
            
            
            
            1.77Fourth
      Quarter
            
            
            1.90
            
            
            
            1.52Year
      Ended March 31, 2008First
      Quarter
            
            $
            1.64
            
            
            $
            1.30Second
      Quarter
            
            
            1.45
            
            
            
            0.95Third
      Quarter
            
            
            1.23
            
            
            
            1.01Fourth
      Quarter
            
            
            1.12
            
            
            
            0.89





The
closing bid price on July 10, 2008 was $1.95.
Transactions on the over-the-counter market reflect inter-dealer quotations,
without adjustments for retail mark-ups, mark-downs or commissions to the
broker-dealer and may not necessarily represent actual
transactions.





As of
July 10, 2008, we had approximately 1,868shareholders of record. We have
never paid a cash dividend on its common stock. Any future dividend on common
stock will be at the discretion of the Board of Directors and will be dependent
upon the Company’s earnings, financial condition, and other factors. Our Board
of Directors presently has no plans to pay any dividends in the foreseeable
future.








ITEM 6


MANAGEMENT’S
DISCUSSION AND ANALYSIS


AND
PLAN OF OPERATION





Liquidity
Outlook





Our
primary source of funding is the net cash flow from the sale of its oil and gas
production. The profitability and cash flow generated by our operations in any
particular accounting period will be directly related to: (a) the volume of
oil and gas produced and then sold, (b) the average realized prices for oil
and gas sold, and (c) lifting costs. Assuming oil prices do not decline
significantly from current levels, we believe the cash generated from operations
will provide sufficient working capital for us to meet our existing and normal
recurring obligations as they become due. In addition, as mentioned in the
“Debt” section below, we have an available borrowing capacity of $4,000,000 as
of July 11, 2008.





Capital
Structure and Liquidity





Overview.
We recognize the importance of developing our capital resource base in order to
pursue our objectives. However, subsequent to our last public offering in 1980,
debt financing has been the sole source of external funding.  In
addition to our routine production-related costs, general and administrative
expenses and, when necessary, debt repayment requirements, we require capital to
fund our exploratory and development drilling efforts, and the acquisition of
additional properties as well as any development and enhancement of these
acquired properties.





10
 Table of Contents








We have
received numerous inquiries regarding the possibility of funding our efforts
through equity contributions or debt instruments. Given strong cash flows, and
the relatively modest nature of our current drilling projects, we have thus far
declined these overtures. Our primary concern in this area is the dilution of
our existing shareholders. However, going forward, given that one of the key
components of our growth strategy is to expand our oil and gas reserve base
through exploration and development drilling, if we were presented with a
significant opportunity and available cash and bank debt financing were
insufficient, it is possible we would consider alternative forms of additional
financing.





Credit
Line. Our current banking relationship, established in March 2002,
is with American National Bank (“the Bank”), located in Denver, Colorado.
Effective January 3, 2006 we amended the existing loan agreement to
increase the line of credit amount from $1,000,000 to $20,000,000 with a
concurrent borrowing base increase from $1,000,000 to $4,000,000. Effective
December 31, 2006 the loan agreement was amended again to extend the
maturity date of the credit agreement to December 31, 2008.





During
the year ended March 31, 2008, we utilized none of our credit facility,
while for the year ended March 31, 2007 we utilized our credit
facility to fund portions of our drilling program and incurred interest charges
of $6,000. Our effective annual interest rate was 8.50% at March 31, 2008
and 2007. On July 11, 2008 we had no outstanding principal balance on the line
of credit with the entire $4,000,000 available for borrowing. If necessary, we
may borrow funds to reduce payables, finance re-completion or drilling efforts,
fund property acquisitions, or pursue other opportunities we cannot envision at
this time. See Note 6 to the Consolidated Financial Statements for a more
detailed discussion of our bank credit facility.





Hedging.
During 2008 and 2007, we did not participate in any hedging activities, nor did
we have any open futures or option contracts.  Additional information
concerning our hedging activities appears in Note 1 to the Consolidated
Financial Statements.





Working
Capital. At March 31, 2008, we had a working capital surplus of
$3,176,000 (a current ratio of 2.11:1) compared to a working capital surplus at
March 31, 2007 of $2,057,000 (a current ratio of 2.03:1). The primary
difference from 2007 to 2008 was a substantial increase in cash and cash
equivalents resulting from the combined effect of improved cash flow from
operations with a drop in the amount of funds used in investing
activities.





Cash Flow.
As mentioned above, our primary source of funding is the cash flow from its
operations. Cash provided by operating activities decreased 15.7% from
$4,283,000 in 2007 to $3,609,000 in 2008. Net cash used in investing activities
decreased 59.3% from $1,413,000 in 2007 to $575,000 in 2008, which relates
primarily to our drilling activities during the year.




We have
not borrowed on our line of credit since June 2006. Cash used in financing
activities was $425,000 in 2007 principally for repayment of debt, while cash
provided by financing activities was $14,000 in 2008, from the proceeds of stock
option exercise.





Capital
Expenditures. During 2008 our capital expenditures were primarily focused
in the DJ Basin of Colorado. Total capital expenditures during 2008 for oil and
gas property and equipment and various leasehold interests were $2,700,000.
Seventy-nine percent of these costs are from the Antenna Federal property in the
DJ Basin of Colorado for the drilling and/or completion of the first eleven
wells.  These projects were primarily funded with internally generated
cash flow from operations. See also the Areas of Focus and Company Developments
sections of Part 1 of this report for further discussion related to our
exploration and development activities.





11
 Table of Contents








We are
continually evaluating exploration, development and acquisition opportunities in
an effort to grow our oil and gas reserves. At present cash flow levels and
available borrowing capacity, we expect to have sufficient funds available for
our share of any additional acreage, seismic and/or drilling cost requirements
that might arise from these opportunities. However, we may alter or vary all or
part of these planned capital expenditures based upon changes in circumstances,
unforeseen opportunities, inability to negotiate favorable acquisition, farmout
or joint venture terms, lack of cash flow, lack of additional funding, if
necessary, and/or other events which we are not able to anticipate.





Divestitures/Abandonments.
We plugged four wells during 2008 and incurred some additional costs pertaining
to the abandonment of wells that were plugged in prior periods.





Impact of
Inflation. Inflation has not had a material impact on the Company in
recent years because of the relatively low rates of inflation in the United
States. While the US dollar has weakened compared to foreign currencies during
the year, the prices of oil and gas have hit all time highs, and we deal
primarily in US dollars.





Other
Commitments. We have no obligations to purchase additional, or sell any
existing, oil and gas property. We also do not have any other commitments beyond
our office lease and software maintenance contracts (see Note 7 to the
Consolidated Financial Statements).





Restatement
and Impact on Financial Statements





During
the preparation and review of our 2008 income tax provision, we discovered
errors in calculating the GAAP cost basis of our oil and gas properties in
determining deferred tax liability and the estimated deferred tax asset for
depletion carryforward for fiscal years ended March 31, 2007 and 2006 under SFAS
109- Accounting for Income Taxes. During this review, we also determined that it
would be appropriate to correct what we considered to be immaterial differences
to properly reconcile accounting for stock option compensation for purposes of
determining deferred tax liability for the fiscal year ended March 31, 2007
under SFAS 109 – Accounting for Income Taxes. The foregoing impacted our
previously filed financial statements for the fiscal years 2007 and 2006 and our
previously filed interim financial statements for those years related to our tax
liabilities and our income tax provision.





In
accordance with the provisions of SFAS 154 – Accounting Changes and Error
Corrections, we have restated, to the earliest period practical, our previously
filed financial statements. See Note 2 – Restatement of Financial Statements in
Notes to Consolidated Financial Statements in Item 7 – Financial Statements of
this Annual Report on Form 10-KSB, for the effect of the restatements on fiscal
years 2007 and 2006.





The
following table details the net income effect of these corrections for fiscal
years 2006 and 2007:




Fiscal
      Year
              
              Net
      Income as Previously Reported
              
              
              Increase
      in Provision for Deferred Income Taxes
              
              
              Net
      Income as Restated2007
              
              $
              2,500,000
              
              
              $
              (445,000
              )
              
              $
              2,055,0002006
              
              $
              2,815,000
              
              
              $
              (482,000
              )
              
              $
              2,333,000


See Note
2 – Restatement of Financial Statements in Notes to Consolidated Financial
Statements in Item 7 – Financial Statements in this Annual Report on Form
10-KSB, for further discussion on the effect of these corrections for fiscal
years 2007 and 2006 to the previously reported amounts.





12
 Table of Contents







Results
of Operations





Fiscal
2008 Compared with Fiscal 2007





Overview.
Net income for the year ended March 31, 2008 was $1,763,000 compared
to net income of $2,055,000 as restated for the year ended March 31, 2007,
a 14.2% decrease. Earnings for 2008 were greatly impacted by the current year
income tax expense and the provision for deferred income taxes following
utilization of the remaining tax net operating loss carry-forward in 2006, as
well as increased general and administrative and production
expenses.





Revenues.
Oil and gas sales revenue increased $286,000 (3.9%) in 2008 over 2007 as a
result of higher average oil prices. Oil sales revenue alone increased $634,000
(9.4%). Gas sales revenue alone decreased $348,000 (34.3%) in 2008 from 2007.




Volumes and
Prices. Decline in production on the two relatively new Halverson wells,
Richland County, Montana along with salt water disposal issues on the West Cole
North Unit, Webb County, Texas contributed to a decrease in oil sales volumes of
14% from 104,000 barrels in 2007 to 89,000 barrels in 2008 while the average
price per barrel increased 29% from $58.70 in 2007 to $75.47 in 2008. Gas sales
volume decreased 30% from 155.8 million cubic feet (MMcf) in 2007 to 108.6
MMcf in 2008 while the average price per Mcf dropped 6%, from $6.51 in 2007 to
$6.13 in 2008. The production decrease in gas was primarily due to the Antenna
Federal wells being temporarily shut in for the rebuilding of tank
batteries.  On an equivalent barrel (BOE) basis, sales decreased
17% from 130,000 BOE in 2007 to 108,000 BOE in 2008.





Expenses.
Oil and gas production expense increased $150,000 (7.8%) in 2008 over 2007.
Oil and gas production expense is comprised of two components: routine lease
operating expenses and workovers. Routine expenses typically include such items
as daily well maintenance, utilities, fuel, water disposal and minor surface
equipment repairs. Workovers, on the other hand, which primarily include
downhole repairs, are generally random in nature. Although workovers are
expected, they can be much more frequent in some wells than others and their
cost can be significant. Therefore, workovers account for more dramatic
fluctuations in oil and gas production expense from period to
period.





Routine
lease operating expense increased $42,000 (3%) from $1,560,000 in 2007 to
$1,602,000 in 2008, which is relatively consistent. Workover expense increased
$108,000 (29%) from $375,000 in 2007 to $483,000 in 2008 primarily as a result
of additional workover expenses on various wells in 2008. On an equivalent
barrel basis, routine lease operating expense increased 24% from $11.99 per BOE
in 2007 to $14.84 in 2008 while workover expense increased 70% from $2.88 in
2007 to $4.89 per BOE in 2008.





Primarily
as a result of the increase in oil and gas sales revenue, production taxes,
which are a function of sales revenue, increased $134,000 (28%) in 2008 over
2007. Production taxes as a percent of oil and gas sales revenue actually
increased from 6.8% in 2007 to 8.3% in 2008.




The
overall lifting cost (oil and gas production expense plus production taxes) per
BOE was $24.86 in 2008 compared to $18.61 in 2007. We caution that this cost per
equivalent barrel is not indicative of all wells, and that certain high cost
wells would be shut in should oil prices begin to drop below certain
levels.
 
 Depreciation,
depletion and amortization expense increased $45,000 (7%) in 2008 over 2007,
which is due to new wells in our Antenna Federal property. Depreciation,
depletion, and amortization expense per BOE increased from $4.85 in 2007 to
$6.34 in 2008.
 
 Accretion
of asset retirement obligation increased $6,000 (5%) in 2008 over 2007. This
increase is a result of additional estimated future plugging and abandonment
costs. Additional information concerning SFAS No. 143 and related activity
during 2008 can be found in Note 3 to the Consolidated Financial
Statements.





13
 Table of Contents







General
and administrative (G&A) expense increased $170,000 (31%) in 2008 over 2007.
This increase was primarily due to D&O insurance, board of director
compensation, consulting fees in connection with Sarbanes-Oxley implementation,
and increased employee compensation consistent with the Company’s
growth.  The percentage of G&A expense that we were able to charge
out to operated properties was 22% in 2008 compared to 27% in 2007. G&A
expense per BOE increased 41% from $4.20 in 2007 to $5.94 in 2008. G&A
expense as a percentage of total sales revenue also increased from 7.7% in 2007
to 10% in 2008.





Other
Income/Expense. Due to significantly higher cash balances throughout the
year, Interest and other income increased from $50,000 in 2007 to $152,000 in
2008. Also in 2007, we recorded as other income a refund, plus accrued interest,
totaling $79,000 from the Department of Energy for overpayments related to fuel
purchases made from 1973 through 1980 by a wholly-owned subsidiary of the
Company that has been inactive since 1980.  Interest and other
expenses, increased from $7,000 in 2007 to $28,000 in 2008.





Income Taxes.In 2008, we recorded income tax expense of $1,525,000 comprised of a
current year income tax provision of $179,000, and a deferred income tax
provision of $1,346,000. This compares to a 2007 income tax expense of $326,000,
as restated. At March 31, 2007 we had a net deferred tax liability of
$1,026,000, as restated. However, with a combination of our net income from
operations over the past few years and the expensing of intangible drilling and
completion costs for tax purposes during these years, our net deferred tax asset
has been utilized and we are now in a deferred tax liability position. Going
forward, under a scenario of sustained net income from operations, we anticipate
recording an income tax expense each year that should approximate 39%. The
effective tax rate for 2008 was 46% of pre-tax income, which differs from the
expected future rate primarily because of the change in fiscal 2008 of the
percentage depletion carryforward as restated from fiscal 2007.




Fiscal 2007 Compared with Fiscal
2006
 
 Overview.
Net income for the year ended March 31, 2007 was $2,055,000 (as
restated) compared to net income of $2,333,000 (as restated) for the year ended
March 31, 2006, an 12% decrease. Earnings for 2007 were greatly impacted by
the current year income tax expense and the provision for deferred income taxes
following utilization of the remaining tax net operating loss carry-forward in
2006.
 
 Revenues.
Oil and gas sales revenue increased $534,000 (8%) in 2007 over 2006 as a result
of both an increase in volume sales and higher average oil prices. Oil sales
revenue alone increased $585,000 (11%). An increase in sales volume in 2007
contributed $235,000 while higher average oil prices in 2007 added $350,000. Gas
sales revenue alone decreased $51,000 (5%) in 2007 from 2006. A positive
variance of $114,000 from higher volume sales was more than offset by a $165,000
negative variance attributable to a lower average price for natural
gas.
 
 Volumes and
Prices. As a result of new production from the Halvorsen 21X-36 and two
wells in our Banks prospect, oil sales volume increased 4% from 99,900 barrels
in 2006 to 104,200 barrels in 2007 while the average price per barrel rose 6%
from $55.35 in 2006 to $58.70 in 2007. Primarily due to new production from our
Louisiana gas well, gas sales volume increased 11% from 140.8 million cubic
feet in (MMcf) 2006 to 155.8 MMcf in 2007 while the average price per Mcf
dropped 14%, from $7.56 in 2006 to $6.51 in 2007. On an equivalent barrel
(BOE) basis, sales increased 5% from 123,400 BOE in 2006 to 130,100 BOE in
2007.
 
 Expenses.
Oil and gas production expense decreased $169,000 (8%) in 2007 from 2006. Oil
and gas production expense is comprised of two components: routine lease
operating expenses and workovers. Routine expenses typically include such items
as daily well maintenance, utilities, fuel, water disposal and minor surface
equipment repairs. Workovers, on the other hand, which primarily include
downhole repairs, are generally random in nature. Although workovers are
expected, they can be much more frequent in some wells than others and their
cost can be significant. Therefore, workovers account for more dramatic
fluctuations in oil and gas production expense from period to
period.
  14
 Table of Contents




Routine
lease operating expense increased $218,000 (16%) from $1,342,000 in 2006 to
$1,560,000 in 2007 mainly because of new wells placed on production in 2007.
Workover expense dropped $387,000 (51%) from $762,000 in 2006 to $375,000 in
2007 primarily as a result of unusually high workover expenses on three
properties in 2006. On an equivalent barrel basis, routine lease operating
expense increased 10% from $10.88 per BOE in 2006 to $11.99 in 2007 while
workover expense dropped 53% from $6.18 in 2006 to $2.88 per BOE in
2007.
 
 Primarily
as a result of the increase in oil and gas sales revenue, production taxes,
which are a function of sales revenue, increased $27,000 (6%) in 2007 over 2006.
Production taxes as a percent of oil and gas sales revenue actually dropped
slightly from 7.0% in 2006 to 6.8% in 2007.
 
 The
overall lifting cost (oil and gas production expense plus production taxes) per
BOE was $18.61 in 2007 compared to $20.78 in 2006. Basic cautions that this cost
per equivalent barrel is not indicative of all wells, and that certain high cost
wells would be shut in should oil prices begin to drop below certain
levels.
 
 Depreciation,
depletion and impairment expense increased $90,000 (16%) in 2007 over 2006.
Included in the 2006 expense is an $85,000 ceiling limitation impairment charge
applicable to our Canadian operations. With respect to U.S. operations only,
depreciation and depletion expense increased $175,000 (38%) in 2007 over 2006
due to extensive drilling activity at the end of 2006 and the resulting
inclusion of new properties in our estimated oil and gas reserves and full cost
pool depletable base in 2007. For U.S. operations only, depreciation and
depletion expense per BOE increased from $3.70 in 2006 to $4.85 in
2007.
 
 Accretion
of asset retirement obligation increased $34,000 (46%) in 2007 over 2006. This
increase is a result of revisions to previous estimates of future plugging and
abandonment costs. Additional information concerning SFAS No. 143 and
related activity during 2007 can be found in Note 2 to the Consolidated
Financial Statements.
 
 General
and administrative (G&A) expense increased $22,000 (4%) in 2007 over 2006.
Increases in SEC reporting, audit related costs, and consulting fees, and a
decrease in the amount of G&A expenses that we could charge out to operated
properties, all were only partially offset by a decrease in employee benefits.
The percentage of gross G&A expense that we were able to charge out was 27%
in 2007 compared to 30% in 2006. G&A expense per BOE decreased 1% from $4.24
in 2006 to $4.20 in 2007. G&A expense as a percentage of total sales revenue
also dropped slightly from 7.9% in 2006 to 7.7% in 2007.
 
 Other
Income/Expense. Due to significantly higher cash balances throughout the
year, interest and other income, which consists almost entirely of interest
income, increased from $23,000 in 2006 to $50,000 in 2007. Interest and other
expenses, consisting primarily of interest from short-term debt financing,
decreased from $11,000 in 2006 to $7,000 in 2007. Also in 2007, we recorded as
other income a refund, plus accrued interest, totaling $79,000 from the
Department of Energy for overpayments related to fuel purchases made from 1973
through 1980 by a wholly-owned subsidiary of the Company that has been inactive
since 1980.
 
 Income Taxes.In 2007 we recorded income tax expense of $1,352,000 as restated,
comprised of a current year income tax provision of $326,000 and a deferred
income tax provision of $1,026,000, as restated. This compares to a 2006 income
tax expense of $495,000 as restated, comprised of a current year income tax
provision of $13,000 and a deferred income tax provision of $482,000, as
restated. With a combination of our net income from operations over the past few
years and the expensing of intangible drilling and completion costs for tax
purposes during these years, our net deferred tax asset has been utilized and we
are now in a deferred tax liability position. Going forward, under a scenario of
sustained net income from operations, we anticipate recording an income tax
expense each year that should approximate 38%. The effective tax rate for 2007
was 27% of pre-tax income, which differs from the expected future tax rate
primarily because of the utilization during 2007 of our remaining net deferred
tax asset carried forward from 2006, which had previously been fully offset by a
valuation allowance due to the uncertainty as to its utilization.


15
 Table of Contents





Selected
Financial Information





The
following table shows selected financial information and averages for each of
the three prior years in the period ended March 31.





2008
            
            
            
            2007
            
            
            
            2006Production:Oil
      (barrels)
            
            
            89,400
            
            
            
            104,200
            
            
            
            99,900Gas
      (Mcf)
            
            
            108,600
            
            
            
            155,800
            
            
            
            140,800Revenue:
      (in thousands)Oil
            
            $
            6,748
            
            
            $
            6,115
            
            
            $
            5,530Gas
            
            
            667
            
            
            
            1,014
            
            
            
            1,065Total
            
            
            7,415
            
            
            
            7,129
            
            
            
            6,595Less:
      Total production expense (in thousands)1
            
            
            2,706
            
            
            
            2,422
            
            
            
            2,564Gross
      profit (in thousands)
            
            $
            4,709
            
            
            $
            4,707
            
            
            $
            4,031Depletion
      expense (in thousands)4
            
            $
            673
            
            
            $
            631
            
            
            $
            456General
      and administrative expense (in thousands)
            
            $
            716
            
            
            $
            546
            
            
            $
            524Average
      sales price2Oil
      (per barrel)
            
            $
            75.47
            
            
            $
            58.70
            
            
            $
            55.35Gas
      (per Mcf)
            
            
            6.13
            
            
            
            6.51
            
            
            
            7.56Average
      production expense1,2,3
            
            
            19.27
            
            
            
            18.61
            
            
            
            20.78Average
      gross profit2,3
            
            
            43.96
            
            
            
            36.17
            
            
            
            32.66Average
      depletion expense2,3,4
            
            
            5.59
            
            
            
            4.85
            
            
            
            3.70Average
      general and administrative expense2,3
            
            
            5.94
            
            
            
            4.20
            
            
            
            4.24




1
            
            Operating
      expenses, including production tax2
            
            Averages
      calculated based upon non-rounded figures3
            
            Per
      equivalent barrel (6 Mcf of gas is equivalent to 1 barrel of
      oil)4
            
            Excluding
      impairment expense related to Canadian full cost pool ceiling
      limitation





Critical
Accounting Policies and Estimates





The
preparation of financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions that affect
the actual amounts of assets and liabilities at the date of the financial
statements and the actual amounts of revenues and expenses during the reporting
period. We base these estimates on assumptions that we understand are reasonable
under the circumstances. The estimated results that are produced by this effort
will differ under different assumptions or conditions.  We
understand that these estimates are necessary and that actual results could vary
significantly from the estimated amounts for the current and future periods. We
understand the following accounting policies and estimates are necessary in the
preparation of our consolidated financial statements: the carrying value of our
oil and gas property, the accounting for oil and gas reserves, the estimate of
our asset retirement obligations and the estimate of our income tax assets and
liabilities.





16
 Table of Contents





Oil and Gas
Property. We utilize the full cost method of accounting for costs related
to our oil and gas property. Capitalized costs included in the full cost pool
are depleted on an aggregate basis over the estimated lives of the properties
using the units-of-production method. These capitalized costs are subject to a
ceiling test that limits such pooled costs to the aggregate of the present value
of future net revenues attributable to proved oil and gas reserves discounted at
10 percent plus the lower of cost or market value of unproved properties
less any associated tax effects. If the full cost pool of capitalized oil and
gas property costs exceeds the ceiling, we will record a ceiling test write-down
to the extent of such excess. This write-down is a non-cash charge to earnings.
If required, it reduces earnings and impacts shareholders’ equity in the period
of occurrence and may result in lower depreciation and depletion in future
periods. The write-down can not be reversed in future periods, even though
higher oil and gas prices may subsequently increase the ceiling.





Oil and Gas
Reserves. The determination of depreciation and depletion expense as well
as ceiling test write-downs related to the recorded value of our oil and gas
properties are highly dependent on the estimates of the proved oil and gas
reserves attributable to these properties. Oil and gas reserves include proved
reserves that represent estimated quantities of crude oil and natural gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. There are numerous uncertainties inherent in estimating
oil and gas reserves and their values, including many factors beyond our
control. Accordingly, reserve estimates are often different from the quantities
of oil and gas ultimately recovered and the corresponding lifting costs
associated with the recovery of these reserves. Ninety-three percent of our
reported oil and gas reserves at March 31, 2008 are based on estimates
prepared by an independent petroleum engineering firm. The remaining seven
percent of our oil and gas reserves were prepared in-house. See also Note 12 to
the Consolidated Financial Statements.





Asset Retirement
Obligations. We have significant obligations related to the plugging and
abandonment of our oil and gas wells, the removal of equipment and facilities,
and returning the land to its original condition. SFAS No. 143, “Accounting
for Asset Retirement Obligations” requires that we estimate the future cost of
this obligation, discount this cost to its present value, and record a
corresponding asset and liability in its Consolidated Balance Sheets. The values
ultimately derived are based on many significant estimates, including the
ultimate expected cost of the obligation, the expected future date of the
required cash expenditures, and inflation rates. The nature of these estimates
requires management to make judgments based on historical experience and future
expectations related to timing. We review the estimate of our future asset
retirement obligations quarterly. These quarterly reviews may require revisions
to these estimates based on such things as changes to cost estimates or the
timing of future cash outlays. Any such changes that result in upward or
downward revisions in the estimated obligation will result in an adjustment to
the related capitalized asset and corresponding liability on a prospective
basis. See also Note 3 to the Consolidated Financial Statements.





Off
Balance Sheet Transactions, Arrangements or Obligations





We have
no significant off balance sheet transactions, arrangements or
obligations.





Recent
Accounting Pronouncements





There
have been several recent accounting pronouncements, but none are expected to
have a material effect on our financial position, results of operations, or cash
flows. For more information, see Note 1 - Recent Accounting Pronouncements in
the Notes to Consolidated Financial Statements.





17
 Table of Contents







Basic Earth Science Systems, Inc.


Table
of Contents


Consolidated
Financial Statements


and
Accompanying Notes


March 31,
2008, 2007, and 2006





PageReport of
      Independent Registered Public Accounting Firm – Hein & Associates
      LLP
            
            
            19Consolidated
      Balance Sheets
            
            
            20-21Consolidated
      Statements of Operations
            
            
            22Consolidated
      Statements of Shareholders’ Equity
            
            
            23Consolidated
      Statements of Cash Flows
            
            
            24Notes to
      Consolidated Financial Statements
            
            
            25-53







18
 Table of Contents







ITEM 7


FINANCIAL
STATEMENTS


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Shareholders
 Basic
Earth Science Systems, Inc.
 Denver,
Colorado
 
 We have
audited the consolidated balance sheets of Basic Earth Science Systems, Inc. and
subsidiaries (the “Company”) as of March 31, 2008, 2007 and 2006, and the
related consolidated statements of operations, shareholders’ equity and cash
flows for each of the years then ended.  These financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provided 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 Basic Earth Science Systems,
Inc. and subsidiaries as of March 31, 2008, 2007 and 2006, and the results of
their operations and their cash flows for each of the years then ended, in
conformity with U.S. generally accepted accounting principles.
 
 As
discussed in Note 2 to the consolidated financial statements, the Company has
restated its 2007 and 2006 consolidated financial statements.
 
 We were
not engaged to examine management’s assertion about the effectiveness of Basic
Earth Science Systems, Inc.’s internal control over financial reporting as of
March 31, 2008 included in the accompanying management’s annual report on
internal control over financial reporting and, accordingly, we do not express an
opinion thereon.
 
  HEIN & ASSOCIATES
LLP
 Denver,
Colorado
 July 11,
2008


19
 Table of Contents








Basic Earth Science Systems, Inc.


Consolidated
Balance Sheets





At
      March 31,2008
              
              
              2007
              
              
              2006As
      restated
              
              
              As
      restatedAssetsCurrent
      assets:Cash
      and cash equivalents
              
              $
              5,571,000
              
              
              $
              2,523,000
              
              
              $
              78,000Accounts
      receivable:Oil
      and gas sales
              
              
              1,110,000
              
              
              
              825,000
              
              
              
              913,000Joint
      interest and other receivables, net of $50,000 and $70,000 in
      allowance
              
              
              236,000
              
              
              
              436,000
              
              
              
              402,000Other
      current assets
              
              
              280,000
              
              
              
              262,000
              
              
              
              297,000Total
      current assets
              
              
              7,197,000
              
              
              
              4,046,000
              
              
              
              1,690,000Oil
      and gas property, full cost method:Proved
      property
              
              
              29,050,000
              
              
              
              27,686,000
              
              
              
              24,257,257Unproved
      property
              
              
              2,515,000
              
              
              
              1,199,000
              
              
              
              2,880,743Accumulated
      depreciation and depletion
              
              
              (18,515,000
              )
              
              
              (17,842,000
              )
              
              
              (17,250,000
              )Net
      oil and gas property
              
              
              13,050,000
              
              
              
              11,043,000
              
              
              
              9,888,000Other
      non-current assets, net
              
              
              443,000
              
              
              
              363,000
              
              
              
              272,000Total
      non-current assets
              
              
              13,493,000
              
              
              
              11,406,000
              
              
              
              10,160,000Total
      assets
              
              $
              20,690,000
              
              
              $
              15,452,000
              
              
              $
              11,850,000





See
accompanying notes to consolidated financial statements.





20
 Table of Contents







Basic
Earth Science Systems, Inc.


Consolidated
Balance Sheets





At
      March 31,2008
              
              
              2007
              
              
              2006As
      restated
              
              
              As
      restatedLiabilities
      and Shareholders’ EquityCurrent
      liabilities:Accounts
      payable
              
              $
              1,443,000
              
              
              $
              744,000
              
              
              $
              389,000Accrued
      liabilities
              
              
              2,586,000
              
              
              
              1,245,000
              
              
              
              1,084,000Total
      current liabilities
              
              
              4,029,000
              
              
              
              1,989,000
              
              
              
              1,473,000Long-term
      liabilities:Long
      term debt
              
              
              —
              
              
              
              —
              
              
              
              445,000Deferred
      tax liability
              
              
              2,800,000
              
              
              
              1,489,000
              
              
              
              482,000Asset
      retirement obligation
              
              
              1,877,000
              
              
              
              1,802,000
              
              
              
              1,372,000Total
      long-term liabilities
              
              
              4,677,000
              
              
              
              3,291,000
              
              
              
              2,299,000Commitments
      and contingenciesShareholders’
      Equity:Preferred
      stock, $.001 par value, 3,000,000 authorized, and none issued or
      outstanding
              
              
              ―
              
              
              
              ―
              
              
              
              ―Common
      stock, $.001 par value, 32,000,000 shares authorized, and 17,465,585 and
      17,125,585 shares issued and outstanding, respectively
              
              
              17,000
              
              
              
              17,000
              
              
              
              17,000Additional
      paid-in capital
              
              
              22,798,000
              
              
              
              22,749,000
              
              
              
              22,710,000Treasury
      stock (349,265 shares); at cost
              
              
              (23,000
              )
              
              
              (23,000
              )
              
              
              (23,000
              )Accumulated
      deficit
              
              
              (10,808,000
              )
              
              
              (12,571,000
              )
              
              
              (14,626,000
              )Total
      shareholders’ equity
              
              
              11,984,000
              
              
              
              10,172,000
              
              
              
              8,078,000Total
      liabilities and shareholders’ equity
              
              $
              20,690,000
              
              
              $
              15,452,000
              
              
              $
              11,850,000





See
accompanying notes to consolidated financial statements.





21
 Table of Contents




Basic Earth Science Systems, Inc.


Consolidated
Statements of Operations





Years
      Ended March 31,2008
              
              
              2007
              
              
              2006As
      Restated
              
              
              As
      RestatedRevenues:Oil
      and gas sales
              
              $
              7,415,000
              
              
              $
              7,129,000
              
              
              $
              6,595,000Well
      service revenue
              
              
              32,000
              
              
              
              38,000
              
              
              
              20,000Total
      revenues
              
              
              7,447,000
              
              
              
              7,167,000
              
              
              
              6,615,000Expenses:Oil
      and gas production
              
              
              2,085,000
              
              
              
              1,935,000
              
              
              
              2,104,000Production
      tax
              
              
              621,000
              
              
              
              487,000
              
              
              
              460,000Well
      servicing expenses
              
              
              27,000
              
              
              
              41,000
              
              
              
              24,000Depreciation,
      depletion and amortization
              
              
              685,000
              
              
              
              640,000
              
              
              
              550,000Accretion
      of asset retirement obligation
              
              
              114,000
              
              
              
              108,000
              
              
              
              74,000Asset
      retirement expense
              
              
              35,000
              
              
              
              125,000
              
              
              
              63,000General
      and administrative
              
              
              716,000
              
              
              
              546,000
              
              
              
              524,000Total
      expenses
              
              
              4,283,000
              
              
              
              3,882,000
              
              
              
              3,799,000Income
      from operations
              
              
              3,164,000
              
              
              
              3,285,000
              
              
              
              2,816,000Other
      Income (Expense):Interest
      and other income
              
              
              152,000
              
              
              
              50,000
              
              
              
              23,000Fuel
      purchase overcharge refund
              
              
              ―
              
              
              
              79,000
              
              
              
              ―Interest
      and other expenses
              
              
              (28,000
              )
              
              
              (7,000
              )
              
              
              (11,000
              )Total
      other income
              
              
              124,000
              
              
              
              122,000
              
              
              
              12,000Income
      before income taxes
              
              
              3,288,000
              
              
              
              3,407,000
              
              
              
              2,828,000Current
      income tax expense
              
              
              179,000
              
              
              
              326,000
              
              
              
              13,000Provision
      for deferred income taxes
              
              
              1,346,000
              
              
              
              1,026,000
              
              
              
              482,000Total
      income taxes
              
              
              1,525,000
              
              
              
              1,352,000
              
              
              
              495,000Net
      income
              
              $
              1,763,000
              
              
              $
              2,055,000
              
              
              $
              2,333,000Per
      share amounts:Basic
              
              $
              0.10
              
              
              $
              0.12
              
              
              $
              0.14Diluted
              
              $
              0.10
              
              
              $
              0.12
              
              
              $
              0.14Weighted
      average common shares outstanding:Basic
              
              
              17,370,256
              
              
              
              16,825,076
              
              
              
              16,732,611Diluted
              
              
              17,480,671
              
              
              
              17,129,537
              
              
              
              17,125,635





See
accompanying notes to consolidated financial statements.





22
 Table of Contents





Basic Earth Science Systems,Inc.


Consolidated
Statements of Shareholders’ Equity


Years
Ended March 31, 2008, 2007, and 2006




Common
      stock
                
                
                Additional
                
                
                Treasury
      stock
                
                
                AccumulatedShares
                
                
                Par
      value
                
                
                paid-in capital
                
                
                Shares
                
                
                Amount
                
                
                deficit
                
                
                TotalAs
      of  March 31, 2006 (as reported)
                
                
                17,126,000
                
                
                $
                17,000
                
                
                $
                22,710,000
                
                
                
                (349,000)
                
                
                $
                (23,000)
                
                
                $
                (14,144,000)
                
                
                $
                8,560,000Cumulative
      effect of error corrections (Note 2)
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (482,000)
                
                
                
                (482,000)As
      of  March 31, 2006 (as restated)
                
                
                17,126,000
                
                
                $
                17,000
                
                
                $
                22,710,000
                
                
                
                (349,000)
                
                
                $
                (23,000)
                
                
                $
                (14,626,000)
                
                
                $
                8,078,000Stock
      options exercised
                
                
                175,000
                
                
                
                —
                
                
                
                20,000
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                20,000Net
      income (as reported)
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                2,500,000
                
                
                
                2,500,000As
      of March 31, 2007 (as reported)
                
                
                17,301,000
                
                
                
                17,000
                
                
                
                22,730,000
                
                
                
                (349,000)
                
                
                
                (23,000)
                
                
                
                (12,126,000)
                
                
                
                10,598,000Cumulative
      effect of error corrections (Note 2)
                
                
                —
                
                
                
                —
                
                
                
                19,000
                
                
                
                —
                
                
                
                —
                
                
                
                (445,000)
                
                
                
                (426,000)As
      of March 31, 2007 (as restated)
                
                
                17,301,000
                
                
                
                17,000
                
                
                
                22,749,000
                
                
                
                (349,000)
                
                
                
                (23,000)
                
                
                
                (12,571,000)
                
                
                
                10,172,000Stock
      options exercised
                
                
                165,000
                
                
                
                —
                
                
                
                49,000
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                49,000Net
      income
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,763,000
                
                
                
                1,763,000Balance
      as of  March 31, 2008
                
                
                17,466,000
                
                
                $
                17,000
                
                
                $
                22,798,000
                
                
                
                (349,000)
                
                
                $
                (23,000)
                
                
                $
                (10,808,000)
                
                
                $
                11,984,000




See
accompanying notes to consolidated financial statements.




23
 Table of Contents





Basic Earth Science Systems, Inc.


Consolidated
Statements of Cash Flows





Years
      Ended March 31,2008
              
              
              
              2007
              
              
              
              2006Cash
      flows from operating activities:
              
              
              
              
              
              As
      restated
              
              
              As
      restatedNet
      income
              
              $
              1,763,000
              
              
              $
              2,055,000
              
              
              $
              2,333,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation,
      depletion and amortization
              
              
              685,000
              
              
              
              640,000
              
              
              
              550,000Deferred
      tax liability
              
              
              1,311,000
              
              
              
              1,007,000
              
              
              
              482,000Additional
      paid in capital  associated with deferred tax
      expense
              
              
              35,000
              
              
              
              19,000
              
              
              
              ―Accretion
      of asset retirement obligation
              
              
              114,000
              
              
              
              108,000
              
              
              
              74,000Change
      in:Accounts
      receivable, net
              
              
              (85,000)
              
              
              
              54,000
              
              
              
              (308,000)Other
      assets
              
              
              (63,000)
              
              
              
              70,000
              
              
              
              (86,000)Accounts
      payable and accrued liabilities
              
              
              (158,000)
              
              
              
              321,000
              
              
              
              (33,000)Other
              
              
              7,000
              
              
              
              9,000
              
              
              
              1,000Net
      cash provided by operating activities
              
              
              3,609,000
              
              
              
              4,283,000
              
              
              
              3,013,000Cash
      flows from investing activities:Oil
      and gas property
              
              
              (587,000)
              
              
              
              (1,703,000)
              
              
              
              (4,271,000)Support
      equipment
              
              
              (16,000)
              
              
              
              (38,000)
              
              
              
              (8,000)Insurance
      settlements
              
              
              66,000
              
              
              
              208,000
              
              
              
              ―Proceeds
      from sale of oil and gas property and equipment
              
              
              14,000
              
              
              
              146,000
              
              
              
              43,000Other
              
              
              (52,000)
              
              
              
              (26,000)
              
              
              
              (45,000)Net
      cash used in investing activities
              
              
              (575,000)
              
              
              
              (1,413,000)
              
              
              
              (4,281,000)Cash
      flows from financing activities:Proceeds
      from exercise of common stock options
              
              
              14,000
              
              
              
              20,000
              
              
              
              9,000Proceeds
      from borrowing
              
              
              ―
              
              
              
              565,000
              
              
              
              1,905,000Debt
      payments
              
              
              ―
              
              
              
              (1,010,000)
              
              
              
              (1,460,000)Net
      cash provided by (used in) financing activities
              
              
              14,000
              
              
              
              (425,000)
              
              
              
              454,000Cash
      and cash equivalents:Increase
      in cash and cash equivalents
              
              
              3,048,000
              
              
              
              2,445,000
              
              
              
              (814,000)Balance,
      beginning of year
              
              
              2,523,000
              
              
              
              78,000
              
              
              
              892,000Balance,
      end of year
              
              $
              5,571,000
              
              
              $
              2,523,000
              
              
              $
              78,000Supplemental
      disclosure of cash flow information:Cash
      paid for interest
              
              $
              28,000
              
              
              $
              7,000
              
              
              $
              8,000Cash
      paid for income tax
              
              $
              171,000
              
              
              $
              13,000
              
              
              $
              ―Non-cash:Increase
      in oil and gas property due to asset retirement obligation
              
              $
              210,000
              
              
              $
              512,000
              
              
              $
              ―Additions
      to oil and gas also included in accrued liabilities
              
              $
              2,273,000
              
              
              $
              ―
              
              
              $
              ―


See
accompanying notes to consolidated financial statements.





24
 Table of Contents





Basic Earth Science Systems, Inc.


Notes
to Consolidated Financial Statements





1.
Summary of Significant Accounting Policies





Organization and
Nature of Operations. Basic Earth Science Systems, Inc. (“Basic” or “the
Company” or “we” or “our” or “us”), was originally organized in July 1969
and had its first public offering in 1980. We are principally engaged in the
acquisition, exploitation, development, operation and production of crude oil
and natural gas. Our primary areas of operation are the Williston basin in North
Dakota and Montana, south Texas and the Denver-Julesburg basin in
Colorado.





Principles of
Consolidation. The consolidated financial statements include our accounts
and those of our wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.





Oil and Gas
Producing Activity. We follow the full cost method of accounting for our
oil and gas activity. Accordingly, all costs associated with the acquisition,
exploration and development of oil and gas properties are capitalized. Should
net oil and gas property cost exceed an amount equal to the present value (using
a 10% discount factor) of estimated future net revenue from proved reserves,
considering related income tax effects, as prescribed by the Securities and
Exchange Commission’s ceiling limitation, the excess is charged to expense
during the period in which the excess occurs. We did not incur a ceiling
limitation charge in either of the years ended March 31, 2008 or
March 31, 2007.





If a
significant portion of our oil and gas reserves are sold, a gain or loss would
be recognized; otherwise, proceeds from sales are applied as a reduction of oil
and gas property. In 2008 and 2007, we reduced the carrying value of our oil and
gas property $14,000 and $146,000, respectively, as a result of the sale of its
interest in certain oil and gas property and equipment. Also in 2008, we
received insurance settlements of $66,000 related to blowout coverage. The
carrying value of our oil and gas property was reduced by the $66,000 received
from these settlements.   In 2007, we received insurance
settlements of $161,000 and $47,000 related to contractor negligence coverage
and blowout coverage, respectively. The carrying value of our oil and gas
property was reduced by the $208,000 received from these
settlements.





All
capitalized costs are depleted on a composite units-of-production method based
on estimated proved reserves attributable to the oil and gas properties we own.
Depletion expense per equivalent barrel of production was $6.34 and $4.85 for
2008 and 2007, respectively.





Use of
Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles in the United States requires us to
make estimates and assumptions that affect the reported amounts of oil and gas
reserves as well as the assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. There are
many factors, including global events, which may influence the production,
processing, marketing, and pricing of crude oil and natural gas. A reduction in
the valuation of oil and gas properties resulting from declining prices or
production could adversely impact depletion rates and ceiling test limitations.
Estimates of oil and gas reserve quantities provide a basis for calculation of
depreciation, depletion, and amortization expense, as well as the potential for
impairment.





Support Equipment
and Other. Support equipment (including such items as vehicles, office
furniture and equipment, and well servicing equipment) is stated at cost.
Depreciation of support equipment and other property is computed using various
methods over periods ranging from five to seven years.





Inventory.
Inventory, consisting primarily of tubular goods and oil field equipment, is
stated at the lower of cost or market, cost being determined by the FIFO method.
See also Notes 4 and 5 below.





25
 Table of Contents











Fair Value of
Financial Instruments. Unless otherwise specified, we believe the
carrying value of financial instruments approximates their fair
value.





Long-Term
Assets. We apply Statement of Financial Accounting Standards
(“SFAS”) No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” in evaluating all long-lived assets except the full cost pool
for possible impairment. Under SFAS No. 144, long-lived assets and certain
intangibles are reported at the lower of cost or their estimated recoverable
amounts. During 2008 and 2007, there was no impairment recorded for long-lived
assets.





Earnings Per
Share. Our earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of the Company and is calculated by dividing net income by
the diluted weighted average number of common shares. The diluted weighted
average number of common shares is computed using the treasury stock method for
common stock that may be issued for outstanding stock options. The following is
a reconciliation of basic and diluted earnings per share for 2008 and
2007:





Years
      Ended March 31,2008
            
            
            2007Numerator:
            
            
            
            
            As
      restatedNet
      income available to common shareholders
            
            $
            1,763,000
            
            
            $
            2,055,000Denominator:Denominator
      for basic earnings per share
            
            
            17,370,256
            
            
            
            16,825,076Effect
      of dilutive securities:Stock
      options
            
            
            110,415
            
            
            
            304,461Denominator
      for diluted earnings per share
            
            
            17,480,671
            
            
            
            17,129,537





All
options currently issued and outstanding were included in the computation of
diluted earnings per share for both 2008 and 2007. See Note 7 below for further
discussion of our stock options.





Stock Option
Plan. With the issuance of SFAS No. 123(R), Accounting for Share
Based Compensation, effective December 2004, we are required to recognize
all equity-based compensation, including stock option grants, as stock-based
compensation expense in our Consolidated Statements of Operations based on the
fair value of the compensation. No options have been granted since
July 2003, and the plan expired in July 2005.  We did not record
any stock-based compensation expense in either 2008 or 2007. See Note 8 below
for further discussion of the Company’s stock options.





Comprehensive
Income.Comprehensive income is comprised of net income and all changes to the
Consolidated Statements of Shareholders’ Equity, except those due to investments
by shareholders, changes in additional paid-in capital and distributions to
shareholders. There was no difference between net income and comprehensive
income for 2008 or 2007.





Cash and Cash
Equivalents. For purposes of the Consolidated Balance Sheets and
Statements of Cash Flows, we consider all highly liquid investments with a
maturity of ninety days or less when purchased to be cash equivalents. The
carrying amount of cash equivalents approximates fair value because of the
short-term maturity of those instruments.





26
 Table of Contents








Income
Taxes. We account for income taxes in accordance with SFAS No. 109,
“Accounting for Income Taxes” which requires the use of the “liability method.”
Accordingly, deferred tax liabilities and assets are determined based on the
temporary differences between the financial statement and tax bases of assets
and liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. See Note 9 below.





Hedging
Activities. We had no hedging activities in 2008 and 2007. Hedging
strategies, or absence of hedging, may vary or change due to change of
circumstances, unforeseen opportunities, inability to fund margin requirements,
lending institution requirements and other events which we are not able to
anticipate.





Major
Customersand Concentration
of Credit Risk.Purchasers of 10% or more of our oil and gas
production revenue for 2008 and 2007 are as follows:





2008
            
            
            
            2007Plains
      Marketing LP
            
            
            3
            %
            
            
            22
            %Murphy
      Oil USA, Inc.
            
            
            22
            %
            
            
            20
            %Valero
      Energy
            
            
            20
            %
            
            
            18
            %Nexen
      Marketing USA, Inc.
            
            
            11
            %
            
            
            6
            %Texon
      LP
            
            
            10
            %
            
            
            8
            %Total
            
            
            66
            %
            
            
            74
            %





It is not
expected that the loss of any of these customers would cause a material adverse
impact on operations since alternative markets for our products are readily
available.





Reclassifications.
Certain prior year amounts may have been reclassified to conform to current year
presentation. Such reclassifications had no effect on the prior year net income,
except as disclosed in Note 2.





Recent
Accounting Pronouncements





In
March 2007, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities, An Amendment of FASB Statement
No. 133.” SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities”, does not provide adequate information about how derivative and
hedging activities affect an entity’s financial position, financial performance,
and cash flows. Accordingly, SFAS 161 requires enhanced disclosures about an
entity’s derivative and hedging activities and thereby improves the transparency
of financial reporting. SFAS 161 is effective for fiscal years and interim
periods beginning after November 15, 2008. The adoption of the provisions
of SFAS 161 is not expected to have a material effect on our financial position,
results of operations, or cash flows.





In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R will significantly change the accounting
for business combinations in a number of areas including the treatment of
contingent consideration, contingencies, acquisition costs, research and
development assets and restructuring costs. In addition, under SFAS 141R,
changes in deferred tax asset valuation allowances and acquired income tax
uncertainties in a business combination after the measurement period will impact
income taxes. SFAS 141R is effective for fiscal years beginning after
December 15, 2008. The adoption of the provisions of SFAS 141R is not
expected to have a material effect on our financial position, results of
operations, or cash flows.





27
 Table of Contents





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements, An Amendment of ARB No. 51.” SFAS 160
amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also amends certain of ARB 51’s consolidation procedures for
consistency with the requirements of SFAS 141R. SFAS 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. The statement shall be applied prospectively as of the
beginning of the fiscal year in which the statement is initially adopted. The
adoption of the provisions of SFAS 160 is not expected to have a material effect
on our financial position, results of operations, or cash flows.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities”, providing companies with an
option to report selected financial assets and liabilities at fair value.The
Standard’s objective is to reduce both complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related assets
and liabilities differently.Generally
accepted accounting principles have required different measurement attributes
for different assets and liabilities that can create artificial volatility in
earnings. SFAS 159 helps to mitigate this type of accounting-induced volatility
by enabling companies to report related assets and liabilities at fair value,
which would likely reduce the need for companies to comply with detailed rules
for hedge accounting.SFAS
159 also establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities.The
Standard requires companies to provide additional information that will help
investors and other users of financial statements to more easily understand the
effect of our choice to use fair value on its earnings. It also requires
entities to display the fair value of those assets and liabilities for which the
Company has chosen to use fair value on the face of the balance sheet.The
effective date of SFAS 159 for our Company is April 1, 2008.The
adoption of the provisions of SFAS 159 is not expected to have a material effect
on our financial position, results of operations, or cash flows.





In
September2006,
the FASB issued SFAS No.158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No.87,
106, and 132(R).” SFAS 158 requires companies to recognize a net asset for a
defined benefit postretirement pension or healthcare plan’s over funded status
or a net liability for a plan’s under funded status in its balance sheet. SFAS
158 also requires companies to recognize changes in the funded status of a
defined benefit postretirement plan in accumulated other comprehensive income in
the year in which the changes occur. SFAS 158 was adopted on March 31,
2007. Additionally, SFAS 158 requires companies to measure plan assets and
benefit obligations as of the date of the fiscal year end balance sheet, which
is consistent with our current practice. This requirement is effective for
fiscal years ending after December15,
2008. The adoption of the provisions of SFAS 158 is not expected to have a
material effect on our financial position, results of operations, or cash
flows.





In
September2006,
the FASB issued SFAS Statement No.157,
“Fair Value Measurements”. SFAS 157 defines fair value, establishes a framework
for measuring fair value in accordance with generally accepted accounting
principles and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November15,
2007. The adoption of the provisions of SFAS 157 is not expected to have a
material effect on our financial position, results of operations, or cash
flows.





28
 Table of Contents





In
July 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in
Income Taxes — An Interpretation of SFAS 109”. FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with SFAS 109, “Accounting for Income Taxes”. FIN48
also prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. In addition, FIN 48 provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The provisions of FIN 48 are to be applied
to all tax positions upon initial adoption of this standard.Only
tax positions that meet the more-likely-than-not recognition threshold at the
effective date may be recognized or continue to be recognized as an adjustment
to the opening balance of retained earnings (or other appropriate components of
equity) for that fiscal year.The
provisions of FIN 48 are effective for fiscal years beginning after
December 15, 2006.We
adopted FIN 48 effective April 1, 2007.See
Note 9, Income Taxes, for further discussion.





2.
Restatement of Prior Period’s Financial Statements





During
the fourth quarter of 2008, we identified errors in the accounting for certain
tax liabilities and we determined the cumulative impact of known differences in
our accounting as set forth below. The errors occurred in calculating the GAAP
cost basis of our oil and gas properties in determining deferred tax liability
and the estimated deferred tax asset for percentage depletion carryforward for
both fiscal years under SFAS 109 - Accounting for Income Taxes.
The gross cost of the oil and gas properties was reduced for the salvage value
of the oil and gas equipment in the deferred tax calculation which reduced the
deferred tax liability associated with our oil and gas properties in fiscal 2007
and 2006. The Company revised the estimated percentage depletion carryforward
calculation for both fiscal years.  The Company also increased the
deferred tax expense for the tax effect of stock options exercised in fiscal
2007.These errors are more fully described below.  In accordance with
the provisions of Statement on Financial Accounting Standards No. 154 –
“Accounting Changes and Error Corrections", we have restated our prior years’
financial statements.  Details of the restatements for fiscal years
2007 and 2006 are included below.





Restatement
of Tax Liabilities





During
the completion of our 2008 income tax provision, it was discovered that we had
not properly reconciled our tax liabilities primarily related to differences
between the net book basis and the net tax basis of our depreciable property,
plant and equipment and other miscellaneous deferred tax
liabilities.  The following tables detail the effect of the
corrections to our previously reported income tax provisions for fiscal years
2007 and 2006:





For
      the Year Ended March 31, 2007As
      reported
              
              
              Adjustments
              
              
              As
      restatedFederal
      income tax provision at statutory rates
              
              $
              1,161,000
              
              
              $
              ―
              
              
              $
              1,161,000State
      income tax
              
              
              106,000
              
              
              
              
              
              
              
              106,000Change
      in valuation allowance
              
              
              (359,000
              )
              
              
              359,000
              
              
              
              ―Change
      in depletion carryforward
              
              
              ―
              
              
              
              71,000
              
              
              
              324,000Change
      in book basis of oil and gas properties
              
              
              ―
              
              
              
              107,000
              
              
              
              107,000Other
              
              
              (1,000
              )
              
              
              (92,000
              )
              
              
              (93,000
              )Income
      tax expense
              
              $
              907,000
              
              
              $
              445,000
              
              
              $
              1,352,000





29
 Table of Contents






For
      the Year Ended March 31, 2007As
      reported
              
              
              Adjustments
              
              
              As
      restatedAllowance
      for doubtful accounts
              
              $
              26,000
              
              
              $
              ―
              
              
              $
              26,000Asset
      retirement obligation
              
              
              731,000
              
              
              
              ―
              
              
              
              731,000Other
      accruals
              
              
              98,000
              
              
              
              ―
              
              
              
              98,000Statutory
      depletion carry-forward
              
              
              1,244,000
              
              
              
              (324,000
              )
              
              
              1,568,000Total
      gross deferred tax assets
              
              
              2,099,000
              
              
              
              (324,000
              )
              
              
              2,423,000Deferred
      tax liability - Depreciation, depletion and intangible drilling
      costs
              
              
              (2,680,000
              )
              
              
              1,232,000
              
              
              
              (3,912,000
              )Net
      deferred tax liability
              
              $
              (581,000
              )
              
              $
              908,000
              
              
              $
              (1,489,000
              )




For
      the Year Ended March 31, 2006As
      reported
              
              
              Adjustments
              
              
              As
      restatedFederal
      income tax provision at statutory rates
              
              $
              993,000
              
              
              $
              ―
              
              
              $
              993,000State
      income tax
              
              
              87,000
              
              
              
              ―
              
              
              
              87,000Change
      in valuation allowance
              
              
              (819,000
              )
              
              
              (360,000
              )
              
              
              (1,179,000
              )Change
      in book basis of oil and gas properties
              
              
              ―
              
              
              
              842,000
              
              
              
              842,000Other
              
              
              (248,000
              )
              
              
              —
              
              
              
              (248,000
              )Income
      tax expense
              
              $
              13,000
              
              
              $
              482,000
              
              
              $
              495,000




For
      the Year Ended March 31, 2006As
      reported
              
              
              Adjustments
              
              
              As
      restatedAllowance
      for doubtful accounts
              
              $
              26,000
              
              
              $
              ―
              
              
              $
              26,000Asset
      retirement obligation
              
              
              537,000
              
              
              
              ―
              
              
              
              537,000Other
      accruals
              
              
              47,000
              
              
              
              ―
              
              
              
              47,000Statutory
      depletion carry-forward
              
              
              1,897,000
              
              
              
              ―
              
              
              
              1,897,000Total
      gross deferred tax assets
              
              
              2,507,000
              
              
              
              ―
              
              
              
              2,507,000Valuation
      allowance
              
              
              (359,000
              )
              
              
              (359,000
              )
              
              
              ―Net
      deferred tax asset
              
              
              2,148,000
              
              
              
              (359,000
              )
              
              
              2,507,000Deferred
      tax liability - Depreciation, depletion and intangible drilling
      costs
              
              
              (2,148,000
              )
              
              
              841,000
              
              
              
              (2,989,000
              )Net
      deferred tax liability
              
              $
              ―
              
              
              $
              482,000
              
              
              $
              (482,000
              )




Restatement
of Financial Statements





The
“Adjustments” column in the following tables reflects the effect of the
corrections to our previously reported financial statements indicated
above.





30
 Table of Contents





Basic
Earth Science Systems, Inc.


Consolidated
Statements of Operations





Year
      Ended March 31, 2007As
      Reported
              
              
              Adjustments
              
              
              As
      RestatedRevenues:Oil
      and gas sales
              
              $
              7,129,000
              
              
              $
              ―
              
              
              $
              7,129,000Well
      service revenue
              
              
              38,000
              
              
              
              ―
              
              
              
              38,000Total
      revenues
              
              
              7,167,000
              
              
              
              ―
              
              
              
              7,167,000Expenses:Oil
      and gas production
              
              
              1,935,000
              
              
              
              ―
              
              
              
              1,935,000Production
      tax
              
              
              487,000
              
              
              
              ―
              
              
              
              487,000Well
      servicing expenses
              
              
              41,000
              
              
              
              ―
              
              
              
              41,000Depreciation,
      depletion and impairment
              
              
              640,000
              
              
              
              ―
              
              
              
              640,000Accretion
      of asset retirement obligation
              
              
              108,000
              
              
              
              ―
              
              
              
              108,000Asset
      retirement expense
              
              
              125,000
              
              
              
              ―
              
              
              
              125,000General
      and administrative
              
              
              546,000
              
              
              
              ―
              
              
              
              546,000Total
      expenses
              
              
              3,882,000
              
              
              
              ―
              
              
              
              3,882,000Income
      from operations
              
              
              3,285,000
              
              
              
              ―
              
              
              
              3,285,000Other
      Income (Expense):Interest
      and other income
              
              
              50,000
              
              
              
              ―
              
              
              
              50,000Fuel
      purchase overcharge refund
              
              
              79,000
              
              
              
              ―
              
              
              
              79,000Interest
      and other expenses
              
              
              (7,000
              )
              
              
              ―
              
              
              
              (7,000
              )Total
      other income
              
              
              122,000
              
              
              
              ―
              
              
              
              122,000Income
      before income taxes
              
              
              3,407,000
              
              
              
              ―
              
              
              
              3,407,000Current
      income tax expense
              
              
              326,000
              
              
              
              ―
              
              
              
              326,000Provision
      for deferred income taxes
              
              
              581,000
              
              
              
              445,000
              
              
              
              1,026,000Total
      income taxes
              
              
              907,000
              
              
              
              445,000
              
              
              
              1,352,000Net
      income
              
              $
              2,500,000
              
              
              $
              (445,000
              )
              
              $
              2,055,000Per
      share amounts:Basic
              
              $
              0.15
              
              
              $
              (0.03
              )
              
              $
              0.12Diluted
              
              $
              0.15
              
              
              $
              (0.03
              )
              
              $
              0.12Weighted
      average common shares outstanding:Basic
              
              
              16,825,076
              
              
              
              16,825,076
              
              
              
              16,825,076Diluted
              
              
              17,129,537
              
              
              
              17,129,537
              
              
              
              17,129,537


31
 Table of Contents





Basic
Earth Science Systems, Inc.


Consolidated
Balance Sheets





At
      March 31, 2007As
      Reported
                
                
                Adjustments
                
                
                As
      RestatedAssetsCurrent
      assets:Cash
      and cash equivalents
                
                $
                2,523,000
                
                
                $
                ―
                
                
                $
                2,523,000Accounts
      receivable:Oil
      and gas sales
                
                
                825,000
                
                
                
                ―
                
                
                
                825,000Joint
      interest and other receivables, net of $70,000 allowance
                
                
                436,000
                
                
                
                ―
                
                
                
                436,000Other
      current assets
                
                
                262,000
                
                
                
                ―
                
                
                
                262,000Total
      current assets
                
                
                4,046,000
                
                
                
                ―
                
                
                
                4,046,000Oil
      and gas property, full cost method:Proved
      property
                
                
                27,686,000
                
                
                
                ―
                
                
                
                27,686,000Unproved
      property
                
                
                1,199,000
                
                
                
                ―
                
                
                
                1,199,000Accumulated
      depreciation and depletion
                
                
                (17,842,000
                )
                
                
                ―
                
                
                
                (17,842,000
                )Net
      oil and gas property
                
                
                11,043,000
                
                
                
                ―
                
                
                
                11,043,000Other
      non-current assets, net
                
                
                363,000
                
                
                
                ―
                
                
                
                363,000Total
      non-current assets
                
                
                11,406,000
                
                
                
                ―
                
                
                
                11,406,000Total
      assets
                
                $
                15,452,000
                
                
                $
                ―
                
                
                $
                15,452,000
  32
 Table of Contents




Basic
Earth Science Systems, Inc.
 Consolidated
Balance Sheets
  At
      March 31, 2007As
      Reported
                
                
                Adjustments
                
                
                As
      RestatedLiabilitiesCurrent
      liabilities:Accounts
      payable
                
                $
                744,000
                
                
                $
                ―
                
                
                $
                744,000Accrued
      liabilities
                
                
                1,245,000
                
                
                
                ―
                
                
                
                1,245,000Total
      current liabilities
                
                
                1,989,000
                
                
                
                ―
                
                
                
                1,989,000Long-term
      liabilities:Long-term
      debt
                
                
                ―
                
                
                
                ―
                
                
                
                ―Deferred
      tax liability
                
                
                581,000
                
                
                
                908,000
                
                
                
                1,489,000Asset
      retirement obligation
                
                
                1,802,000
                
                
                
                ―
                
                
                
                1,802,000Total
      long-term liabilities
                
                
                2,383,000
                
                
                
                908,000
                
                
                
                3,291,000Commitments
      (Note 6)Shareholders’
      EquityPreferred
      stock, $.001 par value Authorized - 3,000,000 shares Issued - 0
      shares
                
                
                ―
                
                
                
                ―
                
                
                
                ―Common
      stock, $.001 par value Authorized - 32,000,000 shares, Issued - 17,304,752
      shares
                
                
                17,000
                
                
                
                ―
                
                
                
                17,000Additional
      paid-in capital
                
                
                22,730,000
                
                
                
                19,000
                
                
                
                22,749,000Treasury
      stock (349,265 shares); at cost
                
                
                (23,000
                )
                
                
                ―
                
                
                
                (23,000
                )Accumulated
      deficit
                
                
                (11,644,000
                )
                
                
                (927,000
                )
                
                
                (12,571,000
                )Total
      shareholders’ equity
                
                
                11,080,000
                
                
                
                (908,000
                )
                
                
                10,172,000Total
      liabilities and shareholders’ equity
                
                $
                15,452,000
                
                
                $
                ―
                
                
                $
                15,452,000





33
 Table of Contents





Basic
Earth Science Systems, Inc.


Consolidated
Statement of Cash Flows





Years
      Ended March 31, 2007As
      Reported
              
              
              Adjustments
              
              
              As
      RestatedIncrease
      (decrease) in cash and cash equivalents:Cash
      flows from operating activities:Net
      income
              
              $
              2,500,000
              
              
              
              (445,000
              )
              
              $
              2,055,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation,
      depletion and impairment
              
              
              640,000
              
              
              
              ―
              
              
              
              640,000Deferred
      tax liability
              
              
              581,000
              
              
              
              426,000
              
              
              
              1,007,000Additional
      paid in capital  associated with deferred tax
      expense
              
              
              ―
              
              
              
              19,000
              
              
              
              19,000Accretion
      of asset retirement obligation
              
              
              108,000
              
              
              
              ―
              
              
              
              108,000Change
      in:Net
      accounts receivable
              
              
              54,000
              
              
              
              ―
              
              
              
              54,000Other
      assets
              
              
              70,000
              
              
              
              ―
              
              
              
              70,000Accounts
      payable and accrued liabilities
              
              
              321,000
              
              
              
              ―
              
              
              
              321,000Other
              
              
              9,000
              
              
              
              ―
              
              
              
              9,000Net
      cash provided by operating activities
              
              
              4,283,000
              
              
              
              ―
              
              
              
              4,283,000Cash
      flows from investing activities:Capital
      expenditures:Oil
      and gas property
              
              
              (1,703,000
              )
              
              
              ―
              
              
              
              (1,703,000
              )Support
      equipment
              
              
              (38,000
              )
              
              
              ―
              
              
              
              (38,000
              )Insurance
      settlements
              
              
              208,000
              
              
              
              ―
              
              
              
              208,000Proceeds
      from sale of oil and gas property and equipment
              
              
              146,000
              
              
              
              ―
              
              
              
              146,000Other
              
              
              (26,000
              )
              
              
              ―
              
              
              
              (26,000
              )Net
      cash used in investing activities
              
              
              (1,413,000
              )
              
              
              ―
              
              
              
              (1,413,000
              )Cash
      flows from financing activities:Proceeds
      from exercise of common stock options
              
              
              20,000
              
              
              
              ―
              
              
              
              20,000Proceeds
      from borrowing
              
              
              565,000
              
              
              
              ―
              
              
              
              565,000Debt
      payments
              
              
              (1,010,000
              )
              
              
              ―
              
              
              
              (1,010,000
              )Net
      cash provided by (used in) financing activities
              
              
              (425,000
              )
              
              
              ―
              
              
              
              (425,000
              )Cash
      and cash equivalents:Increase
      (decrease) in cash and cash equivalents
              
              
              2,445,000
              
              
              
              ―
              
              
              
              2,445,000Balance,
      beginning of year
              
              
              78,000
              
              
              
              ―
              
              
              
              78,000Balance,
      end of year
              
              $
              2,523,000
              
              
              $
              ―
              
              
              $
              2,523,000Supplemental
      disclosure of cash flow information:Cash
      paid for interest
              
              $
              7,000
              
              
              $
              ―
              
              
              $
              7,000Increase
      in oil and gas property due to asset retirement obligation
              
              $
              512,000
              
              
              $
              ―
              
              
              $
              512,000





34
 Table of Contents





Basic
Earth Science Systems, Inc.


Consolidated
Statements of Operations





Year
      Ended March 31, 2006As
      Reported
              
              
              Adjustments
              
              
              As
      RestatedRevenueOil
      and gas sales
              
              $
              6,595,000
              
              
              $
              ―
              
              
              $
              6,595,000Well
      service revenue
              
              
              20,000
              
              
              
              ―
              
              
              
              20,000Total
      revenue
              
              
              6,615,000
              
              
              
              ―
              
              
              
              6,615,000ExpensesOil
      and gas production
              
              
              2,104,000
              
              
              
              ―
              
              
              
              2,104,000Production
      tax
              
              
              460,000
              
              
              
              ―
              
              
              
              460,000Well
      service expenses
              
              
              24,000
              
              
              
              ―
              
              
              
              24,000Depreciation
      and depletion
              
              
              550,000
              
              
              
              ―
              
              
              
              550,000Accretion
      of asset retirement obligation
              
              
              74,000
              
              
              
              ―
              
              
              
              74,000Asset
      retirement expense
              
              
              63,000
              
              
              
              ―
              
              
              
              63,000General
      and administrative
              
              
              524,000
              
              
              
              ―
              
              
              
              524,000Total
      operating expenses
              
              
              3,799,000
              
              
              
              ―
              
              
              
              3,799,000Income
      from operations
              
              
              2,816,000
              
              
              
              ―
              
              
              
              2,816,000Other
      income (expense)Interest
      and other income
              
              
              23,000
              
              
              
              ―
              
              
              
              23,000Interest
      and other expenses
              
              
              (11,000
              )
              
              
              ―
              
              
              
              (11,000
              )Total
      other income
              
              
              12,000
              
              
              
              ―
              
              
              
              12,000Income
      before income taxes
              
              
              2,828,000
              
              
              
              ―
              
              
              
              2,828,000Current
      income tax expense
              
              
              13,000
              
              
              
              ―
              
              
              
              13,000Provision
      for deferred income taxes
              
              
              ―
              
              
              
              482,000
              
              
              
              482,000Total
      income taxes
              
              
              13,000
              
              
              
              482,000
              
              
              
              495,000Net
      income
              
              $
              2,815,000
              
              
              $
              (482,000
              )
              
              $
              2,333,000Per
      share amounts:Basic
              
              $
              0.17
              
              
              
              (0.03
              )
              
              $
              0.14Diluted
              
              $
              0.17
              
              
              
              (0.03
              )
              
              $
              0.14Weighted
      average common shares outstanding:Basic
              
              
              16,732,611
              
              
              
              16,732,611
              
              
              
              16,732,611Diluted
              
              
              17,125,635
              
              
              
              17,125,635
              
              
              
              17,125,635





35
 Table of Contents





Basic
Earth Science Systems, Inc.


Consolidated
Balance Sheets




At
      March 31, 2006As
      Reported
              
              
              Adjustments
              
              
              As
      RestatedAssetsCurrent
      assets:Cash
      and cash equivalents
              
              $
              78,000
              
              
              $
              ―
              
              
              $
              78,000Accounts
      receivable:
              
              
              
              
              
              
              ―Oil
      and gas sales
              
              
              913,000
              
              
              
              ―
              
              
              
              913,000Joint
      interest and other receivables
              
              
              472,000
              
              
              
              ―
              
              
              
              472,000Allowance
      for doubtful accounts
              
              
              (70,000
              )
              
              
              ―
              
              
              
              (70,000
              )Other
      current assets
              
              
              297,000
              
              
              
              ―
              
              
              
              297,000Total
      current assets
              
              
              1,690,000
              
              
              
              ―
              
              
              
              1,690,000Property
      and equipment:Oil
      and gas properties (full cost method)
              
              
              27,138,000
              
              
              
              ―
              
              
              
              27,138,000Furniture,
      fixtures and support equipment
              
              
              368,000
              
              
              
              ―
              
              
              
              368,00027,506,000
              
              
              
              ―
              
              
              
              27,506,000Accumulated
      depreciation
              
              
              (314,000
              )
              
              
              ―
              
              
              
              (314,000
              )Accumulated
      depreciation and depletion – Full cost pool
              
              
              (17,250,000
              )
              
              
              ―
              
              
              
              (17,250,000
              )Net
      property and equipment
              
              
              9,942,000
              
              
              
              ―
              
              
              
              9,942,000Other
      non-current assets
              
              
              218,000
              
              
              
              ―
              
              
              
              218,000Total
      non-current assets
              
              
              10,160,000
              
              
              
              ―
              
              
              
              10,160,000Total
      assets
              
              $
              11,850,000
              
              
              $
              ―
              
              
              $
              11,850,000
  36
 Table of Contents






Basic
Earth Science Systems, Inc.
 Consolidated
Balance Sheets
  At
      March 31, 2006As
      Reported
              
              
              Adjustments
              
              
              As
      RestatedLiabilitiesCurrent
      liabilities:Accounts
      payable
              
              $
              389,000
              
              
              $
              ―
              
              
              $
              389,000Accrued
      liabilities
              
              
              1,084,000
              
              
              
              ―
              
              
              
              1,084,000Total
      current liabilities
              
              
              1,473,000
              
              
              
              ―
              
              
              
              1,473,000Long-term
      liabilities:Long-term
      debt
              
              
              445,000
              
              
              
              ―
              
              
              
              445,000Deferred
      tax liability
              
              
              ―
              
              
              
              482,000
              
              
              
              482,000Asset
      retirement obligation
              
              
              1,372,000
              
              
              
              ―
              
              
              
              1,372,000Total
      long-term liabilities
              
              
              1,817,000
              
              
              
              482,000
              
              
              
              2,299,000Commitments
      (Note 6)Shareholders’
      EquityPreferred
      stock, $.001 par value, Authorized - 3,000,000 shares, Issued - 0
      shares
              
              
              —
              
              
              
              ―
              
              
              
              —Common
      stock, $.001 par value, Authorized - 32,000,000 shares, Issued -
      17,129,752 shares
              
              
              17,000
              
              
              
              ―
              
              
              
              17,000Additional
      paid-in capital
              
              
              22,710,000
              
              
              
              ―
              
              
              
              22,710,000Treasury
      stock (349,265 shares at March 31, 2005 and 2004); at cost
              
              
              (23,000
              )
              
              
              ―
              
              
              
              (23,000
              )Accumulated
      deficit
              
              
              (14,144,000
              )
              
              
              (482,000
              )
              
              
              (14,626,000
              )Total
      shareholders’ equity
              
              
              8,560,000
              
              
              
              (482,000
              )
              
              
              8,078,000Total
      liabilities and shareholders’ equity
              
              $
              11,850,000
              
              
              $
              ―
              
              
              $
              11,850,000


37
 Table of Contents







Basic
Earth Science Systems, Inc.


Consolidated
Statement of Cash Flows





Year
      Ended March 31, 2006As
      Reported
              
              
              Adjustments
              
              
              As
      RestatedIncrease
      (decrease) in cash and cash equivalents:Cash
      flows from operating activities:Net
      income
              
              $
              2,815,000
              
              
              $
              (482,000
              )
              
              $
              2,333,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation,
      depletion and impairment
              
              
              550,000
              
              
              
              ―
              
              
              
              550,000Deferred
      tax liability
              
              
              ―
              
              
              
              482,000
              
              
              
              482,000Accretion
      of asset retirement obligation
              
              
              74,000
              
              
              
              ―
              
              
              
              74,000Change
      in:Net
      accounts receivable
              
              
              (308,000
              )
              
              
              ―
              
              
              
              (308,000
              )Other
      assets
              
              
              (86,000
              )
              
              
              ―
              
              
              
              (86,000
              )Accounts
      payable and accrued liabilities
              
              
              (33,000
              )
              
              
              ―
              
              
              
              (33,000
              )Asset
      retirement obligation
              
              
              (6,000
              )
              
              
              ―
              
              
              
              (6,000
              )Other
              
              
              7,000
              
              
              
              ―
              
              
              
              7,000Net
      cash provided by operating activities
              
              
              3,013,000
              
              
              
              ―
              
              
              
              3,013,000Cash
      flows from investing activities:Capital
      expenditures:Oil
      and gas property
              
              
              (4,271,000
              )
              
              
              ―
              
              
              
              (4,271,000
              )Support
      equipment
              
              
              (8,000
              )
              
              
              ―
              
              
              
              (8,000
              )Purchase
      of lease and well equipment inventory
              
              
              (45,000
              )
              
              
              ―
              
              
              
              (45,000
              )Proceeds
      from sale of oil and gas property and equipment
              
              
              21,000
              
              
              
              ―
              
              
              
              21,000Proceeds
      from sale of lease and well equipment inventory
              
              
              21,000
              
              
              
              ―
              
              
              
              21,000Proceeds
      from sale of support equipment
              
              
              1,000
              
              
              
              ―
              
              
              
              1,000Net
      cash used in investing activities
              
              
              (4,281,000
              )
              
              
              ―
              
              
              
              (4,281,000
              )Cash
      flows from financing activities:Proceeds
      from exercise of common stock options
              
              
              9,000
              
              
              
              ―
              
              
              
              9,000Proceeds
      from borrowing
              
              
              1,905,000
              
              
              
              ―
              
              
              
              1,905,000Debt
      payments
              
              
              (1,460,000
              )
              
              
              ―
              
              
              
              (1,460,000
              )Net
      cash provided by financing activities
              
              
              454,000
              
              
              
              ―
              
              
              
              454,000Cash
      and cash equivalents:Increase
      (decrease) in cash and cash equivalents
              
              
              (814,000
              )
              
              
              ―
              
              
              
              (814,000
              )Balance,
      beginning of year
              
              
              892,000
              
              
              
              ―
              
              
              
              892,000Balance,
      end of year
              
              $
              78,000
              
              
              $
              ―
              
              
              $
              78,000Supplemental
      disclosure of cash flow information:Cash
      paid for interest
              
              $
              8,000
              
              
              $
              ―
              
              
              $
              8,000





38
 Table of Contents







3.
Asset Retirement Obligation





SFAS
No. 143, “Accounting for Asset Retirement Obligations” requires the fair
value of an asset retirement obligation to be recognized in the period in which
it is incurred if a reasonable estimate of fair value can be made. The
associated present value of the asset retirement cost is capitalized as part of
the carrying amount, and is included in the proved oil and gas properties in the
accompanying consolidated balance sheets. We own oil and gas properties that
require expenditures to plug and abandon when reserves in the wells are
depleted. Under SFAS No. 143 these future expenditures are recorded in the
period the liability is incurred (at the time the wells are drilled and
completed or acquired).





The
following table summarizes the activity related to our estimate of future asset
retirement obligations for 2008, 2007, and 2006 :




Years
      Ended March 31,2008
              
              
              2007
              
              
              2006Asset
      retirement obligation at beginning of period
              
              $
              1,971,000
              
              
              $
              1,408,000
              
              
              $
              1,263,000Liabilities settled during the period
              
              
              (116,000
              )
              
              
              (57,000
              )
              
              
              (61,000
              )New obligations for wells drilled and completed
              
              
              84,000
              
              
              
              —
              
              
              
              29,000Accretion of asset retirement obligation
              
              
              114,000
              
              
              
              108,000
              
              
              
              74,000Revisions to estimates
              
              
              126,000
              
              
              
              512,000
              
              
              
              103,000Asset
      retirement obligation at end of period
              
              $
              2,179,000
              
              
              $
              1,971,000
              
              
              $
              1,408,000Current
      liability
              
              $
              302,000
              
              
              $
              169,000
              
              
              
              36,000Long-term
      liability
              
              
              1,877,000
              
              
              
              1,802,000
              
              
              
              1,372,000Asset
      retirement obligation at end of each period
              
              $
              2,179,000
              
              
              $
              1,971,000
              
              
              $
              1,408,000




The asset
retirement expense recorded in years ended March 31, 2008 and 2007
represents plugging and abandonment costs in excess of the estimated asset
retirement obligation recorded with the adoption of SFAS No. 143. We based
our initial estimates on our knowledge and experience plugging wells in earlier
years. The excess costs incurred over original estimates and the revisions to
estimates shown in the table immediately above reflect the impact of escalating
labor and rig costs primarily within the Williston basin area of North Dakota
and Montana.





39
 Table of Contents





4.
Other Current Assets





Other
current assets at March 31, 2008, 2007, and 2006 consisted of the
following:




2008
              
              
              2007
              
              
              2006Lease
      and well equipment inventory
              
              $
              154,000
              
              
              $
              159,000
              
              
              $
              161,000Drilling
      and completion cost prepayments
              
              
              52,000
              
              
              
              50,000
              
              
              
              118,000Prepaid
      insurance premiums
              
              
              58,000
              
              
              
              47,000
              
              
              
              12,000Other
      current assets
              
              
              16,000
              
              
              
              6,000
              
              
              
              6,000Total
      other current assets
              
              $
              280,000
              
              
              $
              262,000
              
              
              $
              297,000




The lease
and well equipment inventory represents well-site production equipment owned by
us that has been removed from wells that we operate. This occurs when we plug a
well or replace defective, damaged or suspect equipment on a producing well. In
this case, salvaged equipment is valued at prevailing market prices, removed
from the full cost pool and made available for sale. This equipment is carried
on the balance sheet at a value not to exceed the original carrying value
established at the time it was placed in inventory. This equipment is intended
for re-sale to third parties at current fair market prices. Sale of this
equipment is expected to occur in less than one year. This policy does not
preclude us from further transferring serviceable equipment to other wells that
we operate, on an as-needed basis.





Drilling
and completion cost prepayments represent cash expenditures advanced by us to
outside operators prior to the commencement of drilling and/or completion
operations on a well.  The 2007 balance corresponds to the unused
portion of cash advances on one North Dakota re-completion and on the Table Top
Unit #1 well in the Company’s Christmas Meadows prospect while the 2008 balance
was for the Lynn #1 and Lynn #2 wells, and the Table Top Unit #1 in North
Dakota.





5.
Other Non-Current Assets





Other
non-current assets at March 31, 2008, 2007, and 2006 consisted of
the following:




2008
              
              
              2007
              
              
              2006Lease
      and well equipment inventory
              
              $
              250,000
              
              
              $
              220,000
              
              
              $
              149,000Plugging
      bonds
              
              
              69,000
              
              
              
              69,000
              
              
              
              69,000Other
      non-current assets
              
              
              124,000
              
              
              
              74,000
              
              
              
              54,000Total
      other non-current assets
              
              $
              443,000
              
              
              $
              363,000
              
              
              $
              272,000




This
lease and well equipment inventory, unlike the equipment inventory in Other
Current Assets that is held for re-sale, is intended for use on leases that we
operate. This equipment inventory represents well-site production equipment that
we own that has either been purchased or has been removed from wells that we
operate. When placed in inventory, new equipment is valued at cost and salvaged
equipment is valued at prevailing market prices. The inventory is carried at the
lower of the original carrying value or fair market value.





Plugging
bonds represent Certificates of Deposit furnished by us to third parties who
supply plugging bonds to federal and state agencies where we operate
wells.





40
 Table of Contents








6.
Credit Line





Our
current banking relationship, established in March 2002, is with American
National Bank (“the Bank”), located in Denver, Colorado. Effective
January 3, 2006 we amended the existing loan agreement to increase the line
of credit amount from $1,000,000 to $20,000,000 with a concurrent borrowing base
increase from $1,000,000 to $4,000,000. Effective December 31, 2006 the
loan agreement was amended again to extend the maturity date of the credit
agreement from December 31, 2007 to December 31, 2008. The current
interest rate is prime plus one-quarter of one percent (0.25%) and the addition
of an unused commitment fee equal to one-half of one percent (0.50%) per annum
on the difference between the outstanding balance and the borrowing base
amount.





Under the
credit facility, we must maintain certain financial covenants. Failure to
maintain any covenant, after a curative period, creates a default under the loan
agreement and requires repayment of the entire outstanding balance. With the
December 31, 2006 amendment, the covenant requiring us to maintain a net
worth of at least $1,750,000 was replaced with a covenant requiring us to
maintain a debt-to-equity ratio less than one. Another covenant obligates us to
maintain a current ratio of at least 1:1 inclusive of unused borrowing capacity
and exclusive of the current portion of long-term debt. We were in compliance
with all covenants at March 31, 2008.





This
credit line is collateralized by a significant portion of our oil and gas
properties and production. Our effective annual interest rate was 8.50% at
March 31, 2008 and 2007. As of March 31, 2008, there was no outstanding
balance on this line of credit.





During
2008, we did not utilize our credit facility, but during 2007 we utilized our
credit facility to fund portions of our drilling and development program and
incurred interest charges of $6,000. As of March 31, 2008 and 2007, there was no
outstanding balance on the line of credit. If necessary, we may borrow funds to
reduce payables, finance re-completion or drilling efforts, fund property
acquisitions, or pursue other opportunities we cannot contemplate at this
time.





7.
Commitments





Effective
March 1, 2008 we relocated to a new 4,000 square foot office space located
in downtown Denver, Colorado.  The lease agreement is for a five-year
term through April 2013 and currently requires approximately $5,500 per
month escalating at a rate of approximately $170 at the end of each year. Office
rent expense was approximately $36,000 in both 2008 and 2007 and we are
committed to a total of $281,000 for the five-year term ending April 1, 2013.
Prior to expiration of the lease term, we will evaluate the Denver real estate
market and the various available options before deciding on where to lease
office space after April 2013.





8.
Shareholders’ Equity





Preferred
Stock. We have 3,000,000 shares of authorized preferred stock that can be
issued in such series and preferences as determined by the Board of
Directors.





Stock Option
Plan. Effective July 27, 1995 our shareholders approved the 1995
Incentive Stock Option Plan (“the Plan”) authorizing option grants to employees
and outside directors to purchase up to 1,000,000 shares of our common stock.
The Plan was structured as a 10-year plan and, as such, ended on July 26,
2005. During the Plan’s existence, a total of 665,000 options were granted; of
this amount, 50,000 options expired unexercised, 590,000 options were exercised
at strike prices ranging from $0.0325 to $0.175 per share, and 25,000 options
remain unexercised as of March 31, 2008 (see tables below).





Current
option holders may exercise their options at the price of $0.1325 per share
(which was the market value at the date of grant) over a period not to exceed
ten years from the grant date provided they remain directors or employees of the
Company.





41
 Table of Contents








A summary
of the status of our stock option plan and outstanding options as of
March 31, 2008, 2007, and 2006 and changes during the years ending on those
dates is presented below:




2008
              
              
              2007
              
              2006Weighted
              
              
              
              
              Weighted
              
              
              
              
              WeightedAverage
              
              
              
              
              Average
              
              
              
              
              AverageExercise
              
              
              
              
              Exercise
              
              
              
              
              ExerciseShares
              
              
              Price
              
              
              Shares
              
              Price
              
              
              Shares
              
              PriceOptions
      unexercised, beginning of year
              
              
              190,000
              
              
              $
              0.0936
              
              
              365,000
              
              $
              0.1023
              
              
              490,000
              
              $
              0.0954Granted
              
              
              —
              
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Cancelled
              
              
              —
              
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Exercised
              
              
              (165,000)
              
              
              
              (0.0941)
              
              
              (175,000)
              
              
              (0.1117)
              
              
              (125,000)
              
              
              (0.0755)Options
      unexercised and exercisable, end of year
              
              
              25,000
              
              
              $
              0.1325
              
              
              190,000
              
              $
              0.0936
              
              
              365,000
              
              $
              0.1023




The
25,000 non-qualified stock options unexercised at March 31, 2008 had an
intrinsic value of $24,000.




Since all
options are fully vested, and the plan has expired, we will have no stock-based
compensation expense in future periods unless a new plan is adopted and
additional options are granted.




9.
Income Tax





A
reconciliation between the income tax provision at the statutory rate on income
taxes and the income tax provision is as follows:




For
      the Years Ended March 31,2008
            
            
            2007As
      restatedFederal
      income tax provision at statutory rates
            
            $
            1,118,000
            
            
            $
            1,161,000State
      income tax
            
            
            164,000
            
            
            
            106,000Change
      in depletion carryforward
            
            
            592,000
            
            
            
            324,000Change
      in book basis of oil and gas properties
            
            
            
            
            
            
            107,000Excess
      percentage depletion tax basis
            
            
            (346,000
            )
            
            
            (253,000
            )Other
            
            
            (3,000
            )
            
            
            (93,000
            )Income
      tax expense
            
            $
            1,525,000
            
            
            $
            1,352,000




42
 Table of Contents









For
      the Years Ended March 31,2008
              
              
              2007As
      restatedAllowance
      for doubtful accounts
              
              $
              20,000
              
              
              $
              26,000Asset
      retirement obligation
              
              
              850,000
              
              
              
              731,000Other
      accruals
              
              
              112,000
              
              
              
              98,000Statutory
      depletion carry-forward
              
              
              1,043,000
              
              
              
              1,568,000Total
      gross deferred tax assets
              
              
              2,025,000
              
              
              
              2,423,000Deferred
      tax liability - Depreciation, depletion and intangible drilling
      costs
              
              
              (4,825,000
              )
              
              
              (3,912,000
              )Net
      deferred tax liability
              
              $
              (2,800,000
              )
              
              $
              (1,489,000
              )


As of
March 31, 2008, we had fully utilized our net operating loss carry-forward
for tax purposes.  We have statutory carryforwards of $1,043,000 that
do not expire.





10.
Related Party Transactions





It is our
policy that officers or directors may assign to, or receive assignments from, us
in oil and gas prospects, but only on the same terms and conditions as accepted
by independent third parties. It is also our policy that officers or directors
and the Company may participate together in oil and gas prospects generated by
independent third parties, but only on the same terms and conditions as accepted
by each other. During 2008 and 2007 none of our officers or directors
participated with the Company in any of our oil and gas transactions. In prior
years, Ray Singleton, President of the Company, has participated with us in
certain acquisitions. With respect to his working interest in the four wells in
which he currently participates, at March 31, 2008 Mr. Singleton had a
net credit balance of approximately $2,000 compared to $11,500 at March 31,
2007. This was due to his share of proceeds from the sale of well production
equipment exceeding the amount due from him for his share of operating expenses.
Also at March 31, 2008 and 2007, we had approximately $2,000 and $500
payables to him, respectively, for his share of net revenue from these
wells.





11.
Oil and Gas Property





The
aggregate amount of capitalized costs related to oil and gas properties and the
aggregate amount of related accumulated depreciation and depletion at
March 31, 2008, 2007, and 2006 are as follows:




2008
              
              
              2007
              
              
              2006Proved
      property
              
              $
              29,035,000
              
              
              $
              27,686,000
              
              
              $
              24,257,000Unproved
      property
              
              
              2,515,000
              
              
              
              1,199,000
              
              
              
              2,881,00031,550,000
              
              
              
              28,885,000
              
              
              
              27,138,000Accumulated
      depreciation and depletion
              
              
              (18,515,000
              )
              
              
              (17,842,000
              )
              
              
              (17,250,000
              )Net
      capitalized oil and gas property
              
              $
              13,035,000
              
              
              $
              11,043,000
              
              
              $
              9,888,000




43
 Table of Contents


Costs
directly associated with the acquisition and evaluation of unproved property are
excluded from the full cost pool depreciation, depletion, and amortization
computation until the properties can be classified as proved. These costs have
been incurred over the last four fiscal years and are not yet evaluated as
proved.  Upon proving these properties the costs will be reclassified
as proved property, or in the event that a decision is made to cease operations
on the property without further work estimated to be performed, the costs will
be removed from unproved property and included in the full cost pool to be amortized.  Primarily,
these costs relate to the following properties:
  Antenna
Federal. The 640
acre Antenna Federal property represents wells in progress totaling $1,250,000
(50%) of the 2008 unproved property total.  This field has been
producing since 1988.  A recent, 16 well, down-spaced, development
drilling effort, straddled the fiscal year end 2008, and we accrued the
estimated drilling and completion cost, based on approved AFE’s, in that
substantially all drilling and completion work had been completed and production
equipment had been delivered.  However, 6 of the 11 wells in which we
have a working interest were not on production at fiscal year
end.  With no production information, the success of hydraulic
stimulation on these wells was unknown.  In that these wells require
hydraulic stimulation to produce, and that initial production is the best
indicator of the success or failure of that stimulation effort, at year end no
reserves were given to these wells and the wells remained
unevaluated.  Since these wells are now on production, at this time,
we would not consider them to be impaired in any
way.
  Banks Prospect.The Banks
prospect consists of $790,000 (31%) of well costs related to the LM#1 well, and
included in the unproved property total. We have a 20% interest in 13,000
gross acres, and have drilled three wells to-date: the State 16-1H, the LM #1
and the LM #2.  The initial well, the State 16-1H was successfully
drilled and completed vertically in the Rival formation.  Next, the LM
#1 was vertically drilled to the Rival formation, but was temporarily shut-in
following an unsuccessful completion attempt.  Based on the results of
the vertically-drilled LM #1, the LM #2 was horizontally drilled and
successfully completed in the Rival formation.  Following the success
of the LM #2, the vertical State 16-1H was re-entered and drilled horizontally.
Both the State 16-1H and LM #2 are producing, and are included in the Ryder
Scott reserves.  They indicate that horizontal drilling is the
preferred solution in this heterogeneous reservoir.  Existing plans
are to develop the remaining acreage, including that surrounding the LM #1
through this wellbore.  We own approximately 20% interest in this
prospect.  Therefore, the timing and location of any further effort is
and will be controlled by a majority of interest owners, not
us.  Since only three wells have been drilled within the 13,000
acreage block, at this time, we would not consider this property to be
impaired.
  Christmas
Meadows. Consists of $400,000 (16%) of the unproved property total and is
only one well; the Table Top Unit #1, which has been drilled on the 40,000+
acreage Christmas Meadows prospect operated by Double Eagle Petroleum Company
(“Double Eagle”).  The costs included in the table above comprise both
the initial purchase of our 2% working interest in the joint venture and our
share of drilling costs to-date for the Table Top Unit #1 well.  The
well reached the originally planned depth of 15,760 feet, though it is not
conclusive that the Dakota formation was encountered. The drill cuttings did not
reveal reservoir rocks (due to either insufficient hydraulics to bring those
cuttings to surface undamaged and intact, because they did not exist or because
the Dakota was not reached).  A full suite of logs was not run because
hole conditions prevented instruments from reaching the bottom of the
well.  Operations were suspended to assess alternative approaches to
completing the project. The wellbore was sealed with a drillable plug at 11,000
feet (the base of the intermediate casing) in order to prevent any abnormal
pressure from migrating to surface.  The Table Top Unit, as originally
formed, was dissolved.  Having met the governmental permitting
obligation for the unit test well, the time-frame and leases have been extended
for drilling the newly formed Main Fork Unit until at least
April 2009.  Double Eagle has disclosed that it is in discussions
with several larger or major companies to take over this venture and deepen this
wellbore down to the deeper Nugget Sandstone at approximately 18,000 feet. Our
small interest precludes us from controlling the timing or direction of this
project. At this time, we do not consider this project to be
impaired.




44
 Table of Contents




The
following table shows, by category and date incurred, the oil and gas property
costs applicable to unproved property that were excluded from the depreciation
and depletion computation at March 31, 2008:
 
 Costs
      Incurred During
              
              Exploration
              
              
              Development
              
              
              Acquisition
              
              
              Total
      UnprovedYear
      Ended
              
              Costs
              
              
              Costs
              
              
              Costs
              
              
              PropertyMarch 31,
      2008
              
              $
              68,000
              
              
              $
              1,248,000
              
              
              $
              —
              
              
              $
              1,316,000March 31,
      2007
              
              
              308,000
              
              
              
              104,000
              
              
              
              —
              
              
              
              412,000March 31,
      2006
              
              
              428,000
              
              
              
              335,000
              
              
              
              —
              
              
              
              763,000March 31,
      2005
              
              
              24,000
              
              
              
              —
              
              
              
              —
              
              
              
              24,000Total
              
              $
              828,000
              
              
              $
              1,687,000
              
              
              $
              —
              
              
              $
              2,515,000


Costs
incurred in oil and gas property development, exploration and acquisition
activities during the years ended March 31, 2008 and 2007 are summarized as
follows:




For
      the Years Ended March 31,2008
              
              
              2007
              
              
              2006Development
      costs
              
              $
              2,410,000
              
              
              $
              1,017,000
              
              
              $
              2,881,000Exploration
      costs
              
              
              40,000
              
              
              
              686,000
              
              
              
              1,394,000Acquisitions:Proved
              
              
              250,000
              
              
              
              —
              
              
              
              —Unproved
              
              
              —
              
              
              
              —
              
              
              
              —Total
              
              $
              2,700,000
              
              
              $
              1,703,000
              
              
              $
              4,275,000




12.
Unaudited Oil and Gas Reserves Information





At
March 31, 2008, 2007, and 2006, 93%, 92%, and 93% respectively, of the
estimated oil and gas reserves presented herein were derived from reports
prepared by independent petroleum engineering firm Ryder Scott Company. The
remaining 7 and 8 percent of the reserve estimates, respectively, were
prepared internally by our management. We caution that there are many inherent
uncertainties in estimating proved reserve quantities and in projecting future
production rates and the timing of development expenditures. Accordingly, these
estimates are likely to change as future information becomes available, and
these changes could be material.





The
properties included in the oil and gas reserve estimates presented below
contributed 97% of both our oil and gas production 2008. We have elected not to
incur the additional expense of evaluating those properties that contributed the
remaining 3% of both oil and gas production for inclusion in our estimated oil
and gas reserves.





Proved
oil and gas reserves are the estimated quantities of crude oil, condensate,
natural gas and natural gas liquids which 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 reserves expected to be recovered through existing wells
with existing equipment and operating methods.





45
 Table of Contents





Analysis of
Changes in Proved Reserves. Estimated quantities of proved developed
reserves (all of which are located within the United States), as well as the
changes in proved developed reserves during the periods indicated, are presented
in the following two tables:





Proved Developed
Reserves


Oil
      and Natural gas liquids
              
              Natural
      gas(Bbls)
              
              
              (Mcf)Proved
      developed reserves at March 31, 2005
              
              
              1,056,000
              
              
              
              870,000Revisions
      of previous estimates
              
              
              (59,000)
              
              
              
              152,000Extensions
      and discoveries
              
              
              55,000
              
              
              
              89,000Sales
      of reserves in place
              
              
              —
              
              
              
              —Improved
      recovery
              
              
              —
              
              
              
              —Purchase
      of reserves
              
              
              —
              
              
              
              —Production
              
              
              (100,000)
              
              
              
              (141,000)Proved
      developed reserves at March 31, 2006
              
              
              952,000
              
              
              
              970,000Revisions
      of previous estimates
              
              
              92,000
              
              
              
              5,000Extensions
      and discoveries
              
              
              55,000
              
              
              
              319,000Sales
      of reserves in place
              
              
              —
              
              
              
              —Improved
      recovery
              
              
              —
              
              
              
              —Purchase
      of reserves
              
              
              —
              
              
              
              —Production
              
              
              (104,000)
              
              
              
              (156,000)Proved
      developed reserves at March 31, 2007
              
              
              995,000
              
              
              
              1,138,000Revisions
      of previous estimates
              
              
              112,000
              
              
              
              (113,000)Extensions
      and discoveries
              
              
              19,000
              
              
              
              203,000Sales
      of reserves in place
              
              
              —
              
              
              
              —Improved
      recovery
              
              
              15,000
              
              
              
              1,000Purchase
      of reserves
              
              
              22,000
              
              
              
              —Production
              
              
              (89,000)
              
              
              
              (109,000)Proved
      developed reserves at March 31, 2008
              
              
              1,074,000
              
              
              
              1,120,000




All of
our oil and gas reserves at March 31, 2008, 2007, and 2006 are
classified as Proved Developed,


Producing.





The table
below sets forth a standardized measure of the estimated discounted future net
cash flows attributable to our proved oil and gas reserves. Estimated future
cash inflows were computed by applying year end (March 31) prices of oil
and gas (with consideration of price changes only to the extent provided by
contractual arrangements) to the estimated future production of proved oil and
gas reserves at March 31, 2008, 2007, and 2006. The future production
and development costs represent the estimated future expenditures to be incurred
in producing and developing the proved reserves, assuming continuation of
existing economic conditions. Discounting the annual net cash flows at 10%
illustrates the impact of timing on these future cash flows.





46
 Table of Contents








Standardized Measure of
Estimated Discounted Future Net Cash Flows


At
      March 31,2008
              
              
              2007
              
              
              2006Future
      cash inflows
              
              $
              114,296,000
              
              
              $
              67,502,000
              
              
              $
              64,022,000Future
      cash outflows:Production
      cost
              
              
              (49,599,000
              )
              
              
              (33,909,000
              )
              
              
              (29,618,000
              )Development
      cost
              
              
              —
              
              
              
              —
              
              
              
              —Future
      income taxes
              
              
              (17,826,000
              )
              
              
              (8,070,000
              )
              
              
              (8,142,000
              )Future
      net cash flows
              
              
              46,871,000
              
              
              
              25,523,000
              
              
              
              26,262,000Adjustment
      to discount future annual net cash flows at 10%
              
              
              (21,911,000
              )
              
              
              (10,899,000
              )
              
              
              (11,230,000
              )Standardized
      measure of discounted future net cash flows
              
              $
              24,960,000
              
              
              $
              14,624,000
              
              
              $
              15,032,000




The
following table summarizes the principal factors comprising the changes in the
standardized measure of estimated discounted net cash flows for 2008, 2007, and
2006.





Changes in Standardized
Measure of Estimated Discounted Net Cash Flows


At
      March 31,2008
              
              
              2007
              
              
              2006Standardized
      measure, beginning of period
              
              $
              14,624,000
              
              
              $
              15,032,000
              
              
              $
              14,819,000Sales
      of oil and gas, net of production cost
              
              
              (4,727,000
              )
              
              
              (4,707,000
              )
              
              
              (4,031,000
              )Net
      change in sales prices, net of production cost
              
              
              14,598,000
              
              
              
              (1,300,000
              )
              
              
              768,000Discoveries,
      extensions and improved recoveries, net of future development
      cost
              
              
              3,054,000
              
              
              
              2,828,000
              
              
              
              2,294,000Change
      in future development costs
              
              
              —
              
              
              
              —
              
              
              
              4,000Development
      costs incurred during the period that reduced future development
      cost
              
              
              —
              
              
              
              —
              
              
              
              —Sales
      of reserves in place
              
              
              —
              
              
              
              —
              
              
              
              —Revisions
      of quantity estimates
              
              
              2,639,000
              
              
              
              1,404,000
              
              
              
              (559,000
              )Accretion
      of discount
              
              
              1,865,000
              
              
              
              1,874,000
              
              
              
              1,948,000Net
      change in income taxes
              
              
              (4,221,000
              )
              
              
              (317,000
              )
              
              
              957,000Purchase
      of reserves
              
              
              361,000
              
              
              
              —
              
              
              
              —Changes
      in timing of rates of production
              
              
              (3,233,000
              )
              
              
              (190,000
              )
              
              
              (1,168,000
              )Standardized
      measure, end of period
              
              $
              24,960,000
              
              
              $
              14,624,000
              
              
              $
              15,032,000




13.
Quarterly Financial Data (Unaudited)





As
discussed in Note 2 - Restatement of Prior Period’s Financial Statements, we
have restated our annual results for fiscal years 2007 and 2006, as well as the
quarterly periods therein to correct errors in our accounting for deferred tax
liabilities.  We have also corrected the interim results for the first
three quarters of fiscal 2008 for these same errors.  The amounts
below have been restated to give effect of these corrections to the interim
periods in 2008, 2007, and 2006.





47
 Table of Contents





Adjustments for Interim
Periods during 2008.





Below is
a summary of the balance sheet information from previously filed interim
financial statements as affected by the restatement and adjustments for each of
the quarterly periods ended June 30, 2007, September 30, 2007, December 31,
2007.





Consolidated Balance Sheet(unaudited)
              
              2008First
      Qtr
              
              
              Second
      Qtr
              
              
              Third
      QtrAssetsTotal
      assets
              
              $
              15,669,000
              
              
              $
              16,774,000
              
              
              $
              19,190,000LiabilitiesTotal
      current liabilities
              
              
              1,603,000
              
              
              
              1,934,000
              
              
              
              3,159,000Deferred
      TaxPreviously
      reported
              
              
              746,000
              
              
              
              986,000
              
              
              
              1,340,000Adjustment
              
              
              1,033,000
              
              
              
              1,158,000
              
              
              
              1,283,000As
      restated
              
              
              1,779,000
              
              
              
              2,144,000
              
              
              
              2,623,000Total
      Long Term LiabilitiesPreviously
      reported
              
              
              2,574,000
              
              
              
              2,791,000
              
              
              
              3,408,000Adjustment
              
              
              1,033,000
              
              
              
              1,158,000
              
              
              
              1,283,000As
      restated
              
              
              3,607,000
              
              
              
              3,949,000
              
              
              
              4,691,000Shareholders'
      EquityAdditional
      Paid in CapitalPreviously
      reported
              
              
              22,730,000
              
              
              
              22,732,000
              
              
              
              22,744,000Adjustment
              
              
              19,000
              
              
              
              19,000
              
              
              
              19,000As
      restated
              
              
              22,749,000
              
              
              
              22,751,000
              
              
              
              22,763,000Total
      Shareholders EquityPreviously
      reported
              
              
              11,492,000
              
              
              
              12,049,000
              
              
              
              12,623,000Adjustment
              
              
              (1,033,000
              )
              
              
              (1,158,000
              )
              
              
              (1,283,000
              )As
      restated
              
              
              10,459,000
              
              
              
              10,891,000
              
              
              
              11,340,000Total
      Liabilities and Equity
              
              $
              15,669,000
              
              
              $
              16,774,000
              
              
              $
              19,190,000
  48
 Table of Contents
  Adjustments for Interim
Periods during 2008.
 
 Below is
a summary of the statement of operations information from previously filed
interim financial statements as affected by the restatement and adjustments for
each of the quarterly periods ended June 30, 2007, September 30, 2007, December
31, 2007.
   Statement of
      Operations(unaudited)
                
                2008First
      Qtr
                
                
                Second
      Qtr
                
                
                Third
      QtrTotal
      Revenue
                
                $
                1,614,000
                
                
                $
                1,794,000
                
                
                $
                2,081,000Income
      before income taxes
                
                
                627,000
                
                
                
                845,000
                
                
                
                941,000Deferred
      TaxesPreviously
      reported
                
                
                165,000
                
                
                
                240,000
                
                
                
                354,000Adjustment
                
                
                125,000
                
                
                
                125,000
                
                
                
                125,000As
      restated
                
                
                290,000
                
                
                
                365,000
                
                
                
                479,000Total
      Income taxesPreviously
      reported
                
                
                215,000
                
                
                
                290,000
                
                
                
                379,000Adjustment
                
                
                125,000
                
                
                
                125,000
                
                
                
                125,000As
      restated
                
                
                340,000
                
                
                
                415,000
                
                
                
                504,000Net
      IncomePreviously
      reported
                
                
                412,000
                
                
                
                555,000
                
                
                
                562,000Adjustment
                
                
                (125,000
                )
                
                
                (125,000
                )
                
                
                (125,000
                )As
      restated
                
                $
                287,000
                
                
                $
                430,000
                
                
                $
                437,000


49
 Table of Contents





Adjustments for Interim
Periods during 2007.





Below is
a summary of the balance sheet information from previously filed interim
financial statements as affected by the restatement and adjustments for each of
the quarterly periods ended June 30, 2006, September 30, 2006, December 31, 2006
and March 31, 2007.






Consolidated Balance
      Sheet(unaudited)
              
              2007First
      Qtr
              
              
              Second
      Qtr
              
              
              Third
      Qtr
              
              
              Fourth
      QtrAssetsTotal
      assets
              
              $
              12,669,000
              
              
              $
              13,612,000
              
              
              $
              14,274,000
              
              
              $
              15,452,000LiabilitiesTotal
      current liabilities
              
              
              1,849,000
              
              
              
              1,769,000
              
              
              
              2,021,000
              
              
              
              1,989,000Deferred
      TaxPreviously
      reported
              
              
              300,000
              
              
              
              613,000
              
              
              
              779,000
              
              
              
              581,000Adjustment
              
              
              227,000
              
              
              
              454,000
              
              
              
              681,000
              
              
              
              908,000As
      restated
              
              
              527,000
              
              
              
              1,067,000
              
              
              
              1,460,000
              
              
              
              1,489,000Total
      Long Term LiabilitiesPreviously
      reported
              
              
              1,543,000
              
              
              
              1,783,000
              
              
              
              1,915,000
              
              
              
              2,383,000Adjustment
              
              
              227,000
              
              
              
              454,000
              
              
              
              681,000
              
              
              
              908,000As
      restated
              
              
              1,770,000
              
              
              
              2,237,000
              
              
              
              2,596,000
              
              
              
              3,291,000Shareholders'
      EquityAdditional
      Paid in CapitalPreviously
      reported
              
              
              22,710,000
              
              
              
              22,713,000
              
              
              
              22,713,000
              
              
              
              22,730,000Adjustment
              
              
              4,750
              
              
              
              9,500
              
              
              
              14,250
              
              
              
              19,000As
      restated
              
              
              22,714,750
              
              
              
              22,722,500
              
              
              
              22,727,250
              
              
              
              22,749,000Total
      Shareholders EquityPreviously
      reported
              
              
              9,277,000
              
              
              
              10,060,000
              
              
              
              10,338,000
              
              
              
              11,080,000Adjustment
              
              
              (227,000
              )
              
              
              (454,000
              )
              
              
              (681,000
              )
              
              
              (908,000
              )As
      restated
              
              
              9,050,000
              
              
              
              9,606,000
              
              
              
              9,657,000
              
              
              
              10,172,000Total
      Liabilities and Equity
              
              $
              12,669,000
              
              
              $
              13,612,000
              
              
              $
              14,274,000
              
              
              $
              15,452,000




50
 Table of Contents




Adjustments for Interim
Periods during 2007.
 
 Below is
a summary of the statement of operations information from previously filed
interim financial statements as affected by the restatement and adjustments for
each of the quarterly periods ended June 30, 2006, September 30, 2006, December
31, 2006 and March 31, 2007.


Statement of
      Operationsb

                  (unaudited)
              
              2007First
      Qtr
              
              
              Second
      Qtr
              
              
              Third
      Qtr
              
              
              Fourth
      QtrTotal
      Revenue
              
              $
              1,984,000
              
              
              $
              2,062,000
              
              
              $
              1,585,000
              
              
              $
              1,536,000Income
      before income taxes
              
              
              1,034,000
              
              
              
              1,103,000
              
              
              
              679,000
              
              
              
              591,000Deferred
      TaxesPreviously
      reported
              
              
              300,000
              
              
              
              313,000
              
              
              
              166,000
              
              
              
              (198,000
              )Adjustment
              
              
              111,250
              
              
              
              111,250
              
              
              
              111,250
              
              
              
              111,250As
      restated
              
              
              411,250
              
              
              
              424,250
              
              
              
              277,250
              
              
              
              (86,750
              )Total
      Income taxesPreviously
      reported
              
              
              317,000
              
              
              
              323,000
              
              
              
              401,000
              
              
              
              (134,000
              )Adjustment
              
              
              111,250
              
              
              
              111,250
              
              
              
              111,250
              
              
              
              111,250As
      restated
              
              
              428,250
              
              
              
              434,250
              
              
              
              512,250
              
              
              
              (22,750
              )Net
      IncomePreviously
      reported
              
              
              717,000
              
              
              
              780,000
              
              
              
              278,000
              
              
              
              725,000Adjustment
              
              
              (111,250
              )
              
              
              (111,250
              )
              
              
              (111,250
              )
              
              
              (111,250
              )As
      restated
              
              $
              605,750
              
              
              $
              668,750
              
              
              $
              166,750
              
              
              $
              613,750


51
 Table of Contents





Adjustments for Interim
Periods during 2006.





Below is
a summary of the balance sheet information from previously filed interim
financial statements as affected by the restatement and adjustments for each of
the quarterly periods ended June 30, 2005, September 30, 2005, December 31, 2005
and March 31, 2006.





Consolidated Balance
      Sheetb

                  (unaudited)
              
              2006First
      Qtr
              
              
              Second
      Qtr
              
              
              Third
      Qtr
              
              
              Fourth
      QtrAssetsTotal
      assets
              
              $
              9,561,000
              
              
              $
              10,169,000
              
              
              $
              10,545,000
              
              
              $
              11,850,000LiabilitiesTotal
      current liabilities
              
              
              2,114,000
              
              
              
              2,079,000
              
              
              
              1,690,000
              
              
              
              1,473,000Deferred
      TaxPreviously
      reported
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―Adjustment
              
              
              120,500
              
              
              
              241,000
              
              
              
              361,500
              
              
              
              482,000As
      restated
              
              
              120,500
              
              
              
              241,000
              
              
              
              361,500
              
              
              
              482,000Total
      Long Term LiabilitiesPreviously
      reported
              
              
              1,162,000
              
              
              
              1,155,000
              
              
              
              1,118,000
              
              
              
              1,817,000Adjustment
              
              
              120,500
              
              
              
              241,000
              
              
              
              361,500
              
              
              
              482,000As
      restated
              
              
              1,282,500
              
              
              
              1,396,000
              
              
              
              1,479,500
              
              
              
              2,299,000Shareholders'
      EquityAdditional
      Paid in CapitalPreviously
      reported
              
              
              22,703,000
              
              
              
              22,709,000
              
              
              
              22,709,000
              
              
              
              22,710,000Adjustment
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―As
      restated
              
              
              22,703,000
              
              
              
              22,709,000
              
              
              
              22,709,000
              
              
              
              22,710,000Total
      Shareholders EquityPreviously
      reported
              
              
              6,285,000
              
              
              
              6,935,000
              
              
              
              7,737,000
              
              
              
              8,560,000Adjustment
              
              
              (120,500
              )
              
              
              (241,000
              )
              
              
              (361,500
              )
              
              
              (482,000
              )As
      restated
              
              
              6,164,500
              
              
              
              6,694,000
              
              
              
              7,375,500
              
              
              
              8,078,000Total
      Liabilities and Equity
              
              $
              9,561,000
              
              
              $
              10,169,000
              
              
              $
              10,545,000
              
              
              $
              11,850,000
  52
 Table of Contents
  Adjustments for Interim
Periods during 2006.
 
 Below is
a summary of the statement of operations information from previously
filed interim financial statements as affected by the restatement and
adjustments for each of the quarterly periods ended June 30, 2005, September 30,
2005, December 31, 2005 and March 31, 2006.
   Statement of
      Operations(unaudited)
                
                2006First
      Qtr
                
                
                Second
      Qtr
                
                
                Third
      Qtr
                
                
                Fourth
      QtrTotal
      Revenue
                
                $
                1,534,000
                
                
                $
                1,641,000
                
                
                $
                1,688,000
                
                
                $
                1,752,000Income
      before income taxes
                
                
                560,000
                
                
                
                644,000
                
                
                
                802,000
                
                
                
                822,000Deferred
      TaxesPreviously
      reported
                
                
                ―
                
                
                
                ―
                
                
                
                ―
                
                
                
                ―Adjustment
                
                
                120,500
                
                
                
                120,500
                
                
                
                120,500
                
                
                
                120,500As
      restated
                
                
                120,500
                
                
                
                120,500
                
                
                
                120,500
                
                
                
                120,500Total
      Income taxesPreviously
      reported
                
                
                13,000
                
                
                
                ―
                
                
                
                ―
                
                
                
                ―Adjustment
                
                
                120,500
                
                
                
                120,500
                
                
                
                120,500
                
                
                
                120,500As
      restated
                
                
                133,500
                
                
                
                120,500
                
                
                
                120,500
                
                
                
                120,500Net
      IncomePreviously
      reported
                
                
                547,000
                
                
                
                644,000
                
                
                
                802,000
                
                
                
                822,000Adjustment
                
                
                (120,500
                )
                
                
                (120,500
                )
                
                
                (120,500
                )
                
                
                (120,500
                )As
      restated
                
                $
                426,500
                
                
                $
                523,500
                
                
                $
                681,500
                
                
                $
                701,500


53
 Table of Contents





ITEM 8


CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS


ON
ACCOUNTING AND FINANCIAL DISCLOSURE





None.





ITEM 8A


CONTROLS
AND PROCEDURES





Disclosure
Controls and Procedures
  As
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934
(the "Exchange Act"), the term "disclosure controls and procedures" means
controls and other procedures of an issuer that are designed to ensure that
information required to be disclosed by the issuer in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and
forms.  Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by an issuer in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the issuer's management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.
  The
Chief Executive Officer and Principal Accounting Officer evaluated the
effectiveness of the Company's disclosure controls and procedures and concluded
that, following implementation of the changes in internal control over financial
reporting discussed below, the Company's disclosure controls and procedures were
effective as of March 31, 2008.
  The
restatement of our 2007 and 2006 financial statements, as contained in this Form
10-KSB, raise the question whether the original statements made by management
concerning our disclosure controls and procedures and our internal control over
financial reporting for 2007 and 2006 should be modified or supplemented so that
such statements would not be misleading in light of these restatements. Based
upon the Commission’s Guidance Regarding Management’s Report On Internal Control
Over Financial Reporting Under Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 (Release Nos. 33-8810, 34-55929, June 20, 2007), the restatement of
financial statements does not, by itself, necessitate that management consider
the effect of prior conclusions nor is management required to reassess and
revise its prior conclusions. Nevertheless, management has reassessed these
prior statements and has concluded that in 2007 and 2006 the Company had a
material weakness in its internal control over income tax reporting with
respect to calculating the GAAP cost basis of oil and gas properties in
determining deferred tax liability and the estimated deferred tax asset for
depletion carryforward, which were discovered in 2008.
 
 Changes
in Internal Control Over Financial Reporting
 
 Anticipating
the need to become compliant with Section 404 of the Sarbanes-Oxley Act of 2002
(SOX), during fiscal year 2008, we undertook a complete reassessment of our
existing control and reporting procedures; and specifically our internal control
over financial reporting.  Pursuant to this reassessment, we
implemented a number of refinements and enhancements to include; better
documentation, further definition of critical responsibilities and enhanced
identification of critical control points.  These modifications had
the effect of strengthening our existing controls and giving us a better
overview of the interrelationships between various control
processes.
  In
addition, in order to assist and enhance our efforts in maintaining effective
controls over the completeness, accuracy and valuation of the accounting for and
disclosure of income taxes, we engaged during the fourth quarter of the year a
CPA firm to assist us as our principal tax advisors on an ongoing basis
beginning for the year ended March 31st,
2008.  This CPA firm has assisted us in determining the restated
valuations of deferred tax liabilities and demonstrated the appropriate level of
knowledge, experience and training commensurate with our financial reporting
requirements.


54
 Table of Contents




Furthermore,
in order to assist and enhance the Company’s efforts in maintaining effective
internal controls over financial reporting, we engaged a Sarbanes-Oxley Section
404 consulting firm to assist us as our SOX advisors and internal auditors on an
ongoing basis beginning for the year ended March 31st,
2008.  This consulting firm has assisted us in developing the
enhancements and refinements necessary for management to reach its conclusions
regarding its assessment of internal controls over financial reporting and has
demonstrated the appropriate level of knowledge, experience and training
commensurate with our financial reporting requirements.
 
 Other
than the above, there were no changes in our internal control over financial
reporting during the year ended March 31, 2008 that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
  Management's
Annual Report on Internal Control Over Financial Reporting
 
 The
management of Basic Earth Science Systems, Inc. is responsible for establishing
and maintaining adequate internal control over financial reporting for the
Company as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange
Act.  This system is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America.
 
 Our
internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the Company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management
and the directors of the Company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the Company's assets that could have a material effect on the
financial statements, and provide reasonable assurance as to the detection of
fraud.
 
 Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements.  Further, because of changes in conditions, effectiveness of
internal controls over financial reporting may vary over time.
 
 With the
participation of the Chief Executive Officer and Principal Accounting Officer,
the Company’s management conducted an evaluation of the effectiveness of the
Company’s internal control over financial reporting based on the framework and
criteria established in Internal Control-Integrated
Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, the Company’s management
concluded that the Company's internal control over financial reporting was
effective as of March 31, 2008.
 
 Management’s
report was not subject to attestation by the Company’s independent registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s
report in this Annual Report on Form 10-KSB.  Therefore, this Annual
Report on Form 10-KSB does not include such an attestation.
 
 By:/s/ Ray
      Singleton
              
              By:
      /s/ Joseph
      YoungRay
      Singleton, President
              
              Joseph
      YoungChief
      Executive Officer
              
              Principal
      Accounting OfficerJuly
      11, 2008
              
              July
      11, 2008


55
 Table of Contents






ITEM 8B


OTHER
INFORMATION





There is
no information required to be disclosed on Form 8-K during the fourth quarter of
the year ended March 31, 2008 that has not been reported.





56
 Table of Contents





Part
III


ITEM
9


DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;


COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT





Directors





The
following sets forth the names and ages of the members of the Board of Directors
of Basic Earth Science Systems, Inc. (“Basic” or “the Company” or “we” or “our”
or “us”) who served during the past year, their respective principal occupations
or employment during the past five years, and the period during which each has
served as a director of the Company.





Ray
Singleton(57) has been a
director of Basic since July 1989. Mr. Singleton joined the Company in
June 1988 as Production Manager/Petroleum Engineer. In October 1989 he was
elected Vice President, and was appointed President and Chief Executive Officer
in March 1993. Mr. Singleton began his career with Amoco Production Company
in Texas as a production engineer. He was subsequently employed by the
predecessor of Union Pacific Resources as a drilling, completion and production
engineer and in 1981 began his own engineering consulting firm, serving the
needs of some 40 oil and gas companies. As a consultant he was retained by the
Company on various projects from 1981 to 1987. Mr. Singleton currently
serves on the Board of Directors of the Independent Petroleum Association of
Mountain States (IPAMS) and is a former president of that organization.
IPAMS is a thirteen state, regional trade association that represents the
interests of independent oil and gas companies in the Rocky Mountain region. In
addition, Mr. Singleton is a member of the Society of Petroleum Engineers.
Mr. Singleton received a Bachelor of Science degree in Petroleum
Engineering from Texas A&M University in 1973 and received a Masters Degree
in Business Administration from Colorado State University’s Executive MBA
Program in 1992.





David Flake(53) first became a director of the Company in September 1987.
Mr. Flake began his career at Basic in November 1980 as tax accountant
and was appointed Controller in July 1983. In September 1987 he was
appointed Secretary/Treasurer and Chief Financial Officer. He held all of these
positions at the Company until he resigned in January 1993 to pursue other
business and financial opportunities. In April 1994 Mr. Flake was
re-appointed Corporate Secretary. From September 1998 through
December 2000 he provided financial consulting services to the Company. On
January 1, 2001 Mr. Flake rejoined Basic as a full-time employee and
was re-appointed Treasurer and Chief Financial Officer until he resigned in
February 2008. Mr. Flake received his Bachelor of Science degree in
Accounting/Business Administration from Regis University in Denver, Colorado in
1977 and his Masters Degree in Business Administration from Colorado State
University’s Executive MBA Program in 1995.





Richard K.
Rodgers(48) has been a director of Basic since December 2006.
Mr. Rodgers was originally appointed to fill the vacancy created by the
resignation of a prior director, and was then elected as a director at the
Company’s shareholder meeting held on January 15, 2007. For the last 3
years, Mr. Rodgers has provided business development, planning and
financial consulting services to various banking and business development
clients. During the past five years, Mr. Rodgers was employed by several Denver
area banks including Key Bank, Guaranty Bank & Trust Company and Colorado
Capital Bank. In his most recent employment with Colorado Capital Bank from 2004
to 2005, he was the President, and was responsible for the start-up, of its
Cherry Creek branch office and served on the board of directors of Colorado
Capital Bank. Mr. Rodgers attended the University of Denver and received
his Bachelor of Science degree in International Business Administration in 1995
and his Master of Science degree in International Business Administration in
1997.





57
 Table of Contents





Monroe W.
Robertson(58)  was
originally appointed to fill the vacancy created when the board, on April
4, 2007, amended the Company’s Bylaws to increase the number of members of
the Board from three (3) members to four (4) members. Subsequently, he was
elected as a director at the Company’s shareholder meeting held on
January 21, 2008. Mr. Roberston currently serves on the Board of Directors
of Cimarex Energy Company and is chairman of that board’s Audit Committee.
Mr. Robertson began his career in 1973 with Gulf Oil Corporation and held
various positions in engineering, corporate planning and financial analysis
until 1986. From 1986 to 1992 he held various positions at Terra Resources and
Apache Corporation. In 1992 Mr. Robertson joined Key Production Company as
its Senior Vice President and Chief Financial Officer. In 1999 he was appointed
President and Chief Operating Officer of that company and served in that role
until 2002. Other than his service on Cimarex’s board which began in
October 2005, for the past five years Mr. Robertson has been a private
investor. Mr. Robertson received a Bachelor of Science degree in Mechanical
Engineering along with Master of Science degrees in both Mechanical Engineering
and Nuclear Engineering from the Massachusetts Institute of Technology in 1973.
He also has received a Masters Degree in Business Administration from National
University in 1979. Mr. Robertson is a member of the National Association
of Corporate Directors.





Executive
Officers





During
the past year, until Mr. Flake resigned as an officer of the Company in February
2008, the Company’s executive officers were Ray Singleton and David
Flake.  Both were also board members. Their names, ages, principal
occupations and/or employment during the past five years are set forth above.
There are no family relationships between or among the officers and Board of
Directors.





Directors
are elected by the Company’s shareholders at each annual meeting or, in the case
of a vacancy, are appointed by the directors then in office, to serve until the
next annual meeting or until their successors are elected and qualified.
Officers are appointed by and serve at the discretion of the Board of Directors.
There are no family relationships between or among the Board of
Directors.





Involvement
in Certain Legal Proceedings





During
the past five years, no present director or executive officer of the Company has
been the subject matter of any of the following legal proceedings: (a) any
bankruptcy petition filed by or against any business of which such person was a
general partner or executive officer either at the time of the bankruptcy or
within two years prior to that time; (b) any criminal convictions; (c) any
order, judgment, or decree permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of business,
securities or banking activities; or (d) any finding by a court, the SEC or the
CFTC to have violated a federal or state securities or commodities
law.  Further, no such legal proceedings are believed to be
contemplated by governmental authorities against any director or executive
officer.




Corporate
Governance





Independent
Directors.Each of the Company’s directors, except for Messrs. Singleton
and Flake, qualifies as an “independent director” as defined under the published
listing requirements of the American Stock Exchange. The independence definition
includes a series of objective tests. For example, an independent director may
not be employed by Basic and may not engage in certain types of business
dealings with the Company. In addition, the Board has made a subjective
determination as to each independent director that no relationship exists, which
in the opinion of the Board, would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director. In making these
determinations, the Board reviewed and discussed information provided by the
directors and by the Company with regard to each director’s business and
personal activities as they may relate to the Company and its management. Also,
the Board determined that the members of the Audit Committee each qualify as
“independent” under special standards established by the American Stock Exchange
and the SEC for members of audit committees.





58
 Table of Contents








Audit Committee.The Board of Directors has a standing Audit Committee which, at March 31,
2008, consisted of Richard Rodgers and Monroe Robertson. During fiscal 2008 the
Audit Committee met four times. The Audit Committee is authorized to review,
with the Company’s independent accountants, the annual financial statements of
the Company prior to publication and to make annual recommendations to the Board
for the appointment of independent public accountants for the ensuing year. It
is the responsibility of the Audit Committee to review the effectiveness of the
financial and accounting functions, operations, and internal controls
implemented by Basic’s management.





The Board
has certified both Mr. Robertson and Mr. Rodgers as financially
literate, and Mr. Robertson as an “audit committee financial expert,” as
defined under Item 407(d)(5) of Regulation S-B under the Exchange Act. Both
Mr. Robertson and Mr. Rodgers are considered “independent directors”
under the listing standards of the American Stock Exchange.





Compensation
Committee.The Board of Directors has a standing Compensation Committee
which, at March 31, 2008, consisted of Richard Rodgers and Monroe Robertson,
both of whom are independent under the guidelines of the American Stock Exchange
listing standards. Mr. Rodgers serves as the Committee’s chairman. The
responsibilities of the Compensation Committee (the “Committee”) of the Board of
Directors are three-fold: first, establishing and administering the general
compensation policies of the Company, second, setting the specific compensation
for the Company’s chief executive officer (CEO) and lastly, recommending to
the Board of Directors the independent director compensation.





No
interlocking relationship exists between the members of the Company’s Board of
Directors or Compensation Committee and the board of directors or compensation
committee of any other company.





Nominating
Committee.The
Board of Directors has a standing Nominating Committee which, at March 31, 2008,
consisted of Richard Rodgers and Monroe Robertson.





No
material changes have been made to the procedures by which security holders may
recommend nominees to the Board of Directors since we filed with the Securities
and Exchange Commission, on December 13, 2007, its  definitive proxy
statement for the 2007 Annual Meeting of Shareholders.





Code of Ethics.We have adopted a Code of Ethics as defined in Item 406 of
Regulation S-B that applies to its directors, principal executive and
financial officer and persons performing similar functions. The Code of Ethics
can be found on our website at http://www.basicearth.net.





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





Section 16(a)
of the Securities Exchange Act requires the Company’s officers and directors and
shareholders of more than ten percent of the Company’s common stock to file
reports of ownership and changes in ownership of the Company’s common stock with
the Securities and Exchange Commission (SEC). Officers and directors are
required by SEC regulations to furnish Basic with the information necessary for
the Company to file all required Section 16(a) reports. During fiscal 2008 all
required reports were filed timely.





59
 Table of Contents








ITEM 10


EXECUTIVE
COMPENSATION





Summary
Compensation Table





The
following table sets forth the compensation paid or accrued by the Company to
its Chief Executive Officer and Chief Financial Officer for fiscal 2008 and
2007. No other director, officer or employee received annual compensation that
exceeded $100,000.




Non-Equity
            AllName
      and
            
            Fiscal
            
            Salary
            
            
            Bonus
            
            Incentive
      Plan
            Other
            
            TotalPrincipal
      Position
            
            Year
            
            ($)
            
            
            ($)
            
            Compensation
            Compensation
            
            ($)(1)
            
            (2)
            (3)Ray Singleton
            
            2008
            
            $
            134,250
            
            
            $
            6,346
            
            
            $
            4,053
            
            
            $
            6,176
            
            
            $
            150,825President and Chief Executive Officer
            
            2007
            
            $
            102,183
            
            
            $
            3,981
            
            
            $
            5,983
            
            
            $
            4,031
            
            
            $
            116,178David Flake
            
            2008
            
            $
            85,574
            
            
            $
            24,240
            
            
            $
            3,205
            
            
            $
            4,084
            
            
            $
            117,103Secretary/Treasurer,
            
            2007
            
            $
            90,798
            
            
            $
            3,562
            
            
            $
            4,731
            
            
            $
            3,119
            
            
            $
            102,210Former
      Chief Financial Officer and Controller




(1)
            
            The
      amount shown for each executive officer is the amount accrued for in prior
      periods and paid in fiscal 2008.(2)
            
            The
      amount shown for each executive officer is the amount accrued for fiscal
      2008 and paid for fiscal 2007 through the Oil and Gas Incentive
      Compensation Plan.(3)
            
            For
      Mr. Singleton, amount includes matching funds contributed by the
      Company to its 401(k) plan of $5,204 and $3,254 for fiscal 2008 and 2007,
      respectively. It also includes $850 and $777 for premiums paid by the
      Company on a life insurance policy for Mr. Singleton during fiscal
      2008 and 2007, respectively. Mr. Singleton designates the
      beneficiary. For Mr. Flake, the Company’s former CFO, all amounts
      were for matching funds contributed by the Company to its 401(k) plan for
      his benefit.





Effective
April 1, 1980 the Company adopted an Oil and Gas Incentive Compensation
Plan (the O&G Plan) for key employees. Through this O&G Plan, Basic pays
to the O&G Plan participants, consisting of both former and current key
employees, a portion of its net revenue (after deducting operating expenses)
from certain properties. Under the O&G Plan rules, the portion of the net
revenue contributed from any property cannot exceed 5% of the Company’s interest
in that property. While payments are still made to the O&G Plan participants
due to previous grants, the last time a new property was added to the O&G
Plan was in 1988.





The
participants in the O&G Plan made no cash outlay at the time of grant in
order to participate; it was entirely non-contributory, and an interest is not
assignable, transferable, nor can it be pledged by the participant. Interest in
the O&G Plan vested over a period ranging from four to eleven years. We can
sell or otherwise transfer its interest in properties designated for the O&G
Plan. If we sell a property in the O&G Plan, the participants shall receive
their respective percentages of the sales price. There are currently five
participants in the O&G Plan including Messrs. Singleton and Flake, our
former CFO. The other three participants are former officers who have vested
interests in the O&G Plan ranging from 60 percent to 100 percent.
Compensation paid or accrued through this plan to Messrs. Singleton and
Flake is included in the Other Annual Compensation column in the Executive
Officer Compensation table above.





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On
July 27, 1995 the Board of Directors adopted the 1995 Incentive Stock
Option Plan (the ISO Plan) and in October 1995, our shareholders approved
the ISO Plan. The ISO Plan remained in effect for a period of ten years,
expiring on July 26, 2005. This ISO Plan was established to provide a
flexible and comprehensive stock option and incentive plan which permitted the
granting of long-term incentive awards to employees, including officers and
directors employed by us or our subsidiary, as a means of enhancing and
strengthening our ability to attract and retain those individuals on whom the
continued success of the Company most depends.





Of the
1,000,000 shares authorized under the ISO Plan, prior to its expiration, options
for only 665,000 shares were granted. Of that amount and as of March 31, 2008,
50,000 options expired unexercised, 590,000 options were exercised at strike
prices ranging from $0.0325 to $0.175 per share, and 25,000 options remain
unexercised.





In
October 1997 we implemented a savings plan that allows participants to make
contributions by salary reduction pursuant to Section 401(k) of the Internal
Revenue Code. Employees are required to work for the Company one year before
they become eligible to participate in the 401(k) Plan. The Company matches 100%
of the employee’s contribution up to 3% of the employee’s salary. Contributions
are vested when made. Contributions to the 401(k) Plan on behalf of Messrs.
Singleton and Flake, our former CFO, are also included in the All Other
Compensation column in the Summary Compensation Table above.





Outstanding
Equity Awards at Fiscal Year End





The
following table provides information on the current stock option holdings by
each of the named executive officers and directors as of March 31, 2008.
The table below includes unexercised stock options related to director
compensation for David Flake who is no longer an officer of the Company, but
continues to retain his stock options as a director.





Option
      AwardsName
            
            Number
      of Securities Underlying Unexercised Options (#)
    Exercisable
            
            Number
      of Securities Underlying Unexercised Options (#)
    Unexercisable
            
            Equity
      Incentive Plan Awards: (#) of Securities Underlying Unexercised Unearned
      Options (3)
            
            Option
      Exercise Price
            
            Option
      Expiration DateDavid
      Flake
            
            
            25,000
            
            
            
            —
            
            
            
            N/A
            
            
            $
            0.133
            
            
            
            7/26/2010





We have
no contract with any officer which would give rise to any cash or non-cash
compensation resulting from the resignation, retirement or any other termination
of such officer’s employment with the Company or from a change in control of the
Company or a change in any officer’s responsibilities following a change in
control.





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Director
Compensation





Prior to
fiscal 2008, directors received no cash compensation for their services to the
Company as directors, but were reimbursed for out-of-pocket expenses incurred to
attend board meetings. However, from July 1995 until its expiration in
July 2005, the Incentive Stock Option Plan (“the ISO Plan”), noted above,
provided eligible, non-employee members of the Board of Directors of Basic or
its subsidiaries (Non-Employee Directors), grants of certain options to purchase
common stock of the Company, as compensation for their services. During the
years the ISO Plan was active, 425,000 non-qualified options were granted to
independent directors: 250,000 to Edgar Huffman and 175,000 to David Flake, our
former CFO, who was then an independent director. As of March 31, 2008,
Mr. Flake has 25,000 unexercised non-qualified options.





On
March 8, 2007 the Board of Directors adopted a new Director Compensation
Plan. On April 12, 2007 the Board of Directors resolved issues concerning
the Plan and then ratified the Plan effective April 1, 2007.





With
respect to this Plan, independent director compensation consists of a cash
retainer, meeting fees, committee fees and stock grants. Independent directors
receive an annual cash retainer of $16,000, in addition to $2,000 and $500 for
quarterly board meetings and committee meetings (which take place as needed),
respectively. Committee chairpersons of the Audit, Compensation, and Nominating
Committees receive $5,500, $4,500 and $3,500, respectively. Additionally,
independent board members receive an annual stock grant equal to $36,000 vested
over three years. The number of shares included in each grant is determined
based upon the average closing price of the ten trading days preceding each
April 1st anniversary date. Thus, effective April 1, 2007 and April 1,
2008, subject to vesting, Messrs. Robertson and Rodgers are entitled to
stock grants of 22,713 and 36,036 shares each, respectively.





Name
            Fees Earned or Paid in Cash
              ($)
            
            
            Stock Awards
              ($)
            
            All Other Compensation
              ($)
            
            Total
              ($)(1
            )Richard
      Rodgers
            
            $
            29,000
            
            
            
            
            
            
            $
            36,000
            
            
            $
            —
            
            
            $
            65,000Monroe
      Robertson
            
            
            28,000
            
            
            
            
            
            
            
            36,000
            
            
            
            —
            
            
            
            64,000Total
            
            
            57,000
            
            
            
            
            
            
            
            72,000
            
            
            
            —
            
            
            
            129,000





(1)
            
            The
      amount shown for each director is the amount awarded each year vesting
      over a three year period.




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ITEM 11


SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT





Set forth
below, as of July 11, 2008, is information concerning stock ownership of all
persons, or group of persons, known by the Company to own beneficially 5% or
more of the shares of Basic’s common stock and all directors and executive
officers of the Company, both individually and as a group, who held such
positions in fiscal 2008. Basic has no knowledge of any other persons, or group
of persons, owning beneficially more than 5% of the outstanding common stock of
the Company as of March 31, 2008.





Name
      and Address of Beneficial Owner
            Type
      and Class
            
            Shares
      of Common Stock Beneficially Owned
            
            
            Percent
      of Outstanding Shares Beneficially OwnedRay
      Singleton, Denver CO (a)
            Common
      Stock
            
            
            4,505,912
            
            
            
            25.8
            %David
      Flake, Denver CO (b)
            Common
      Stock
            
            
            758,535
            
            
            
            4.3
            %Richard Rodgers, Denver, CO (c)
            Common
      Stock
            
            
            7,571
            
            
            
            (e
            )Monroe
      W. Robertson, Denver, CO (d)
            Common
      Stock
            
            
            13,471
            
            
            
            (e
            )All
      officers and directors as a group
            Common
      Stock
            
            
            5,285,489
            
            
            
            30.3
            %(4 persons) (a), (b), (c) and (d)




(a)
            
            All
      4,505,912 shares are owned directly by
  Mr. Singleton.(b)
            
            Represents
      719,849 shares owned directly by Mr. Flake, the Company’s former CFO,
      and 38,686 shares with indirect beneficial ownership.(c)
            
            All
      7,571 shares are fully vested and owned direclty by Mr.
  Rodgers.(d)
            
            All
      13,471 shares are fully vested and owned directly by
      Mr. Robertson.(e)
            
            Less
      than 1%





Company
management knows of no arrangements that may result in a change in control of
Basic.





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ITEM 12


CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS





It is
Company policy that officers or directors may assign to or receive assignments
from Basic in oil and gas prospects only on the same terms and conditions as
accepted by independent third parties. It is also the policy of Basic that
officers or directors and Basic may participate together in oil and gas
prospects generated by independent third parties only on the same terms and
conditions as accepted by each other.





With
respect to prospects initiated during either fiscal 2008 or 2007, none of
Basic’s officers or directors participated with the Company. However, in
previous years, Mr. Singleton participated with the Company in certain
acquisitions. With respect to his working interest in the four wells in which he
currently has a working interest, at March 31, 2008 Mr. Singleton had
a net credit balance of approximately $2,000 compared to $11,500 at March 31,
2007. This was due to his share of proceeds from the sale of well production
equipment exceeding the amount due from him for his share of operating expenses.
Also at March 31, 2008 and 2007, the Company had approximate $2,000 and
$500 payables to him, respectively, for his share of net revenue from these
wells.  During fiscal 2008 and 2007 there were no other material
related party transactions.





ITEM 13


EXHIBITS
AND REPORTS ON FORM 8-K


Exhibits


Exhibit
      No.
            
            
            Document3i1
            
            
            Restated
      Certificate of Incorporation included in Basic’s Form 10-K for the
      year ended March 31, 19813i1
            
            
            By-laws
      included in Basic’s Form S-1 filed October 24,
    19803i1
            
            
            Certificate
      of Amendment to Basic’s Restated Certificate of Incorporation dated
      March 31, 199610(i)a1
            
            
            Loan
      Agreement between The Bank of Cherry Creek and Basic, dated March 4,
      200210(i)a1
            
            
            Amended
      Loan Agreement between American National Bank (formerly The Bank of Cherry
      Creek) and Basic dated January 3, 2006.10(i)a1
            
            
            Amended
      Loan Agreement between American National Bank (formerly The Bank of Cherry
      Creek) and Basic dated December 31, 200610(ii)1
            
            
            Oil
      and Gas Incentive Compensation Plan included in Basic’s Form 10-K for
      the year ended March 31, 198510(ii)1
            
            
            Restricted
      Stock Agreement dated effective as of April 7, 2007211
            
            
            Subsidiaries
      of Basic included in Basic’s Form 10-KSB for the year ended March 31,
      200231.1
            
            
            Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Ray
      Singleton, Chief Executive Officer)31.2
            
            
            Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Joseph
      Young, Principal Accounting Officer)32.1
            
            
            Certification
      Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Ray Singleton, Chief Executive
      Officer)32.2
            
            
            Certification
      Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Joseph Young, Principal Accounting
      Officer).





1
Previously filed and incorporated herein by reference





Other
exhibits and schedules are omitted because they are not applicable, not required
or the information is included in the financial statements or notes
thereto.





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ITEM 14


PRINCIPAL
ACCOUNTANT FEES AND SERVICES





The
following table discloses the fees that the Company was billed for professional
services rendered by its independent public accounting firm, Hein &
Associates LLP (Hein), in each of the last two fiscal years.





Years
      Ended
              March
      31,2008
            
            
            2007Audit
      fees (1)
            
            $
            70,000
            
            
            $
            50,953Audit-related
      fees(2)
            
            
            —
            
            
            
            2,125Tax
      fees(3)
            
            
            11,500
            
            
            
            10,000All
      other fees(4)
            
            
            —
            
            
            
            —Total
            
            $
            81,500
            
            
            $
            63,078





(1)
            
            Reflects
      fees billed for the audit of the Company’s consolidated financial
      statements included in its Form 10-KSB and review of its quarterly reports
      on Form 10-QSB, which represents a 37.3% increase over the prior
      year.(2)
            
            Reflects
      fees, if any, for consulting services related to financial accounting and
      reporting matters.(3)
            
            Reflects
      fees billed for tax compliance, tax advice and preparation of the
      Company’s federal tax return.(4)
            
            Reflects
      fees, if any, for other products or professional services not related to
      the audit of the Company’s consolidated financial statements and review of
      its quarterly reports, or for tax
services.





Pre-Approval
Policies and Procedures





The Audit
Committee approves all audit, audit-related services, tax services and other
services provided by Hein. Any services provided by Hein that are not
specifically included within the scope of the audit must be pre-approved by the
Audit Committee in advance of any engagement. Under the Sarbanes-Oxley Act of
2002, audit committees are permitted to approve certain fees for audit-related
services, tax services and other services pursuant to a de minimus exception
prior to the completion of an audit engagement. In fiscal 2008, none of the fees
paid to Hein were approved pursuant to the de minimus exception.





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Signatures





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





BASIC
EARTH SCIENCE SYSTEMS, INC.


DateBy:/s/ Ray
      Singleton
            
            July
      11, 2008Ray
      Singleton, PresidentBy:
      /s/ Joseph
      Young
            
            July
      11, 2008Joseph
      Young,Principal
      Accounting Officer





In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.





Name
      and Capacity
            
            DateBy:/s/ Ray
      Singleton
            
            July
      11, 2008Ray
      Singleton, DirectorBy:/s/ David
      Flake
            
            July
      11, 2008David
      Flake, DirectorBy:
      /s/ Richard K.
      Rodgers
            
            July
      11, 2008Richard
      K. Rodgers, Director andCompensation
      Committee ChairmanBy:
      /s/ Monroe W.
      Robertson
            
            July
      11, 2008Monroe
      W. Robertson, Director andAudit
      Committee Chairman