**SECURITYAND EXCHANGE COMMISSION**

**WASHINGTON, D.C.20549**

 

**FORM 10-KSB**

 

**(Mark One)**

 

| **ý**                                            | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |
|-------------------------------------------------------|----------------------------------------------------------------------------------------------------|
|                                                  |                                                                                               |
| **For the Fiscal Year  Ended November 30, 2003** |
|                                                  |                                                                                               |
| **OR**                                                |
|                                                  |                                                                                               |
| **o**                                                 | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                  |                                                                                               |
| **Commission File  No.   0-30746**     |

 

**TBX RESOURCES, INC.**

(Name of Small Business Issuer inits charter)

 
| **Texas**                                             |   | **75-2592165**                     |
|-------------------------------------------------------|--------|------------------------------------|
| (State of incorporation)                              |   | (IRS Employer Identification  No.) |
|                                                  |   |                               |
| **3030 LBJ Freeway, Suite 1320  Dallas, Texas 75234** |   | **75234**                          |
| (Address of Principal Executive  Office)              |   | Zip Code                           |

 

Registrant’s telephone number, including AreaCode: **(972) 243-2610**

 

Securities registered pursuant toSection 12(b) of the Act:  **None**

 

Securities registered pursuant toSection 12(g) of the Act:    Common Stock

(Title of Class)

 

Check whether the Registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the past 12 months (or for such shorter period thatthe Registrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days.

 
| ý |   |   | o  |
|--------|--------|--------|----|
| YES    |   |   | NO |

 

Check if disclosure of delinquent filers inresponse to Item 405 of Regulation S-B is not contained in this form, and nodisclosure will be contained, to the best of the Registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-KSB or any amendment to this Form 10-KSB. ý

 

The Company’s revenues for the most recentfiscal year were $439,607.

 

The aggregate market value of the votingstock held by non-affiliates of the Company on February 29, 2004, was$728,991.

 

As of February 29, 2004, the Company had30,772,537 issued and outstanding shares of common stock.

 

 

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**ITEM1.****     DESCRIPTION OF BUSINESS.**

 

## **BACKGROUND**

## ** **

TBX Resources, Inc., was incorporated in thestate of Texas in March 1995.  Ourprimary focus has been to acquire producing oil and gas properties withopportunities for future development. Prior to acquiring a property, we analyzethe previous production and operating history of the property, as well as theproduction history and related operating procedures for similar wells producingfrom the same formations in the general area. By acquiring producing propertiesthat respond positively to improved production practices and enhanced recoverytechniques, we have built an inventory of infield development drillinglocations.

 

As of November 30, 2003, our company hadtotal assets of $1,475,897 of which net oil and gas properties amounted to$1,099,839 or 74.52% of our total assets. At November 30, 2003, we hadapproximately $7,438 in cash and money market accounts and a negative $404,803in working capital.  Our accumulativelosses through November 30, 2003, totaled $7,915,850. Our revenues for ourfiscal year ended November 30, 2003 were $439,607 and our net losses forthe same period were $1,247,713 Our ratio of current assets to currentliabilities is 0.2:1; we have no long-term debt. As of November 30, 2003,our shareholders’ equity was a positive $950,772.

 

Our company has experienced losses over thepast several years. However, our management is projecting a decrease in generaland administrative expenses, an increase in joint venture management fees, anincrease in prices obtained for our oil and gas produced and an increase in ourtotal production, due to more reworking of our wells.  Our management believes that, with the projected lower generaland administrative expenses, increases in production, higher prices for ourproduction, and joint venture management fees our company’s financial positionshould improve for the fiscal year ending November 30, 2004. However, thisimprovement is dependent upon many factors, some of which are not within ourcontrol and there can be no assurance that our actual results will improve.

 

Our mission is to be a publicly traded,independent oil and gas exploration and production company which can take fulladvantage of opportunities resulting from the major oil companies’ divestitureof domestic oil and gas properties. In particular, most major oil companies arecurrently more interested in devoting their exploration dollars toward thedevelopment of oil and gas fields that are not located in the United States,primarily because of the assumption by the major oil companies that domesticoil and gas properties have been significantly depleted. In addition, due tothe extent of the development of domestic oil and gas properties, it is morelikely that a significant new discovery in the oil and gas industry wouldlikely be conducted in those areas that have not been so heavily developed,generally being properties that are not contained within the United States.Because major oil companies are more interested in developing their overseasholdings, they often sell their domestic properties at prices that areattractive to independent oil companies, especially since we have significantlylower administrative costs than large oil companies. Due to our lower infrastructurecosts, we believe that our costs of owning and operating domestic oil and gasproperties are lower than those same costs as experienced by major oilcompanies.

 

JOINT VENTURE ACTIVITIES

 

During the third quarter of the current fiscal year, the Companyentered into a management contract with a company in which Mr. Burroughs, ourPresident, is the sole shareholder. Under the agreement, the Company performsadministrative and drilling supervision services on a well-by-well basis for afixed fee.

 

In September of the previous fiscal year, we obtained an option topurchase 2,800 acres of oil and gas leases in the Barnett Shale play in theFort Worth Basin of Wise County, Texas. In October of the same year, weformed the “Grasslands I, Limited Partnership” in which we are acting as theGeneral Partner for the purpose of acquiring the Wise County acreage fordevelopment drilling. The Company has a 20% interest in the Partnership and isreimbursed on a turnkey basis for 100% of the organization and offering costs,lease acquisition costs and administrative expenses.

 

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Previously the Company acted as the jointventure manager for 11 Joint Ventures, all of which were located in east Texasand western Louisiana. The joint ventures we developed were “rolled up” intoour company in that we exchanged shares of our common stock in return for ourjoint venture partners’ interest in the properties developed by their jointventures.

 

WELLS HELD BY THE COMPANY

 

As more particularly described in the description of propertiessection, we own or operate all or a portion of 23 wells located in Gregg,Hopkins, Franklin, Panola and Wood Counties, Texas. Of these 23 wells, 2 wellshave been designated as injection wells. Injection wells are wells into whichsalt water is injected to either assist in causing oil or gas to flow to aparticular well that is designated as a production well or to simply dispose ofsalt water that is often produced along with oil. In addition, 4 wells arecurrently producing oil. The remaining 17 wells are either currently shut-in,scheduled to be brought back into production or are designated as injectionwells. During the next twelve months, we hope to be able to bring some of thewells that are currently shut-in on-line so that they will begin to produceoil. However, our ability to re-open these wells is dependent upon obtainingsufficient financing to pay the costs associated with re-opening these wellsand operating the same once re-opened. Also, the Company has an interest in 6proven wells in Oklahoma. These wells are located in Ellis, Beckham, Garfield,Caddo and Canadian Counties, Oklahoma. All 6 of the wells are in production fornatural gas. Engineering estimates of provable reserves were not obtained forthese wells since their production is minor and will not have a material impacton the Company’s reserve value.

 

DEVELOPMENT AND EXPLORATION ACTIVITIES

 

Economic factors prevailing in the oil andgas industry change from time to time. The uncertain nature and trend ofeconomic conditions and energy policy in the oil and gas business generallymake flexibility of operating policies important in achieving desiredprofitability. We intend to evaluate continuously all conditions affecting ourpotential activities and to react to those conditions, as we deem appropriatefrom time to time by engaging in businesses most profitable for us.

 

In addition, in order to finance futuredevelopment and exploration activities, we will sponsor or manage public orprivate partnerships depending upon the number, size and economic feasibilityof our generated prospects, the level of participation of industry partners andvarious other factors. However, potential investors should note that wecurrently do not have in place any definite financing opportunities and therecan be no assurance that we will be able to enter into such financingarrangements or that if we are able to enter into such arrangements, we will beable to achieve any profitability as a result of our operations.

 

During both this and previous years wereceived funds from the sale of our common stock. On October 1, 2001 weentered into a Regulation S Stock Purchase Agreement (“Stock PurchaseAgreement”) with Citizen Asia Pacific Limited (CAPL), a Hong Kong companywhereby we agreed to offer and sale shares of our common stock in reliance ofan exemption from the registration requirements of the United States and statesecurities laws under Regulation S promulgated under the Securities Act of 1933.The Stock Purchase Agreement stipulates that CAPL will use its best efforts topurchase from us up to 500,000 restricted shares of common stock at a per shareprice which shall be 38% of the moving ten day average closing prices of ourshares of common stock as quoted on the OTC Bulletin Board or other publictrading market. We have the right to accept or reject subscriptions for theshares, in whole or in part. The agreement expired September 30, 2002. OnOctober 3, 2002 the Company entered into a consulting agreement withTelvest, Inc. Under the terms of the agreement, Telvest provides advisoryservices for foreign investments (Regulation S) for a fee of 3% of all fundsraised. The agreement expired January 31, 2003.  We expect the principal use of any funds generated from thefuture sale of common stock will be for developing existing oil and gasproperties and/or the acquisition of new properties.

 

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## **BUSINESS RISKS**

## ** **

Our company is subject to all of the risksnormally associated with the exploration for and production of oil and gas,including uncontrollable flows of oil, gas or well fluids into the atmosphere,pollution, and fires, each of which could result in damage to or destruction ofoil and gas wells, producing formations, or production facilities or damage topersons and other property. As is common in the industry, we do not fullyinsure against all these risks either because insurance is not available orbecause we elect not to insure due to prohibitive premium costs. The occurrenceof an event affecting the Company could have a material adverse effect on thefinancial position and results of our operations.

 

Our exploration activities carry risks thatthe value of the related acreage may be decreased by adverse geologicalstudies, unfavorable drilling results on nearby acreage, or lease expirations.In addition, drilling carries a significant risk that no commercial oil or gasproduction will be obtained and the investment will not be recovered. We preferto re-complete or rework producing properties to minimize this risk. Theultimate cost of drilling, completing, and operating wells is often uncertain.Moreover, drilling operations may be curtailed or delayed, with the likelihoodof increased costs, as a result of, among other factors, title problems,wellhead prices, weather conditions, and geologic uncertainty.

 

Our competitors include major oil companiesand numerous independent oil and gas companies, individuals and drilling andincome programs. Many of our larger competitors possess and employ financialand personnel resources substantially greater than those available to us. Suchcompanies are able to pay more for oil and gas properties and to define,evaluate, bid for and purchase a greater number of properties than ourfinancial or human resources permit. Our ability to acquire additionalproperties and to discover reserves in the future will be dependent upon ourability to evaluate and select suitable properties and to consummate transactionsin a highly competitive environment.

 

The availability of a ready market for oiland gas produced from properties now owned or hereafter acquired by us and theprices for such production are dependent upon numerous factors, many of whichare beyond our control. These factors include, among other things, the level ofdomestic production, the availability of imported oil and gas, actions taken byforeign oil and gas producing nations, the availability of pipelines withadequate capacity and other transportation facilities, the availability andmarketing of other competitive fuels, fluctuating demand for oil, gas andrefined products, and the extent of government regulation and taxation (underboth present and future legislation) of the production, refining,transportation, pricing, use and allocation of oil, natural gas, refinedproducts, and substitute fuels. In view of the many uncertainties affecting thesupply and demand for crude oil, natural gas, and refined petroleum products,we cannot predict the prices or marketability of our oil and gas production.

 

Our oil production is sold at or near ourwells under short-term purchase contracts at prevailing prices in accordancewith arrangements, which are customary in the oil industry. Our gas productionis sold on the spot market and not, therefore, subject to long-term contracts.Although this may prevent us from being required to dispose of our productionat low rates, there can be no assurance that purchasers will be willing tocontinue to purchase our natural gas on the spot market.

 

The production of oil and gas is subject toextensive federal, state and city laws, rules, orders and regulations governinga wide variety of matters, including the drilling and spacing of wells,allowable rates of production, prevention of waste and pollution and protectionof the environment. In addition to the direct costs borne in complying withsuch regulations, operations and revenues may be impacted to the extent thatcertain regulations limit oil and gas production to below economic levels.Although the particular regulations applicable in each state in whichoperations are conducted vary, such regulations are generally designed toensure that oil and gas operations are carried out in a safe and efficientmanner and to ensure that similarly situated operators are provided withreasonable opportunities to produce their respective fair share of availableoil and gas reserves. However, since these regulations generally apply to alloil and gas producers, our management believes that these regulations shouldnot put us at a material disadvantage to other oil and gas producers.

 

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State initiatives to regulate further thedisposal of oil and gas wastes could have a major impact on us. In addition, weare subject to laws and regulations concerning occupational health and safety.We do not anticipate being required in the near future to expend amounts thatare material in relation to our total capital expenditures program by reason ofenvironmental or occupational health and safety laws and regulations, butinsomuch as such laws and regulations are frequently changed, we are unable topredict the ultimate cost of compliance with these laws. However, we do notbelieve that our environmental risks are materially different from those ofcomparable gas and oil companies operating in similar geographic areas.

 

## **OFFICES**

## ** **

We maintain our corporate offices at 3030 LBJFreeway, Suite 1320, Dallas, Texas 75234, and pay an average monthly rental ofapproximately $5,074.00. Our lease runs from February 1, 2004 throughJuly 31, 2009 at a aggregate cost of approximately $335,000.

 

**ITEM2. DESCRIPTION OF PROPERTY**

 

GENERAL.****Following is information concerningproduction from our oil and gas wells, productive well counts and bothproducing and undeveloped acreage. Our oil and gas properties are locatedwithin the northern part of the east Texas salt basin. The earliest explorationin this area dates back to the early 1920s and 1930s, when frontier oil producerswere exploring areas adjacent to the famous “east Texas field” located near thetown of Kilgore, Texas. We have leasehold rights in three oil and gas fieldslocated in Gregg, Hopkins, Franklin, Panola, and Wood Counties, Texas. Morerecently, we acquired several wells and acreages in Oklahoma that are describedfollowing the Texas properties below.

 

RESERVES REPORTED TO OTHER AGENCIES. We arenot required and do not file any estimates of total, proved net oil or gasreserves with reports to any federal authority or agency.

 

PROPERTIES. The following is a breakdown ofour properties:

 

| **Name of Field**                 |   | **Gross Producing Well Count** |   | **Net Producing Well Count** |   |
|-----------------------------------|--------|--------------------------------|--------|------------------------------|--------|
| East Texas  Field                 |   | 0                              |   | 0                            |   |
| Mitchell Creek  & Talco Field |   | 1                              |   | 1                            |   |
| Manziel &  Quitman Field      |   | 3                              |   | 3                            |   |

 

The following information pertains to ourproperties as of November 30, 2003 (1):

 
| **Name of****Field** |   | **Proved****Reserves:  Oil  (bbls)** |   | **Proved****Reserves:  Gas  (mcf)** |   | **Proved  Developed****Reserves:  Oil  (bbls)** |   | **Proved****Developed  Reserves:  Gas  (mcf)** |   | **Current  Production:****Oil  (bbls)(1)** |   | **Percentage of  Reserves in Field****to Total Reserves  Held by the  Company** |   |
|----------------------|--------|--------------------------------------|--------|-------------------------------------|--------|-------------------------------------------------|--------|------------------------------------------------|--------|--------------------------------------------|--------|---------------------------------------------------------------------------------|--------|
| East                 |   |                                 |   |                                |   |                                            |   |                                           |   |                                       |   |                                                                            |   |   |   |
| Texas                |   |                                 |   |                                |   |                                            |   |                                           |   |                                       |   | oil                                                                             |   | 6.2 |   |
| Field                |   | 6,407                                |   | 0                                   |   | 6,407                                           |   | 0                                              |   | 0                                          |   | gas                                                                             |   | 0 |   |
|                 |   |                                 |   |                                |   |                                            |   |                                           |   |                                       |   |                                                                            |   |   |   |
| Mitchell Creek       |   |                                 |   |                                |   |                                            |   |                                           |   |                                       |   | oil                                                                             |   | 3.7 |   |
| & Talco  Field   |   | 33,681                               |   | 0                                   |   | 66,681                                          |   | 0                                              |   | 350                                        |   | gas                                                                             |   | 0 |   |
|                 |   |                                 |   |                                |   |                                            |   |                                           |   |                                       |   |                                                                            |   |   |   |
| Manziel &        |   |                                 |   |                                |   |                                            |   |                                           |   |                                       |   | oil                                                                             |   | 61.1 |   |
| Quitman Field        |   | 62,874                               |   | 0                                   |   | 62,874                                          |   | 0                                              |   | 425                                        |   | gas                                                                             |   | 0 |   |

 

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(1) The current production figure specifiedabove is for the production for the month of November 2003.

 

PRODUCTIVE WELLS AND ACREAGE

 
| **Geographic Area** |   | **Total Gross****Oil Wells** |   | **Net****Productive  Oil Wells** |   | **Total Gross****Gas Wells** |   | **Net Productive****Gas Wells** |   | **Total Gross  Developed****Acres** |   | **Net****Developed  Acres** |   |
|---------------------|--------|------------------------------|--------|----------------------------------|--------|------------------------------|--------|---------------------------------|--------|-------------------------------------|--------|-----------------------------|--------|
| East Texas  Region  |   | 21                           |   | 21                               |   | 0                            |   | 0                               |   | 843.20                              |   | 838.34                      |   |

 

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Notes:

 

1. Total GrossOil Wells was calculated by subtracting 2 wells designated as Injection Wellsfrom the 23 wells owned and/or operated by TBX Resources, Inc. as of November 30,2003.

 

2. NetProductive Oil Wells were calculated by multiplying the working interest heldby TBX Resources, Inc. in each of the 21 Gross Oil Wells and adding theresulting products.

 

3. Total GrossDeveloped Acres is equal to the total surface acres of the properties in whichTBX Resources, Inc. holds an interest.

 

4. Net DevelopedAcres is equal to the Total Gross Developed Acres multiplied by the percentageof the total working interest held by TBX Resources, Inc. in the respectiveproperties.

 

5. All acreagein which we hold a working interest as of November 30, 1999 had existingwells located thereon; thus all acreage leased by TBX Resources, Inc. may beaccurately classified as developed.

 
| **GEOGRAPHIC AREA** |   | **GROSS ACRES** |   | **NET ACRES** |   |
|---------------------|--------|-----------------|--------|---------------|--------|
| East Texas  Region  |   | 843.20          |   | 838.34        |   |

 

Note:

 

1.               Acreage that has existing wells and may beclassified as developed may also have additional development potential based onthe number of producible zones beneath the surface acreage. A morecomprehensive study of all properties currently leased by us would be requiredto determine precise developmental potential.

 

ANADARKO BASIN-WESTERN OKLAHOMA

 

The Company has an interest in 6 proven gas wells in Oklahoma. These wells are located in Ellis, Beckham,Garfield, Caddo and Canadian Counties, Oklahoma. All six of the wells are inproduction. No additional acreage was purchased in the current fiscalyear.  We completed a gas well that islocated on our Vici prospect in the first quarter of 2003. The Company has a13.31% working interest in the well. During the previous fiscal year, wecompleted one well, sold our working interest in three wells and made a partialsale of our Vice acreage as follows:

 

1. We sold ourentire 20% working interest in the Josephus # 1-33 gas well located in EllisCounty.

 

2. We sold ourentire 03% working interest in the Alan 1-11 gas well located in BeckhamCounty.

 

3. We sold ourentire 03% working interest in the Lillie 2-11 gas well located in BeckhamCounty.

 

4.   We sold our entire 07% working interest in theJenson Farms #1-33 gas well located on the Union City prospect.

 

5. We sold 12.0% of our 37.5% workinginterest in the 1,505-acre tract in Ellis County.

 

6. We sold 10.0%of our 28.24% working interest the Dennett #2-34 gas well that is located onour Vici prospect in Ellis County.

 

In addition to the above described wells weown working interests in two lease tracts; one located in Ellis County,Oklahoma with a gross acreage interest of 27.5% in 1,505 acres and the secondlocated in Canadian County, Oklahoma, constituting a 20% working interest in240 acres. The leases were purchased for the sum of $83,700 and $19,200,respectively. The Company also has a 3% interest in 640 acres in BeckhamCounty, Oklahoma.

 

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## **ITEM3. LEGAL PROCEEDINGS**

 

There are no material pending legalproceedings, other than ordinary routine litigation incidental to the business,to which we are a party or of which our property is the subject.

 

**ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

No matter was submitted during the fourthquarter of the fiscal year ended November 30, 2003, to a vote ofsecurities holders, through the solicitation of proxies or otherwise.

 

**ITEM5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.**

 

Prices for our common stock are currentlyquoted in the over the counter Bulletin Board maintained by the NASD and ourticker symbol is TBXR. Prices for our stock were approved for quotation on theBulletin Board on January 27, 2001. The following table shows the high andlow bid information for our common stock for each quarter during which pricesfor our common stock have been quoted.

 
| **QUARTER**                            |   | **LOW BID** |   | **HIGH BID** |   |
|----------------------------------------|--------|-------------|--------|--------------|--------|
| Quarter ending  February 28, 2003 |   | $           | 0.45   |         | $      | 0.09 |   |
| Quarter ending  May 31, 2003           |   | $           | 0.35   |         | $      | 0.08 |   |
| Quarter ending  August 31, 2003   |   | $           | 0.04   |         | $      | 0.08 |   |
| Quarter ending  November 30, 2003 |   | $           | 0.03   |         | $      | 0.05 |   |

 
| **QUARTER**                            |   | **LOW BID** |   | **HIGH BID** |   |
|----------------------------------------|--------|-------------|--------|--------------|--------|
| Quarter ending  February 29, 2002 |   | $           | 0.15   |         | $      | 0.24 |   |
| Quarter ending  May 31, 2002           |   | $           | 0.29   |         | $      | 0.40 |   |
| Quarter ending  August 31, 2002   |   | $           | 0.24   |         | $      | 0.29 |   |
| Quarter ending  November 30, 2002 |   | $           | 0.07   |         | $      | 0.10 |   |

 

The above information was obtained from theNASD. Because these are over-the-counter market quotations, these quotationsreflect inter-dealer prices, without retail mark-up, markdown or commissionsand may not represent actual transactions.

 

We have approximately 820 shareholders ofrecord for our common stock as of February 29, 2003.

 

**ITEM6. MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION.**

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDEDNOVEMBER 30, 2003 AND 2002

 

CAUTIONARY STATEMENT

 

Statements in this report which are notpurely historical facts, including statements regarding the Company’santicipations, beliefs, expectations, hopes, intentions or strategies for thefuture, may be forward-looking statements within the meaning ofSection 21E of the Securities Act of 1934, as amended. All forward-lookingstatements in this report are based upon information available to us on thedate of the report. Any forward-looking statements involve risks anduncertainties that could cause actual results or events to differ materiallyfrom events or results described in the forward-looking statements. Readers arecautioned not to place undue reliance on these forward-looking statements.

 

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RECENT DEVELOPMENTS

 

During the previous quarter, the Company entered into a management contractwith a company in which Mr. Burroughs is the sole shareholder. Under theagreement, the Company performs administrative and drilling supervisionservices on a well-by-well basis for a fixed fee. The Company has earnedapproximately $263,000 and incurred costs of approximately $100,000 throughNovember 30, 2003. The Company recorded a loss on its Talco Field propertyin East Texas due to expired leases. The Company wrote-off the costs of theacreage, wells and related depreciation, depletion and amortization andrecorded a loss of approximately $484,000. By relinquishing title to theproperty at this time, the Company was able to avoid a remedial liabilityestimated to be approximately $200,000. The property was shut-in; accordingly,there were no income or expense items associated with this property during thecurrent fiscal year. The property is currently being leased by a company inwhich our president, Tim Burroughs is the sole shareholder. In addition, theCompany plugged and abandoned its Jenson Farms prospect that was located inOklahoma and the Florence lease in East Texas. In this regard the Companywrote-off the costs of the acreage, wells and related depreciation, depletionand amortization and recorded a loss on abandonment of approximately $203,000.Jenson Farms and Florence were non-producing properties; accordingly, therewere no income or expense items associated with these properties during thecurrent fiscal year.

 

In September of the previous year, we obtained an option topurchase 2,800 acres of oil and gas leases in the Barnett Shale play in theFort Worth Basin of Wise County, Texas. In October 2002, we formed the“Grasslands I, Limited Partnership” in which we are acting as the GeneralPartner for the purpose of acquiring the Wise County acreage for developmentdrilling. The Company has a 20% interest in the Partnership and is reimbursedon a turnkey basis for 100% of the organization and offering costs, leaseacquisition costs and administrative expenses. Our cumulative revenue from thePartnership is $88,477 offset by our expenses of $49,233. On October 3, 2002, we entered into aconsulting agreement with Telvest, Inc. Under the terms of this agreement,Telvest provides advisory services for foreign investments (Regulation S) for afee of 3% of all funds raised. The agreement ran through January 31, 2003.The Company realized approximately $110,000 through the sales of its commonstock.

 

RESULTS OF OPERATIONS

 

The Company incurred an operating loss of$1,247,713 for the fiscal year ended November 30, 2003 as compared to anet loss of $2,263,805 for fiscal year ended November 30, 2002. Thedecrease in our operating loss of $1,016,157, 44.9%, is discussed below.

 

REVENUE - Total revenue increased $233,898,113.7%, from $205,709 for the twelve months ended November 30, 2002 to$439,607 for the twelve months ended November 30, 2003.

 

During the twelve months endedNovember 30, 2003, the Company generated approximately $176,229 in revenuefrom oil and gas sales as compared to $117,232 for the twelve months endedNovember 30, 2002. The $58,997 increase, 50.3%, is attributable to thepayment of approximately $52,000 in prior years oil runs for the correction ofan error by one of the Company’s oil purchasers. During the past 12 months, oilsales on the Texas properties increased approximately $51,000 due to theproduction from two additional wells brought on-line during the current fiscalyear. The majority of the Texas wells remain shut-in awaiting re-work or thedesignation as injection wells. Revenue from the Company’s Oklahoma propertiesdecreased approximately $44,000 in the current fiscal year that resulted fromlast year’s sale of the Company’s interest in three producing properties (seeabove) and a decline in production from the remaining properties.

 

Joint venture management fee income for thetwelve months ended November 30, 2003 was $263,378 while there was $88,477for the year ending November 30, 2002. The $174,901 increase, 197.7%, is attributable to thefollowing factor. During the previous quarter, the Company entered into amanagement contract with a company in which Mr. Burroughs is the soleshareholder. Under the agreement, the Company performs administrative anddrilling supervision services on a well-by-well basis for a fixed fee. TheCompany has earned $263,378 through November 30, 2003. InSeptember of last year, the Company formed and is acting as the generalpartner for The Grasslands I, Texas Limited Partnership. The purpose of

 

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the partnership is to acquire 2,800 acres of oil and gas leases in theBarnett Shale play in the Fort Worth Basin for developmental drilling. TheCompany is to be reimbursed on a turnkey basis for organization and offeringcosts, lease acquisition costs and administrative expenses. The prior year’srecorded income from the venture is $88,477. There is no earned income from theGrasslands I limited partnership in the current year.

 

EXPENSES - Total expenses decreased $792,253,45.3%, from $2,470,614 for the twelve months ended November 30, 2002 to$1,678,261 for the twelve months ended November 30, 2003.

 

Lease operating expenses and taxes decreased$6,183, 05.4% from $114,690 for the twelve months ended November 30, 2002to $108,507 for the twelve months ended November 30, 2003. The decrease isprimarily the result of the sale of the Company’s interest in the Oklahoma gaswells and offset by an increase in work over costs for two East Texas wells.

 

Joint venture costs and expenses increased$48,849, 99.2%, from $49,223 for the twelve months ended November 30, 2002to $98,072 for the current fiscal year. The increase relates to the addition ofthree contracts with an affiliated company for the organization and managementof drilling activities of joint venture partnerships (see joint venturemanagement fees above).

 

General and administrative expenses decreased$218,735, 29.9%, from $884,045 for the twelve months ended November 30,2002 to $616,088 for the twelve months ended November 30, 2003. Thedecrease of $218,735, 26.2%, is primarily due to lower consulting and legalfees, public relations costs, and contract services offset by an increase inpayroll and related costs and general office expenses.

 

Loss on abandonment of oil and gas propertieswas $687,317 for the twelve months ended November 30, 2003.The Company recorded a loss on its Talco Field property in East Texas due toexpired leases. The Company wrote-off the costs of the acreage, wells andrelated depreciation, depletion and amortization and recorded a loss ofapproximately $484,424. By relinquishing title to the property at this time,the Company was able to avoid a remedial liability estimated to beapproximately $200,000. The property was shut-in; accordingly, there were noincome or expense items associated with this property during the current fiscalyear. The property is currently being leased by a company in which ourpresident, Tim Burroughs is the sole shareholder. In addition, the Companyplugged and abandoned one Oklahoma gas well and one East Texas oil well andwrote-off the costs of the acreage, wells and related depreciation, depletionand amortization and recorded a loss on abandonment of approximately $186,722and $16,121, respectively. Both were non-producing properties; accordingly,there were no income or expense items associated with these properties duringthe current fiscal year. The Company sold its Bethany Field property in thefourth quarter of the previous fiscal year for $60,000.00. The Companywrote-off the costs of the acreage, wells and related depreciation, depletionand amortization and recorded a loss on the transaction of approximately$1,050,000. Management is of the opinion that the estimated costs of $3.8million to re-work and develop this property will not yield an adequate returnon its investment. Accordingly, in order to cut its losses and avoid asignificant future drain on the Company’s working capital resources, Managementelected to sell all of the Company’s interest in the field to an unrelatedparty for approximately $60,000. In addition the Company sold a partialinterest in several Oklahoma gas well and recorded a gain of approximately$41,000.

 

During the fourth quarter of the previousfiscal year, 2002, the Company recorded a loss of $140,000 on the sale of its$200,000 investment in Southern Oil & Gas Company, Inc. (Southern) aprivately held company. When the Company originally purchased its interest inSouthern, it also entered into an operations and management contract (the“Operations Contract”) providing that the Company was to be paid the profits ofSouthern that exceeded $40,000 each month. Because the amounts we were to bepaid under the Operations Contract have not materialized and the lowerproduction levels for Southern oil properties, management decided to sell its20% interest in Southern for $60,000.00 to avoid future additional losses.

 

During the previous fiscal year, the Company let lapse itsnon-exclusive option to purchase five prospects covering 3,323 acres inMontague County, Texas and charged current operations $150,000. The Company hasfound new acreage that it believes will be more prolific than the MontagueCounty prospect.

 

8

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The Company is the general partner of the “Grasslands I, LimitedPartnership” that was formed in the current fiscal year to purchaseapproximately 2,800 acres in the Barnett Shale of the Fort Worth Basin in WiseCounty, Texas for development drilling.

 

Depreciation, depletion and amortizationdecreased $3,832, 2.2%, from $172,109 for the twelve months endedNovember 30, 2002 to $168,277 for the twelve months endedNovember 30, 2003. The decrease is due to the abandonment of oil and gasproperties offset by higher charges for the remaining properties. Future chargesto depreciation, depletion, and amortization may be substantially higher as aresult of increased production or changes in reserve prices and/or quantities.

 

OTHER INCOME AND EXPENSE - Interest incomefor the twelve months ended November 30, 2003 was $733 as compared to $901for the same period last fiscal year. The Company’s cash balances have declinedduring the past year thus the decrease of $168 in interest income. Interestexpense was approximately $10,000 in the current fiscal year that relates toadvances/loans from affiliates. There was no interest charged in the previousyear. Other miscellaneous income was approximately $208 in the current fiscalyear as compared to $34 in the previous fiscal year.

 

PROVISION FOR INCOME TAXES - No tax benefitswere recorded for the twelve months ended November 30, 2003 and 2002.

 

NET LOSS - The Company’s net loss decreased$1,016,157 (44.9%) ; from $2,263,870 for the twelve months endedNovember 30, 2002 to $1,247,713 for the twelve months endedNovember 30, 2003. The decrease in the loss is attributable to an increasein operating income of $233,898, plus the reduction of losses on the sale andabandonment of oil and gas properties of $322,352, the write-off of SouthernOil & Gas Co. investment in the amount of $140,000, the write-off theCompany’s non-exclusive option to purchase five prospects inMontague County, Texas in the amount of $150,000, lease operations totaling$6,183 and general and administrativeexpenses totaling $218,713, depreciation depletion and amortization of $3,832 offset by jointventure expenses of $48,849.

 

Effective December 1, 1999, ourpresident, Mr. Tim Burroughs received stock options good for five years fromthe date of issuance to purchase up to 500,000 shares of the Company’s commonstock a year at a price which shall not be greater than 50% of the average bidprice for the shares during the previous quarter in which they are exercised.The fair value of the options will be recorded as compensation expense when areasonable estimate of such costs are available or the amount Mr. Burroughs hasto pay is known. Based on the formula for calculating the purchase price,material charges to compensation expense may be recorded in future years. As ofNovember 30, 2003, Mr. Burroughs has the option to purchase 2,000,000shares of the Company’s common stock, at an average exercise price of $0.0175per share.

 

**TBXRESOURCES, INC.LIQUIDITY AND CAPITAL RESOURCES**

 

As of November 30, 2003, we have totalassets of $1,475,897 of which net oil and gas properties amount to $1,099,839or 74.5% of the total assets. The Company’s accumulated losses throughNovember 30, 2003 totaled $7,915,850. At November 30, 2003, we have$7,438 in cash and money market accounts. The ratio of current assets tocurrent liabilities is 0.2:1, we have no long-term debt. As ofNovember 30, 2003, our shareholders equity was a positive $950,772.

 

We have funded operations from cash generatedfrom the sale of common stock, the sale of oil and gas properties, jointventure fees and loans from affiliates. The Company’s cash used for operatingactivities totaled $123,591 and $210,146 for the twelve months endedNovember 30, 2003 and November 30, 2002, respectively. Thisrepresents an improvement of $86,555 in cash used for operating activities.Cash provided by the disposal of oil and gas properties totaled $340,359 in theprevious year and none in current year. The Company received $60,000 in theprevious fiscal year for its 20% interest in Southern Oil & Gas Company,Inc. a non-public company with no market for its shares. The Company’s capitalinvestments totaled $10,856 and $556,499 for the twelve months endedNovember 30, 2003 and November 30, 2002, respectively. Cash used forother assets totaled $150,000 for the twelve months ended November 30,2002 and none for the same period this year. Cash provided by the sale ofcommon stock totaled $107,568 during

 

9

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the twelve months ended November 30,2003 while cash provided by the sale of common stock totaled $139,152 for thesame period last year.

 

We want to manage more joint venture limitedpartnerships. As manager of these programs, we should receive sufficient feesto earn a profit on our work. We expect that fees from this activity will beour a source of funds in the near future. Also, the Company completed one EllisCounty, Oklahoma well and reworked two East Texas wells. We estimate that thesewells may generate net income of approximately $15,000 per month; however,there can be no assurance that such level of production will continue now or inthe future, as the well is a new well and current data may prove to beunreliable.

 

In September of theprevious year, we obtained an option to purchase 2,800 acres of oil and gasleases in the Barnett Shale play in the Fort Worth Basin of Wise County, Texas.In the following month, we formed “The Grasslands I, Texas Limited Partnership”in which we are acting as the General Partner for the purpose of acquiring theWise County acreage for development drilling. The Company has a 20% interest inthe Partnership and is reimbursed on a turnkey basis for 100% of theorganization and offering costs, lease acquisition costs and administrativeexpenses. In addition, we plan to re-work 8of our East Texas wells in the coming year which may increase revenue byapproximately $300,000 to $360,000 a year. However, there can be no assurancethat our planned and projected level of production will materialize in thefuture.

 

We expect that the principal use of funds inthe near future will be from joint venture management fees and oil and gasrevenues and developing our oil and gas properties and/or the acquisition ofnew properties. Based on the aforementioned plans management expects to reduceits losses and generate positive cash flows from operations. However, there canbe no assurance that such plans will materialize. In addition, actual resultsmay vary from management’s plans and the amount may be material.

 

10

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**ITEM7. FINANCIAL STATEMENTS.**

 

TBX RESOURCES, INC.

INDEX TO FINANCIAL STATEMENTS ANDSCHEDULES

 
| Independent Accountant’s Audit Report Dated  March 16, 2004                                 |   |
|-------------------------------------------------------------------------------------------------------|--------|
|                                                                                                  |   |
| Balance Sheet – November 30, 2003                                                           |   |
|                                                                                                  |   |
| Statements of Operations-  For The Twelve Months Ended November 30, 2003 and 2002                |   |
|                                                                                                  |   |
| Statements of Cash Flows-  For The Twelve Months Ended November 30, 2003 and 2002                |   |
|                                                                                                  |   |
| Statements of Stockholders’ Equity-  For The Twelve Months Ended November 30, 2003 and 2002 |   |
|                                                                                                  |   |
| Notes to Audited Financial Statements                                                                 |   |

 

F-1

----

 

**JAMES G. SOMMA, CPA1000 E. Ash Lane, Suite 1703****Euless,Texas 76039**

 

The Board of Directors and Stockholders

TBX Resources, Inc.

Dallas, Texas

 

**INDEPENDENTACCOUNTANT’S AUDIT REPORT**

 

I have audited the accompanying balance sheet of TBX Resources, Inc. asof November 30, 2003 and the related statements of operations,stockholders’ equity and cash flows for each of the two years in the periodended November 30, 2003, as required by Item 310 (a) of Regulation S-B.All information included in these financial statements is the responsibility ofthe management. My responsibility is to express an opinion on these financialstatements based on my audit.

 

I have conducted my audit in accordance with auditing standardsgenerally accepted in the United States of America. Those standards requirethat I plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts disclosed in thefinancial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. I believe that myaudit provides a reasonable basis for my opinion.

 

In my opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of TBX Resources, Inc.as of November 30, 2003, and the results of its operations and cash flowsfor each of the two years in the period ended November 30, 2003, inconformity with accounting principles generally accepted in the United Statesof America.

 

The Supplementary Information Regarding Oil and GasProducing Activities on pages F-12 through F-14 is not a required part of thebasic financial statements but is supplementary information required by theFinancial Accounting Standards Board. We have applied certain limitedprocedures, which consisted principally of inquiries of management regardingthe methods of measurement and presentation of the supplementary information.However, we did not audit the information and express no opinion on it.

 

 

March 16, 2004

 

James G. Somma, CPA

 

F-2

----

 

**TBX RESOURCES, INC.**

**BALANCESHEET**

**NOVEMBER 30, 2003**

 
| **ASSETS**                                                                                                             |   |       |       |
|------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|
| **Current Assets**                                                                                                     |   |       |       |
| Cash and equivalents                                                                                                   |   | $          | 7,438      |   |
| Trade accounts receivable                                                                                              |   | 12,884     |       |
| Loan to affiliate                                                                                                      |   | —     |       |
| Prepaid consulting fees- current portion                                                                               |   | 100,000    |       |
| Total current assets                                                                                                   |   | 120,322    |       |
|                                                                                                                   |   |       |       |
| **Equipment and Property**                                                                                             |   |       |       |
| Office furniture, fixtures and equipment                                                                               |   | 117,693    |       |
| Oil and gas properties, using successful  efforts accounting                                                           |   |       |       |
| Proved properties and related equipment                                                                                |   | 1,576,502  |       |
|                                                                                                                   |   | 1,694,195  |       |
| Less accumulated depreciation, depletion  and amortization                                                             |   | (566,375   | )          |
| Total equipment and property                                                                                           |   | 1,127,820  |       |
|                                                                                                                   |   |       |       |
| **Prepaid Consulting and Other**                                                                                       |   | 227,755    |       |
| **Total Assets**                                                                                                       |   | $          | 1,475,897  |   |
|                                                                                                                   |   |       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                          |   |       | ** ** |
|                                                                                                                   |   |       |       |
| **Current Liabilities**                                                                                                |   |       |       |
| Trade accounts payable                                                                                                 |   | $          | 119,010    |   |
| Loans and advances from affiliates                                                                                     |   | 347,910    |       |
| Taxes payable                                                                                                          |   | 10,251     |       |
| Deferred income                                                                                                        |   | 47,954     |       |
| Total current liabilities                                                                                              |   | 525,125    |       |
|                                                                                                                   |   |       |       |
| **Commitments and Contingencies**                                                                                      |   | —     |       |
|                                                                                                                   |   |       |       |
| **Stockholders’ Equity**                                                                                          |   |       |       |
| Preferred stock- $.01 par value; authorized  10,000,000 shares;  no shares outstanding                                 |   | —     |       |
| Common stock- $.01 par value; authorized  100,000,000 shares;  30,772,537 shares outstanding at November 30, 2002 |   | 307,725    |       |
| Additional paid-in capital                                                                                             |   | 8,558,897  |       |
| Accumulated deficit                                                                                                    |   | (7,915,850 | )          |
| Total stockholders’ equity                                                                                        |   | 950,772    |       |
| **Total Liabilities and Stockholders’ Equity**                                                                    |   | $          | 1,475,897  |   |

 

The accompanying notes are an integral partof these financial statements.

 

F-3

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**TBX RESOURCES, INC.STATEMENTS OF OPERATIONS**

 
|                                                                              |   | **For the  Twelve Months Ended  November 30,** |       |
|-----------------------------------------------------------------------------------|--------|-----------------------------------------------------|------------|
|                                                                              |   | **2003**                                            |       | **2002** |   |
| **Revenues:**                                                                     |   |                                                |       |   |   |
| Oil and gas sales                                                                 |   | $                                                   | 176,229    |   | $ | 117,232 |   |
| Joint venture management fees                                                     |   | 263,378                                             |       | 88,477 |   |
|                                                                              |   |                                                |       |   |   |
| Total revenues                                                                    |   | 439,607                                             |       | 205,709 |   |
| **Expenses:**                                                                     |   |                                                |       |   |   |
| Lease operating and taxes                                                         |   | 108,507                                             |       | 114,690 |   |
| Joint venture costs and expenses                                                  |   | 98,072                                              |       | 49,223 |   |
| General and administrative                                                        |   | 616,088                                             |       | 834,823 |   |
| Loss on sale of investment in Southern Oil  & Gas Co.                         |   | —                                              |       | 140,000 |   |
| Loss on oil & gas lease option                                                |   | —                                              |       | 150,000 |   |
| Loss on sale & abandonment of oil and  gas properties                         |   | 687,317                                             |       | 1,009,669 |   |
| Depreciation, depletion and amortization                                          |   | 168,277                                             |       | 172,109 |   |
|                                                                              |   |                                                |       |   |   |
| Total expenses                                                                    |   | 1,678,261                                           |       | 2,470,514 |   |
|                                                                              |   |                                                |       |   |   |
| **Operating Loss**                                                                |   | (1,238,654                                          | )          | (2,264,805 | ) |
| **Other Income (Expense):**                                                       |   |                                                |       |   |   |
|                                                                              |   |                                                |       |   |   |
| Interest and other                                                                |   | (9,059                                              | )          | 935 |   |
|                                                                              |   |                                                |       |   |   |
| **Loss Before Provision for Income Taxes**                                        |   | (1,247,713                                          | )          | (2,263,870 | ) |
|                                                                              |   |                                                |       |   |   |
| Provision for income taxes                                                        |   | —                                              |       | — |   |
| **Net Loss**                                                                      |   | $                                                   | (1,247,713 | ) | $ | (2,263,870 | ) |
| **Net Loss Per Common Share, Basic and  Diluted**                                 |   | $                                                   | (0.04      | ) | $ | (0.09 | ) |
| Weighted average common shares used in per  share calculations: Basic and Diluted |   | 30,091,143                                          |       | 24,341,704 |   |

 

The accompanying notes are an integral partof these financial statements.

 

F-4

----

 

**TBX RESOURCES, INC.**

**STATEMENTSOF CASH FLOWS**

 
|                                                                                    |   | **For the  Twelve Months Ended  November 30,** |       |
|-----------------------------------------------------------------------------------------|--------|-----------------------------------------------------|------------|
|                                                                                    |   | **2003**                                            |       | **2002** |   |
| **Cash Flows From Operating Activities:**                                               |   |                                                |       |   |   |
| Net loss                                                                                |   | $                                                   | (1,247,713 | ) | $ | (2,263,870 | ) |
| Adjustments to reconcile net loss to net  cash provided (used) by operating activities: |   |                                                |       |   |   |
| Depreciation, depletion and amortization                                                |   | 168,277                                             |       | 172,109 |   |
| Prepaid consulting fees                                                                 |   | 100,000                                             |       | 100,000 |   |
| Issuance of common stock for consulting  services                                       |   | 17,745                                              |       | 237,187 |   |
| Loss on sale of interest in Southern Oil  & Gas Co.                                 |   | —                                              |       | 140,000 |   |
| Loss on option to purchase Barnett Shale  leases                                        |   | —                                              |       | 150,000 |   |
| Loss (gain) on disposal of oil & gas  properties                                    |   | 687,317                                             |       | 1,009,669 |   |
| Changes in operating assets and  liabilities:                                           |   |                                                |       |   |   |
| Decrease (increase) in:                                                                 |   |                                                |       |   |   |
| Receivables                                                                             |   | (5,660                                              | )          | (20,129 | ) |
| Loans To Affiliates                                                                     |   | 25,000                                              |       | — |   |
| Prepaid consulting and other                                                            |   | 5,662                                               |       | 63,370 |   |
| Increase (decrease) in:                                                                 |   |                                                |       |   |   |
| Trade payables, taxes and accrued expenses                                              |   | 8,440                                               |       | (77,005 | ) |
| Loans from Affiliates                                                                   |   | 187,910                                             |       | 160,000 |   |
| Deferred income from joint venture                                                      |   | (70,569                                             | )          | 118,523 |   |
| Net cash provided by (used) for operating  activities                                   |   | (123,591                                            | )          | (210,146 | ) |
| **Cash Flows From Investing Activities:**                                               |   |                                                |       |   |   |
| Cash provided by the sale of stock of  Southern Oil & Gas Co.                       |   | —                                              |       | 60,000 |   |
| Cash provided by the disposal of oil and  gas properties                                |   | —                                              |       | 340,359 |   |
| Cash used to acquire and develop oil &  gas properties                              |   | (10,856                                             | )          | (556,499 | ) |
|                                                                                    |   | (10,856                                             | )          | (156,140 | ) |
| **Cash Flows From Financing Activities:**                                               |   |                                                |       |   |   |
| Cash provided by the change in other assets                                             |   | —                                              |       | 150,000 |   |
| Cash provided by the issuance of common  stock                                          |   | 107,568                                             |       | 139,152 |   |
|                                                                                    |   | 107,568                                             |       | 289,152 |   |
| **Net Increase (Decrease) In Cash**                                                     |   | (26,879                                             | )          | (77,134 | ) |
| Cash at beginning of period                                                             |   | 34,317                                              |       | 111,451 |   |
| Cash at end of period                                                                   |   | $                                                   | 7,438      |   | $ | 34,317 |   |
|                                                                                    |   |                                                |       |   |   |
| **SUPPLEMENTAL SCHEDULE OF NONCASH  FINANCING ACTIVITIES**                         |   |                                                |       |   |   |
| Fair value of consulting services acquired  for common stock                            |   | $                                                   | —     |   | $ | 666,468 |   |

 

The accompanying notes are an integral partof these financial statements.

 

F-5

----

 

**TBX RESOURCES, INC.STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

 
|                                  |   | **Common  Stock** |   | **Additional  Paid-In  Capital** |    | **Accum-  ulated  Deficit** |   | **Total  Stock-  holders’  Equity** |   |
|---------------------------------------|--------|-------------------|--------|----------------------------------|---------|-----------------------------|--------|------------------------------------------|--------|
|                                  |   | **Shares**        |   | **Par Value**                    |    |                        |   |                                     |
| **Balance November 30, 2001**    |   | 19,874,389        |   | $                                | 198,744 |                        | $      | 7,736,945                                |   | $ | (4,404,267 | ) | $ | 3,531,422 |   |
| Issuance of common stock for cash     |   | 640,639           |   | 6,407                            |    | 132,745                     |   | —                                   |   | 139,152 |   |
| Issuance of common stock for services |   | 6,177,345         |   | 61,773                           |    | 604,695                     |   | —                                   |   | 666,468 |   |
| Net loss for period                   |   | —            |   | —                           |    | —                      |   | (2,263,870                               | )      | (2,263,870 | ) |
| **Balance November 30, 2002**    |   | 26,692,373        |   | 266,924                          |    | 8,474,385                   |   | (6,668,137                               | )      | 2,073,172 |   |
| Issuance of common stock for cash     |   | 3,760,836         |   | 37,608                           |    | 69,960                      |   | —                                   |   | 107,568 |   |
| Issuance of common stock for services |   | 319,328           |   | 3,193                            |    | 14,552                      |   | —                                   |   | 17,745 |   |
| Net loss for period                   |   | —            |   | —                           |    | —                      |   | (1,247,713                               | )      | (1,247,713 | ) |
| **Balance November 30, 2003**    |   | 30,772,537        |   | $                                | 307,725 |                        | $      | 8,558,897                                |   | $ | (7,915,850 | ) | $ | 950,772 |   |

 

The accompanying notes are an integral partof these financial statements.

 

F-6

----

 

**TBX RESOURCES, INC.NOTES TO FINANCIAL STATEMENTS**

** **

**1.****              BUSINESSACTIVITIES:**

 

TBX Resources, Inc., a Texas Corporation, was organized onMarch 24, 1995. The Company’s principal business activity is acquiring anddeveloping oil and gas properties. The Company owns 23 wells and operatesanother 7 wells located in East Texas. Of the 23 wells located in East Texas, 4wells are currently producing oil and 2 wells have been designated as injectionwells.  The remaining 17 wells areeither currently shut-in, scheduled to be brought back into production or aredesignated as injection wells. Also, the Company has an interest in 6 provenwells in Oklahoma. The Company’s philosophy is to acquire properties with thepurpose of reworking existing wells and/or drilling development wells to make aprofit. In addition, the Company has sponsored and/or managed joint venturedevelopment partnerships for the purpose of developing oil and gas properties forprofit.

 

**2.****              SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES:**

 

**Cash Equivalents**

The Company considers all highly liquid investments purchased with anoriginal maturity of three months or less to be cash equivalents.

 

**Oil and Gas Revenue**

Oil and gas revenue is reported when production is sold. The Companyaccrues revenue for oil and gas production sold but not paid.

 

**JointVenture Income and Expenses**

The Company sponsorsjoint venture partnerships. Income from the ventures is generally recorded asfunds are transferred from the partnership to the Company. Payments made to theCompany in excess of amounts earned are recorded as deferred income. Theprograms are undertaken on a turnkey basis. Accordingly, all monies raised arerecorded as joint venture income and all expenses to acquire, rework andoperate the wells are charged to joint venture costs and expenses. Profit isrecorded as earned. A provision for loss is reported in the period programcosts are estimated to exceed turnkey revenue.

 

**Office Furniture, Fixturesand Equipment**

These assets are stated at the Company’s cost and depreciated on anaccelerated basis over five to seven years. Maintenance and repair costs areexpensed when incurred, while major improvements are capitalized.

 

**Oil and GasProperties**

The Company follows the successful efforts method of accounting for oiland gas exploration and development expenditures. Under this method, costs ofsuccessful exploratory wells and all development wells are capitalized. Coststo drill exploratory wells that do not find proved reserves are expensed. Inthe absence of a determination as to whether the reserves that have been foundcan be classified as proved, TBX Resources carries the costs of drilling suchan exploratory well as an asset for no more than one year following completionof drilling. If, after that year has passed, a determination that provedreserves have not been found, TBX Resources assumes that the well is impaired,and charges its costs to expense. Significant costs associated with the acquisitionof oil and gas properties are capitalized. Upon sale or abandonment of units ofproperty or the disposition of miscellaneous equipment, the cost is removedfrom the asset account, the related reserves relieved of the accumulateddepreciation or depletion and the gain or loss is credited to or chargedagainst operations. Both proved and unproved oil and gas properties that areindividually significant are periodically assessed for impairment of value, anda loss is recognized at the time of impairment by providing an impairmentallowance. Other unproved properties are amortized based on the Company’sexperience and average holding period. Capitalized costs of producing oil andgas, properties, after considering estimated dismantlement and abandonment costsand estimated salvage values are depreciated and depleted by theunit-of-production method. Support equipment and other property and equipmentare depreciated over their estimated useful lives. On the sale or retirement ofa complete unit of a proved property, the cost and related accumulateddepreciation, depletion, and amortization are eliminated from the propertyaccounts, and the resultant gain or loss is recognized. On the retirement orsale of a partial unit of proved property, the cost is charged to accumulateddepreciation, depletion, and amortization with a resulting gain or lossrecognized in income. On the sale of an entire interest in an unproved propertyfor cash or cash equivalent, gain or loss on the sale is recognized, takinginto consideration the amount of any recorded impairment if the property hadbeen assessed individually. If a partial interest in an unproved property issold, the amount received is treated as a reduction of the cost of the interestretained. Maintenance and repairs are charged to expense; betterments ofproperty are capitalized and depreciated as described below.

 

##### **Depreciation,Depletion and Amortization**

The Company provides for depreciation,depletion and amortization of its investment in producing oil and gas propertieson the unit-of-production method, based upon independent reserve engineers’estimates of recoverable oil and gas reserves from the property.

 

F-7

----

 

**Investment InSouthern Oil & Gas Company, Inc.**

The Company’s investment in Southern Oil & GasCompany, Inc. is accounted for by the cost method. The impact of the costversus equity method (the preferred method) of accounting for the investment isnot considered material.

 

**Income Taxes**

The Company computes income tax expense using Statement of FinancialAccounting Standards (SFAS) No. 109, “Accounting for Income Taxes”. SFAS 109requires the measurement of deferred tax assets for deductible temporarydifferences and operating loss carry forwards and of deferred tax liabilitiesfor taxable temporary differences. Measurement of current and deferred taxliabilities and assets is based on provisions of enacted law. The effects offuture changes in tax laws and rates are not anticipated.

 

## **EarningsPer Share (EPS)**

The Company computes earnings per share using Statement of FinancialAccounting Standards (SFAS) No. 128, “ Earnings Per Share”. Basic earnings percommon share is calculated by dividing net income or loss by the average numberof shares outstanding during the year. Diluted earnings per common share iscalculated by adjusting outstanding shares, assuming conversion of allpotentially dilutive stock options. The computation of diluted EPS does notassume conversion, exercise, or contingent issuance of shares that would havean antidilutive effect on earnings per common share. Antidilution results froman increase in earnings per share or reduction in loss per share from theinclusion of potentially dilutive shares in EPS calculations.

 

## **Stock-BasedCompensation**

The Companyrecognizes compensation expense for options granted to employees using theintrinsic value method under Accounting Principles Board (APB) No. 25,“Accounting for Stock Issued to Employees”.                      Under this method, compensation to be recognized by theCompany for stock options issued is measured by the difference between thequoted market price of the stock at the measurement date less the amount theemployee is required to pay. This is an acceptable method of accounting foremployee stock options under the more recent Statement of Financial AccountingStandards (SFAS) No. 123, “Accounting for Stock-Based Compensation”.

 

## **Estimates**

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from these estimates.

 

## **NewAccounting Pronouncements**

In April 2002, the FASB issued Statement NO. 145, “Rescission ofFASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, andTechnical Corrections.” This Statement rescinds FASB Statement No. 4,“Reporting Gains and Losses from Extinguishment of Debt” and amendment of thatStatement, FASB Statement No. 64, “Extinguishment of Debt Made to SatisfySinking-Fund Requirements” and FASB Statement No. 44, “Accounting forIntangible Assets of Motor Carriers”. This Statement amends FASB Statement No.13, “Accounting for Leases”, to eliminate an inconsistency between the requiredaccounting for sale-lease back transactions and the required accounting forcertain lease specifications that have economic effects that are similar tosale-leaseback transactions. The Company does not expect the adoption to have amaterial impact to the Company’s financial position or results ofoperations.  In June 2002, the FASBissued Statement No. 146, “Accounting for Costs Associated with Exit orDisposal Activities.” This Statement addresses financial accounting andreporting for costs associated with exit or disposal activities and nullifiesEmerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring).” The provisions of thisStatement are effective for exit or disposal activities that are initiatedafter December 31, 2002, with early application encouraged. The Companydoes not expect the adoption to have a material impact to the Company’sfinancial position or results of operations.

 

In December 2002, the FASB issued Statement of Financial AccountingStandards No. 148, Accounting for Stock-Based Compensation—Transition andDisclosure (“SFAS 148”). SFAS 148 amends SFAS 123 and provides alternativemethods of transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation. SFAS 148 also amends thedisclosure requirements of SFAS 123 to require prominent disclosures in bothannual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults. SFAS 148 is effective for financial statements for annual periodsending after December 15, 2002, and interim periods beginning afterDecember 31, 2002. The Company has adopted the disclosure requirements ofSFAS 148 but will continue to use APB 25 to account for stock-basedcompensation.

 

In January 2003, the FASB issuedInterpretation No. 46, “Consolidation of Variable Interest Entities, anInterpretation of Accounting Research Bulletin No. 51”.  Under the provisions of Interpretation No.46, certain variable interest entities, often referred to as “Special PurposeEntities”, are required to be consolidated by the primary beneficiary of theentity if the equity investors in the entity do no have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties. Interpretation No. 6 is effective for all entitiescreated 

 

F-8

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or acquired prior to February 1, 2003.The provisions of Interpretation No. 46 must be applied for the first interimor annual period beginning after June 15, 2003. The Company hasimplemented the provisions of FASB Interpretation No. 46 and has concluded thatthe adoption does not have a material impact on the Company’s financialstatements.

 

In December 2003, the FASB issued a revision of FASB Statement No.132, Employers’ Disclosures about Pensions and Other Postretirement Benefits(SFAS 132), to improve financial statement disclosures for defined benefitplans. The change replaced existing disclosure requirements for pensions. Thestandard requires that companies provide more details about their plan assets. ThisStatement is effective for financial statements with fiscal years ending afterDecember 15, 2003. The interim-period disclosures required by thisStatement are effective for interim periods beginning after December 15,2003. The Company does not expect the adoption to have a material impact to theCompany’s financial position or results of operations.

 

**3.****              ACCUMULATEDOPERATING LOSSES:**

 

At November 30, 2003, the Company had accumulatedlosses of $7.9 million. The Company’s ability to continue is based on futureplans and past successes of its officers. The Company is attempting to raise additional equity funds

 

and to sponsor joint venture partnerships that will beused to develop existing oil and gas properties and/or purchase additionalproperties. The ability of the Company to attain profitable operations isdependent on the Company operating in an environment of stable prices andincreasing production over current levels. These financial statements have beenprepared on the basis that the Company will realize its assets and dischargeits liabilities in the normal course of business.

 

**4.****              AFFILIATEDPARTY TRANSACTIONS:**

 

a.               The operator of the East Texas oil andgas leases, Gulftex Operating, Inc. is an affiliate of TBX Resources.  Mr. Burroughs, a major stockholder andpresident of the Company, is the sole shareholder of Gulftex.  TBX Resources paid Gulftex $9,600 for boththis year and last year for activities associated with operating the wells.Included in trade accounts payable at November 30, 2003 is $10,356 dueGulftex Operating for lease operating expenses. Also, the Company hadpreviously advanced Gulftex Operating Company $25,000 for a performance bond.Gulftex repaid the Company during the current fiscal year.

 

b.              During the current fiscal year thecompany paid back approximately $20,000 of a $40,000 loan from its president,Mr. Tim Burroughs. The Company also owes Mr. Burroughs $125,000 for a loan froman affiliate in which Mr. Burroughs is the sole shareholder. The two loans werecombined and the Company recorded accrued interest of approximately $10,000 asof November 30, 2003.The loan balance as of November 30, 2003 isapproximately $154,100 and is payable on demand at an interest rate of 6% perannum. The loan is secured by the Company’s oil and gas properties. The Companyexpects to pay back this loan from operating revenue by the end of the nextfiscal year. In addition, the Company advanced approximately $39,000 to anothercompany in which Mr. Burroughs is a shareholder. The funds advanced were usedfor marketing activities on behalf of the Company. As of November 30,2003, the Company was repaid the $39,000 advanced.

 

c.               During the current fiscal year, theGrasslands I partnership advanced the Company approximately $193,800. The fundswere used to fund operations expenses. The Company expects to repay the loanswithin the next twelve months. See Note 8, “Affiliated Oil and Gas JointVenture Partnerships” below.

 

**5.****              INVESTMENTIN SOUTHERN OIL & GAS COMPANY, INC.:**

 

On January 6, 1999 the Company purchased a 20% interest inSouthern Oil & Gas Company’s (Southern) stock for $200,000. Southern is anoil and gas company that owns oil wells, primarily in northeast Louisiana. When the Company originally purchased itsinterest in Southern, it also entered into an operations and managementcontract (the “Operations Contract”) providing that the Company was to be paidthe profits of Southern that exceeded $40,000 each month. Because the amountswe were to be paid under the Operations Contract have not materialized and thelower production levels for Southern oil properties, management decided to sellits 20% interest in Southern to avoid a further erosion of itsinvestment amount. The Company sold its interest to the principal shareholderof Southern during in the fourth quarter of the previous fiscal year for$60,000 and recorded a loss on the transaction of $140,000.

 

**6.****              PREPAIDCONSULTING AND OTHER:**

 

a.               On March 7, 2002 the Companyexecuted a professional services agreement with Mr. Samuel Warren, President ofboth Warren Drilling, Inc. and Drill Pipe Industries, Inc. Under the terms ofthe agreement, which is to run for five years, the 

 

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Company is receiving assistance in developing new business opportunitiesand strategies, expanding existing operations, and facilitating any othernormal business transactions requested by the Company. The Company compensatedMr. Warren by issuing him 4,271,089 shares of the Company’s common stock valuedfor the purpose of this transaction at $500,000. The amount is included inprepaid consulting. The Company is amortizing the cost of Mr. Warren’s servicesover the term of the agreement (5 years). To date, the company has amortized$175,000 of the contract’s value.

 

b.              During the previous fiscal year, theCompany let lapse its non-exclusive option to purchase five prospects covering3,323 acres in Montague County, Texas and charged $150,000 to operations. TheCompany has found new acreage that it believes will be more prolific than theMontague County prospect. See discussion of Grasslands I, Limited Partnershipbelow.

 

**7.**              **COMMITMENTS AND CONTINGENCIES:**

 

a.               The Company executed an EmploymentAgreement effective December 1, 1999 with Mr. Tim Burroughs, President,for three years. Under the terms of the agreement, Mr. Burroughs is entitled toreceive an annual compensation of $150,000, and other items enumerated in theagreement, plus bonuses of up to 10% for material changes to the Company; forexample, when the Company completes a major acquisition, funding or financing.No bonuses were paid or accrued for the twelve months ended November 30,2003 and 2002. In addition, under the terms of the employment agreement, Mr.Burroughs received stock options good for five years from the date of issuanceto purchase up to 500,000 shares per year of the Company’s common stock forfive years at a price which shall not be greater than 50% of the average bidprice for the shares during the previous quarter in which the options are exercised.The options are cumulative and allow Mr. Burroughs to exercise his optionsthrough November 30, 2004 for a total of 2,500,000 shares. As ofNovember 30, 2003, Mr. Burroughs has the option to purchase 2,000,000shares of the Company’s common stock. The fair value of the options will be recorded as compensation expensewhen a reasonable estimate of such costs are available or the amount Mr.Burroughs has to pay is known. Based on the formula for calculating thepurchase price, material charges to compensation expense may be recorded infuture years. The contract was extended until a new employment agreement can beexecuted early next year.

 

b.              The Company is obligated for $334,900under a lease agreement for rent of its new office space in Dallas, Texas. Thelease runs from February 1, 2004 through July 31, 2009. The averagemonthly lease payment over the term of the lease is approximately $5,074. Theactual lease payment for the current fiscal year is $30,732. Following is aschedule of lease payments by year:

 
| **Year** |   | **Amount** |    |
|----------|--------|------------|---------|
| 2004     |   | $          | 32,798  |   |
| 2005     |   | 67,733     |    |
| 2006     |   | 67,733     |    |
| 2007     |   | 67,733     |    |
| 2008     |   | 64,012     |    |
| 2009     |   | 34,891     |    |
|     |   | $          | 334,900 |   |

 

c.               Gulftex Operating is the bonded operatorfor TBX Resources and is responsible for compliance with the laws and regulationsrelating to the protection of the environment. While it is not possible toquantify with certainty the potential impact of actions regarding environmentalmatters, particularly any future remediation and other compliance efforts, inthe opinion of management, compliance with the present environmental protectionlaws will not have a material adverse affect on the financial condition,competitive position or capital expenditures of TBX Resources. However, theCompany’s cost to comply with increasingly stringent environmental regulationsmay have an adverse effect on the Company’s future earnings.

 

**8.****              AFFILIATEDOIL AND GAS JOINT VENTURE PARTNERSHIPS:**

 

In September of 2002, the Company formed and is acting as thegeneral partner for the Grasslands I, Limited Partnership. The purpose of thepartnership is to acquire 2,800 acres for oil and gas development in theBarnett Shale play in the Fort Worth Basin of Wise County, Texas. The Companyis to be reimbursed on a turnkey basis for organization and offering cost,lease acquisition costs and administrative expenses.  Revenue earned to date is $88,477 offset by expenses of $49,233.See Note 4, “Affiliated Party Transactions” above

 

**9.****              SALEAND/OR ABANDONEMENT OF OIL AND GAS PROPERTIES:**

 

The Companywrote-off its investment in the Talco Field property in East Texas in thecurrent fiscal year. The Company wrote-off 80% of the costs of the acreage,wells and related depreciation, depletion and amortization and recorded a loss

 

F-10

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on the property ofapproximately $484,500. This was a non-producing property; accordingly therewere no income or expense items associated with this property during thecurrent fiscal year. The Company retained a 5% overriding interest and a 15%back in interest after payout to third party investors. In addition, theCompany abandoned its Jefferson Farms prospect in Oklahoma and its J.T.Florence property in East Texas. In this regard the Company wrote-off the costsof the acreage, wells and related depreciation, depletion and amortization andrecorded a loss on abandonment of approximately $187,000 and $16,000,respectively. The Jefferson Farms and J.T. Florence properties werenon-producing properties; accordingly there were no income or expense itemsassociated with these properties during the current fiscal year. During theprevious fiscal year the Company sold its Bethany Field property in the fourthquarter of the previous fiscal year. Management is of the opinion that thecosts of re-working, developing and producing this property will not yield anadequate return on its investment. Accordingly, in order to avoid a futuredrain on the Company’s working capital resources, Management elected to sellall of the Company’s interest in the field to an unrelated party forapproximately $60,000. The Company wrote-off the costs of the acreage, wellsand related depreciation, depletion and amortization and recorded a loss on thetransaction of approximately $1,050,000.The Company also sold three of itsOklahoma properties during the past fiscal year. The money was used to bothfund the drilling of two development wells in Oklahoma and to support currentoperations. The Company wrote off the costs of the wells and relateddepreciation, depletion and amortization and reported a net gain ofapproximately $46,000 on the transactions.

 

**10.****       STOCKHOLDERS’EQUITY:**

 

a.               The Company amended its Articles ofIncorporation on July 11, 2001 to grant the Company the authority to issue10,000,000 shares with a par value of $0.01 (one cent) each all of which sharesshall be known as preferred stock. The shares of preferred stock have nopreemptive or other subscription rights, have no conversion rights and are notsubject to redemption.  No personalliability should attach to the ownership of TBX preferred stock.  In the event of a liquidation of TBXResources, the preferred shareholders, if any, would be entitled to theirproportionate part of the assets of TBX Resources, but only after thesatisfaction of all secured and unsecured creditors. No shares of preferredstock are outstanding at November 30, 2003.

 

b.              On October 1, 2001 the Companyrenewed its Regulation S Stock Purchase agreement with Citizen Asia PacificLimited (CAPL), a Hong Kong company. The shares are being offered and sold onreliance of an exemption from registration requirements of the United StatesFederal and State securities laws under Regulation S promulgated under theSecurities Act.  The agreement stipulatesthat CAPL will use its best efforts to purchase from the Company 500,000restricted shares of common stock (renewable for additional amounts) at a pershare price which shall be 38% of the average closing prices of the Company’sshares of common stock as quoted on the OTC Bulletin Board or other publictrading market. The Company has the right to accept or reject subscriptions forthe shares, in whole or in part. The agreement expired September 30, 2002.The Company sold approximately $140,000 in common stock through CAPL in thepreceeding fiscal year. On October 3,2002 the Company entered into a consulting agreement with Telvest, Inc. Underthe terms of the agreement, Telvest provides advisory services for foreigninvestments (Regulation S) for a fee of 3% of all funds raised. The agreement ranthrough January 31, 2003. The Company sold approximately $108,000 incommon shares through the term of the agreement.

 

c.               Duringthe current fiscal year, the Company used the services of consultants whoreceived 319,328    shares of commonstock. The Company recorded the transactions as a $17,745 charge to expensewith an offsetting credit to capital. During the same period in the fiscalyear, the Company used the services of consultants who received 6,177,345shares of common stock. The Company recorded the transactions as a $666,468charge to expense with an offsetting credit to capital.

 

d.              Options to purchase shares of commonstock are not included in the computation of diluted earnings per share becausethe effect would be antidilutive.

 

**11.****       INCOMETAXES:**

 

The components offederal income taxes for the current and previous fiscal year are as follows:

 
|                   |   | **2003** |    | **2002** |   |
|------------------------|--------|----------|---------|----------|--------|
| Current tax benefit    |   | $        | 424,222 |     | $      | 788,200 |   |
| Valuation allowance    |   | (424,222 | )       | (788,200 | )      |
| Net income tax benefit |   | $        | -0-     |     | $      | -0- |   |

 

**11.****       INCOMETAXES (continued):**

 

At November 30, 2002, the Company has Federal tax loss carryforwards of approximately $7.9 million available to offset future taxableincome. The Federal tax loss carry forwards expire in varying amounts from 2011to 2023.

 

F-11

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**12.****       INTERIMFINANCIAL REPORTING:**

 

During the fourth quarter of the fiscal year ended November 30,2003, the Company credited to depreciation, depletion and amortizationapproximately $150,000. The Company had previously overstated its estimates forthe current fiscal year. This adjustment did not have a significant effect onpreviously reported operating results.

 

**13.****       SUPPLEMENTARYOIL AND GAS INFORMATION -UNAUDITED:**

 
|                                                       |   | **November 30,** |      |
|------------------------------------------------------------|--------|-----------------------|-----------|
|                                                       |   | **2003**              |      | **2002** |   |
| Capitalized Costs Relating to Oil and Gas                  |   |                  |      |   |   |
| Producing Activities:                                      |   |                  |      |   |   |
| Property (acreage costs)- Proved                           |   | $                     | 545,571   |   | $ | 705,428 |   |
| Producing assets                                           |   | 1,030,191             |      | 1,557,784 |   |
|                                                       |   | 1,576,502             |      | 2,263,212 |   |
| Less: accumulated depreciation and  depletion              |   | 476,663               |      | 331,983 |   |
| Net Capitalized Costs                                      |   | $                     | 1,099,839 |   | $ | 1,931,229 |   |
| Costs Incurred in Property Acquisition,                    |   |                  |      |   |   |
| Exploration and Development Activities:                    |   |                  |      |   |   |
| Property acquisition costs                                 |   | $                     | —    |   | $ | 40,429 |   |
| Exploration costs                                          |   | —                |      | — |   |
| Development costs                                          |   | 10,856                |      | 516, 070 |   |
| Total                                                      |   | $                     | 10,856    |   | $ | 556,499 |   |
| Results of Operations for Producing  Activities:           |   |                  |      |   |   |
| Oil and gas sales                                          |   | $                     | 176,229   |   | $ | 117,232 |   |
| Gain (loss) on sale of properties                          |   | (687,317              | )         | (1,009,669 | ) |
| Production costs                                           |   | (108,507              | )         | (114,690 | ) |
| Depreciation, depletion and amortization                   |   | (154,320              | )         | (161,654 | ) |
| Impairment of oil and gas properties from  changing prices |   | —                |      | — |   |
|                                                       |   | (773,915              | )         | (1,168,781 | ) |
| Income tax benefit                                         |   | —                |      | — |   |
| Results of Operations Excluding Selling,  General and      |   |                  |      |   |   |
| Administrative and Joint Venture Activities                |   | $                     | (773,915  | ) | $ | (1,168,781 | ) |

 

**Oil and Gas ReserveQuantities**

An independentpetroleum engineer determined estimated reserves and related valuations for theEast Texas properties. Estimates of proved reserves are inherently impreciseand are subject to revisions based on production history, results of additionalexploration and development and other factors. Proved reserves are reservesjudged to be economically producible in future years from known reservoirsunder existing economic and operating conditions. Proven developed reserves areexpected to be recovered through existing wells, equipment and operatingmethods. Sufficient production information is not available to prepare anadequate reserve report for seven production wells in Oklahoma. The Company hasvarying interests in the wells and the reserve quantities would not materiallyaffect the Company’s total estimated reserves and valuations at this time.

 

Following is asummary of the changes in estimated proved developed and undeveloped oil andgas reserves of the Company, which are located in East Texas, for the yearsended November 30, 2003 and 2002:

 

F-12

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|                                   |   | **Oil  (BBL)** |   | **Gas  (MCF)** |   |
|----------------------------------------|--------|----------------|--------|----------------|--------|
| Proved reserves November 30, 2001 |   | 733,857        |   | 1,418,004      |   |
| Revisions to previous estimates        |   | (6,451         | )      | —         |   |
| Production                             |   | (3,661         | )      | —         |   |
| Sales, transfers and retirements       |   | (477,355       | )      | (1,418004      | )      |
| Proved reserves November 30, 2002 |   | 246,390        |   | —         |   |
| Revisions to previous estimates        |   | (74,118        | )      | —         |   |
| Production                             |   | (3,400         | )      | —         |   |
| Sales, transfers and retirements       |   | (65,909        | )      | —         |   |
| Proved reserves November 30, 2003 |   | 102,963        |   | —         |   |
|                                   |   |           |   |           |   |
| Proved developed reserves:             |   |           |   |           |   |
| November 30, 2001                 |   | 254,875        |   | —         |   |
| November 30, 2002                 |   | 246,390        |   | —         |   |
| November 30, 2003                 |   | 102,963        |   | —         |   |

 

**Standardized Measureof Discounted Cash Flows Relating to Proved Oil and Gas Reserves**

Statement ofFinancial Accounting Standards No. 69 prescribes guidelines for computing astandardized measure of future net cash flows relating to estimated proven reserves.The Company has followed these guidelines, which are briefly discussed in thefollowing paragraph.

 

Future cash inflows and future production and development costs aredetermined by applying year-end prices for 2003 of $27.00/bbl and for 2002, $21.00/bbland costs to the estimated quantities of oil to be produced. Estimated futureincome taxes are computed by using statutory rates including consideration forpreviously legislated future statutory depletion rates. The resulting futurenet cash flows are reduced to present value amount by applying a 10% annualdiscount factor. The assumptions used to compute the standardized measure arethose prescribed by the Financial Accounting Standards Board and, as such, donot necessarily reflect the Company’s expectations of actual revenues to bederived from those reserves or their present worth. The limitations inherent inthe reserve quantity estimation process, as discussed previously are equallyapplicable to the standardized measure computations since these estimates arethe basis for the valuation process. Presented below is the standardizedmeasure of discounted future net cash flows relating to proved oil reserves asof November 30, 2003 and 2002.

 
|                                                                                  |   | **2003**   |      | **2002**   |   |
|---------------------------------------------------------------------------------------|--------|------------|-----------|------------|--------|
| Future cash inflows                                                                   |   | $          | 2,780,000 |       | $      | 5,174,180 |   |
| Future production costs                                                               |   | (1,332,824 | )         | (2,631,338 | )      |
| Future development costs                                                              |   | (6,933     | )         | (232,083   | )      |
| Future income tax expense                                                             |   | (489,683   | )         | (785,658   | )      |
| Future net cash flows                                                                 |   | 950,560    |      | 1,525,101  |   |
| 10% annual discount for estimated timing of  cash flows                               |   | (457,885   | )         | (734,641   | )      |
| Standardized measure of discounted future  net cash flows relating to proved reserves |   | $          | 492,675   |       | $      | 790,460 |   |

 

F-13

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**Followingreconciles the change in the standardized measure of discounted future net cashflow:**

 
| December 1, 2001                                       |   | $          | 2,058,805 |   |
|-------------------------------------------------------------|--------|------------|-----------|--------|
| Increase (decrease) due to:                                 |   |       |      |
| Sales of oil and gas produced, net of  production costs     |   | (7,205     | )         |
| Net changes in prices and production costs                  |   | 300,765    |      |
| Net change in future development costs                      |   | 110,414    |      |
| Revisions to previous quantity estimates                    |   | 114,250    |      |
| Net change from sales, transfers and  disposals of minerals |   | (1,883,551 | )         |
| Accretion of discount                                       |   | (601,852   | )         |
| Net change in income taxes                                  |   | 607,250    |      |
| Other                                                       |   | 91,584     |      |
| November 30, 2002                                      |   | 790,460    |      |
| Sales of oil and gas produced, net of  production costs     |   | (10,072    | )         |
| Net changes in prices and production costs                  |   | 923,079    |      |
| Net change in future development costs                      |   | (108,431   | )         |
| Revisions to previous quantity estimates                    |   | (273,134   | )         |
| Net change from sales, transfers and  disposals of minerals |   | (666,716   | )         |
| Accretion of discount                                       |   | (45,788    | )         |
| Net change in income taxes                                  |   | (133,313   | )         |
| Other                                                       |   | 16,590     |      |
| November 30, 2003                                      |   | $          | 492,675   |   |

 

F-14

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**ITEM8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE.**

 

1) On January 31, 2004, the Registrant dismissed James A. Moyers,CPA (‘Moyers”) as its independent accountant.

 

2.) On January 31, 2004, the Registrant retained James GeorgeSomma, CPA (“Somma”) as its independent accountant. The decision to engageSomma as set forth above and to dismiss James A. Moyers, CPA was approved bythe board of directors of the Registrant.

 

3) The Company did not consult with Somma with regard to any matterconcerning the application of accounting principles to any specifictransactions, either completed or proposed, or the type of audit opinion thatmight be rendered with respect to the Company’s financial statements prior toengaging the firm.

 

4) Moyers reports on the Registrant’s financial statements for thefiscal years ended November 30, 2002 and 2001 did not contain an adverseopinion or disclaimer of opinion, nor were they qualified or modified as touncertainty, audit scope or accounting principles.

 

5) During the fiscal years ended November 30, 2002 and 2001, andthe subsequent interim period through August 31, 2003, (i) there were nodisagreements with Moyers on any matter of accounting principles or practices,financial statement disclosure, or auditing scope or procedures, whichdisagreements, if not resolved to the satisfaction of Moyers, would have causedthem to make reference to the subject matter of the disagreements in connectionwith their report and (ii) there were no “reportable events” as defined in Item304 (a)(I)(v) of Regulation S-K.

 

**ITEM9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS: COMPLIANCEWITH SECTION 16(A) OF THE EXCHANGE ACT.**

 

Our current executive officers and directors,their ages and present positions with TBX Resources are identified below. Ourdirectors hold office until the annual meeting of the shareholders followingtheir election or appointment and until their successors have been duly electedand qualified. Our officers are elected by and serve at the pleasure of ourBoard of Directors.

 

| **NAME**       |   | **AGE** |   | **POSITION**           |
|----------------|--------|---------|--------|------------------------|
| Tim Burroughs  |   | 44      |   | President and Director |
| Sherri Cecotti |   | 39      |   | Secretary/Treasurer    |

 

TIM BURROUGHS is the President, ChiefFinancial Officer and founder of TBX Resources, Inc. Mr. Burroughs has been ourPresident and Chief Financial Officer since our company’s inception in 1995.Prior to founding our company, Mr. Burroughs worked for several Dallas/Ft.Worth area based energy companies. Mr. Burroughs also studied businessadministration at Texas Christian University in Ft. Worth, Texas.

 

In addition to serving as the President andChief Financial Officer of our Company, Mr. Burroughs is also the President ofMarketing Research Group, Inc. and Sweetwater Land & Oil Co. Thesecompanies were all organized by Mr. Burroughs in 1997 to participate in variousopportunities in the oil and gas industry. However, since the organization ofthese companies, Mr. Burroughs has decided to not aggressively pursue throughthese companies the business he originally intended and has instead spent themajority of his professional time devoted to our business. In the future, Mr.Burroughs expects to spend little or no time on the business of these othercompanies. Mr. Burroughs is also the sole shareholder of Gulftex Operating,Inc. oil and gas operating company that performs services on behalf of TBX andfrom which Mr. Burroughs benefits financially. See “Certain Relationships andRelated Transactions.”

 

SHERRI CECOTTI is the Secretary-Treasurer andrecently joined our company in February 2002. Prior to joining our companyMs. Cecotti was employed by the Expo Design Center/Home Depot, from 1999 to 

 

11

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2002 as an assistant store manager, and intheir central installation office. From 1992-1998 Ms. Cecotti was operationsmanager for Marshall Fields in Dallas, Texas.

 

**ITEM10. EXECUTIVE COMPENSATION**

 

The following table sets forth thecompensation awarded to, earned by, or paid to the executive officers named:

 
| **NAME AND POSITION** |   | **YEAR** |   | **ANNUAL SALARY** |       | **BONUS** |   |
|-----------------------|--------|----------|--------|-------------------|------------|-----------|--------|
|                  |   |     |   |              |       |      |   |
| Tim Burroughs         |   | 2002     |   | $                 | 150,000.00 |      | $      | -0- |   |
| President             |   | 2003     |   | $                 | 150,000.00 |      | $      | -0- |   |
|                  |   |     |   |              |       |      |   |
| Sherri Cecotti        |   | 2002     |   | $                 | 36,500.00  |      |   |   |
| Secretary/Treasurer   |   | 2003     |   | $                 | 48,000.00  |      |   |   |

 

Effective December 1, 1999, we enteredinto an employment agreement with our President, Mr. Burroughs, whereby Mr.Burroughs shall receive stock options good for five years from the date ofissuance to purchase up to 500,000 of our common stock each year at a pricewhich shall not be greater than 50% of the average bid price for our commonstock during the previous quarter.

 

**ITEM11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.**

 

SECURITY OWNERSHIP OF MANAGEMENTAND CERTAIN SECURITY HOLDERS

 

The following table sets forth the stockownership of the officers, directors and shareholders holding more than 5% ofthe common stock of TBX Resources as of February 28, 2004:

 
| **TITLE OF  CLASS** |   | **NAME AND ADDRESS OF  OWNER**     |   | **AMOUNT OWNED** |   | **PERCENT OF CLASS** |   |
|---------------------|--------|------------------------------------|--------|------------------|--------|----------------------|--------|
|                |   |                               |   |             |   |                 |   |
| Common Stock        |   | Tim Burroughs(1)                   |   | 1,565,896        |   | .0509                | %      |
|                |   | 3330 LBJ Freeway                   |   |             |   |                 |   |
|                |   | Suite 1320  Dallas,  TX 75234 |   |             |   |                 |   |

 
| **TITLE OF  CLASS** |   | **NAME AND ADDRESS OF  OWNER** |   | **AMOUNT OWNED** |   | **PERCENT OF CLASS** |   |
|---------------------|--------|--------------------------------|--------|------------------|--------|----------------------|--------|
| Common Stock        |   | Tim Burroughs                  |   | 5,000,000        |   | .1625                | %      |
|                |   | Family Tr (2)                  |   |             |   |                 |   |
|                |   | 12300 Ford Road, Suite 194     |   |             |   |                 |   |
|                |   | Dallas, Texas 75234            |   |             |   |                 |   |
|                |   |                           |   |             |   |                 |   |
| Common Stock        |   | Samuel Warren                  |   | 3,378,316        |   | .1098                | %      |
|                |   | 5Cindywood Street              |   |             |   |                 |   |
|                |   | Texarkana, TX 75503            |   |             |   |                 |   |

 

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(1) Effective December 1, 1999, weentered into an employment agreement with our President, Mr. Burroughs, wherebyMr. Burroughs shall receive stock options good for five years from the date ofissuance to purchase up to 500,000 shares of our common stock each year at aprice which shall not be greater than 50% of the average bid price for ourcommon stock during the previous year. This right to purchase accumulates sothat if Mr. Burroughs does not purchase the shares to which he is entitled froma year, that amount of shares that are not purchased is added to the previousnumber of shares that Mr. Burroughs may purchase. The result is that Mr.Burroughs shall have the right to acquire an additional 2,500,000 shares of ourcommon stock over a five-year period. Mr. Burroughs currently owns 1,565,896 

 

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shares of our common stock and is alsocurrently entitled to purchase 1,500,000 additional shares pursuant to hisemployment agreement, which results in Mr. Burroughs owning or being currentlyentitled to purchase a total of 2,500,000 shares of our common stock. Mr.Burroughs current contract is extended until the end of the first quarter of2003 when a new contract will be executed.

 

(2) The beneficiary of the Burroughs FamilyTrust is Becca Burroughs, the daughter of Tim Burroughs, our President.

 

**ITEM12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**

 

All of the operations conducted in the fieldon behalf of our company are conducted by Gulftex Operating, Inc. Ourpresident, Tim Burroughs, owns all of the common stock of Gulftex Operating,Inc. In the past, no compensation was paid to Gulftex Operating, Inc. or TimBurroughs for the ownership of Gulftex Operating, Inc. or for the managementactivities conducted by Gulftex Operating, Inc. However, we pay GulftexOperating, Inc., $800.00 per month for the activities conducted by GulftexOperating, Inc., in operating our wells. In addition, During the fourth quarterof the current fiscal year, Gulftex Operating contracted with our Company toperform management and drilling supervision services on a well-by-well basis.

 

**ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K**

 

EXHIBITS

31.1 Certification by Tim P. Burroughs, ChiefExecutive Officer/Chief Financial Officer pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

32.1 Certification by Tim P. Burroughs, ChiefExecutive Officer/Chief Financial Officer pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

FORMS 8-K

We hereby incorporate by reference our Form8-K filed on March 2, 2004

 

**ITEM14.CONTROLS AND PROCEDURES**

 

Evaluationof Disclosure Controls and Procedures

 

Our President/Chief Financial Officer conducted an evaluation of our“disclosure controls and procedures” (as defined in the Securities Exchange Actof 1934 (the “Exchange Act”) Rules 13a-14(c)) within 90 days of the filing dateof this Annual Report on Form 10-KSB (the “Evaluation Date”). Based on theevaluation, our President/Chief Financial Officer has concluded that as of theEvaluation Date, our disclosure controls and procedures are effective to ensurethat all material information required to be filed in this Annual Report onForm 10-KSB has been made known to them in a timely fashion.

 

Changesin Internal Controls

 

There have been no significant changes (including corrective actionswith regard to significant deficiencies or material weaknesses) in our internalcontrols or in other factors that could significantly affect these controlssubsequent to the evaluation date set forth above.

 

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**ITEM 15.PRINCIPAL ACCOUNTING FEES AND SERVICES**

 

Audit Fees

 

The aggregate fees billed by our independent auditors, for professionalservices rendered for the audit of our annual financial statements on Form 10-KSBand the reviews of the financial reports included in our Quarterly Reports onForm 10-QSB for the years ended November 30, 2003 and 2002 amounted to$46,000 and $51,000, respectively.

 

Tax Fees

 

The aggregate fees billed by our auditors for professional servicesrendered for tax compliance, tax advice and tax planning for the years endedNovember 30, 2003 and 2002 amounted to $5,000 and $7,000 respectively.Such services consisted of U.S. federal, state and local tax preparation, taxadvice and assistance regarding statutory, regulatory or administrativedevelopments.

 

All Other Fees

 

No fees were billed by our auditors for products and services otherthan those described above under “Audit Fees” and “Tax Fees” for the year endedNovember 30, 2003 and 2002.

 

Board of Directors Pre-Approval Policies and Procedures

 

In December 2003, the Board of Directors adopted polices andprocedures for pre-approving all audit and non-audit services provided by ourindependent auditors prior to the engagement of the independent auditors withrespect to such services. Under the policy, our independent auditors areprohibited from performing certain non-audit services and are pre-approved toperform certain other non-audit and tax related services. All audit services,audit-related services, tax services and other services provided by ourauditors have been pre-approved by the Board of Directors.

 

SIGNATURES

 

In accordance with the requirements of theExchange Act, the registrant caused this report to be signed by the undersigned,hereunto duly authorized.

 

TBX RESOURCES, INC.

 

DATE:   March 16,2004

 
| SIGNATURE:                                        |   /s/ Tim Burroughs |   |
|---------------------------------------------------|-------------------------------|--------|
| TIM BURROUGHS, PRESIDENT/CHIEF FINANCIAL  OFFICER |

 

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