FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Forward-Looking Statements for fiscal 2009 and later periods are made in this document. Such statements represent estimates by management based on the Company's historical operating trends, its proved oil and natural gas reserves and other information currently available to management. The Company cautions that the Forward-Looking Statements provided herein are subject to all the risks and uncertainties incident to the acquisition, development and marketing of, and exploration for oil and natural gas reserves. Investors should also read the other information in this Form 10-Q and the Company's 2008 Annual Report on Form 10-K where risk factors are presented and further discussed. For all the above reasons, actual results may vary materially from the Forward-Looking Statements and there is no assurance that the assumptions used are necessarily the most likely to occur.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2009, the Company had positive working capital of $1,810,684, as compared to positive working capital of $4,599,004 at September 30, 2008. The decrease in working capital resulted from a large decrease in oil and natural gas sales receivables, a decrease in refundable income taxes and increases in prepayment of sales price on assets to be sold, partially offset by a sizable decrease in accounts payable. Significantly lower oil and natural gas sales prices received during fiscal 2009 have greatly reduced the Company's receivables from the sale of oil and natural gas. The lower fiscal 2009 oil and natural gas sales prices have also been the main factor in decreased drilling activity, thus reducing the Company's accounts payable. A substantial amount of the payments made for capital expenditures thus far in 2009 has been for wells committed to, or which began drilling in fiscal 2008. Refundable income taxes declined as the Company's fiscal 2008 refund due was received during the quarter ended March 31, 2009. Prepayment of sales price on assets to be sold increased as the Company entered into an agreement to sell 67% of its leasehold interests in the Southeast Leedey field in Dewey County, Oklahoma effective July 1, 2009; in conjunction therewith, the Company received $2,514,343 as a full prepayment for the properties on June 26, 2009 (see NOTE 15: Subsequent Events).
The Company's operating cash flow for the first nine months of fiscal 2009 increased to $30,617,545, a 20% increase over the comparable period in fiscal 2008. Fiscal 2009 net cash provided by operating activities, as compared to fiscal 2008, increased primarily as a result of decreased oil and natural gas sales receivables, decreased refundable income taxes, decreased derivative contracts and increased non-cash items of depreciation, depletion and amortization and provision for impairment, partially offset by a decrease in deferred income taxes. Additions to properties and equipment for oil and natural gas activities during the 2009 period were $24,069,809 as compared to $29,625,707 in the 2008 period. Additions to properties and equipment are distinct from capital expenditures in that these additions include capital expenditures and net decrease (increase) in accounts payable for properties and equipment additions as reflected on the Statements of Cash Flows; therefore, additions to properties and equipment represent amounts added to properties and equipment in the period, whereas capital expenditures represent amounts paid in the period. Depressed natural gas prices are expected by management to continue through the remainder of fiscal 2009, resulting in reduced operating cash flows and lower drilling activity, which will result in reduced property and equipment additions for oil and natural gas activities. Management expects oil prices to remain relatively stable through the remainder of fiscal 2009; however, since over 80% of the Company's sales are from the sale of natural gas, oil prices have a marginal effect on the Company's cash flows. The Company does not operate any of its oil and natural gas properties and cannot control drilling activity on its mineral and leasehold acreage, thus low natural gas prices will likely continue to have a negative impact on the Company's drilling activity, making it extremely difficult for the Company to predict additions to properties and equipment with certainty. Therefore, based on management's assessment of current conditions, fiscal 2009 additions to property and equipment for oil and natural gas activities are projected to be approximately $32 million; whereas fiscal 2008 additions to property and equipment for oil and natural gas activities were approximately $53 million.
The industry-wide decline in drilling activity has also created downward pressure on the costs for drilling rigs, well equipment, and well services, which is expected to reduce the overall costs of drilling and completing wells. As lower natural gas prices continue to put downward pressure on drilling activity, and resulting production declines eventually occur, supply and demand is expected to come back into balance resulting in increased natural gas prices.
The Company historically funded capital additions, overhead costs and dividend payments primarily from operating cash flow. However, due to sharp decreases in oil and natural gas prices during fiscal 2009 and the increased expenditures for drilling in the prior two years, the Company has utilized its revolving line-of-credit facility to help fund these expenditures. The Company's strategy to minimize significant increases in borrowings will be to reduce its working interest participation in certain large ownership wells or by simply taking a no cost royalty interest in certain wells. By doing so, the Company

reduces its capital expenditures and thereby limits borrowings, but still receives the benefit of a relatively high net revenue interest in new wells. Even with this strategy, and given current drilling activity, temporary moderate increases in borrowing can occur while the Company awaits the receipt of first revenues (which normally is 4 to 6 months after production begins) on recently completed wells. Several wells that have been recently completed will provide additional cash flow to the Company during the fourth quarter of fiscal 2009 as the first payments on these wells are received. Debt levels should remain reasonably stable through the remainder of fiscal 2009 as these first revenues are received and the effects of the managed drilling activity reduces cash expenditures. During the fiscal 2009 third quarter the Company was able to increase its borrowing base under its revolving credit facility from $25 million to $35 million, providing substantial availability of funds, should the need arise. The Company also is well within compliance on all of its debt covenants (current ratio, debt to EBITDA, tangible net worth and dividends as a percent of operating cash flow).
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2009 - COMPARED TO THREE MONTHS ENDED JUNE 30, 2008
Overview:
The Company recorded a third quarter 2009 net loss of $928,512, or $.11 per share, as compared to a net income of $6,468,885 or $.76 per share in the 2008 quarter. The contributing factors to the recorded loss for the period are decreased revenue due to depressed oil and natural gas prices and increased DD&A. The increase in DD&A is the result of increased oil and natural gas production in the 2009 quarter and lower oil and natural gas reserves (resulting from significantly lower oil and natural gas prices in the 2009 quarter) as compared to the 2008 quarter. Expected reserves per well decrease when product prices decline as the lower prices result in wells reaching their economic limits earlier in time, thus shortening the wells' economic lives and increasing the DD&A rate per mcfe of production.
Revenues:
Total revenues decreased $9,673,246 or 52% for the 2009 quarter. The decrease was the result of an $11,493,696 decrease in oil and natural gas sales partially offset by positive changes of $1,815,815 related to the fair value of natural gas derivative contracts. Lower revenues from oil and natural gas sales resulted from a decrease of 68% in natural gas sales prices to $2.96 per mcf and a decrease of 55% in oil sales prices to $53.89. Although sales prices steeply declined, the negative effect on revenues was mitigated by increases in both oil and natural gas sales volumes of 7% and 37%, respectively. The table below outlines the Company's sales volumes and average sales prices for oil and natural gas for the three month periods of fiscal 2009 and 2008:

                                  BARRELS           AVERAGE               MCF             AVERAGE             MCFE              AVERAGE
                                    SOLD             PRICE               SOLD              PRICE              SOLD               PRICE
Three months ended 6/30/09         34,145          $  53.89            2,442,604          $ 2.96            2,647,474          $  3.42
Three months ended 6/30/08         31,907          $ 120.92            1,788,462          $ 9.33            1,979,904          $ 10.38

The increases in sales volumes are a result of successful drilling in the Company's core areas of the southeast Oklahoma Woodford Shale, the Fayetteville Shale in Arkansas and the Anadarko Basin in western Oklahoma where the Company participates in multiple plays. Contributing to the increased sales volumes, several new wells came on line during the fiscal 2009 quarter in these core areas. Drilling in these areas has, for the most part, stabilized at a relatively low level and is expected to result in fewer new wells coming on line during the remaining three months of fiscal 2009. This will limit the potential for sales volume increases during the last quarter of fiscal 2009.

Sales volumes by quarter for the last five quarters were as follows:

               Quarter ended    Barrels Sold      MCF Sold        MCFE Sold
                  6/30/09            34,145       2,442,604       2,647,474
                  3/31/09            34,744       2,171,660       2,380,124
                 12/31/08            30,260       2,313,739       2,495,299
                  9/30/08            31,375       1,995,333       2,183,583
                  6/30/08            31,907       1,788,462       1,979,904

Gains (Losses) on Natural Gas Derivative Contracts:

Fair value of derivative contracts as of June 30, 2009 was ($923,629) and $207,745 as of March 31, 2009. The Company had a net loss of $470,974 in the three months ended June 30, 2009 compared to a loss of $2,286,789 for the three months ended June 30, 2008. The Company received cash payments under the contracts of $660,400 during the 2009 quarter and made cash payments of $878,900 during the fiscal 2008 quarter.
Lease Operating Expenses (LOE):
LOE decreased $82,799 or 4% in the 2009 quarter. LOE per mcfe decreased to $.79 per mcfe in the 2009 quarter, as compared to $1.10 per mcfe in the 2008 quarter. Even though new wells continue to come on line, significantly lower "value based" fees (primarily gathering, compression and marketing costs) and lower field services and supplies costs combined to cause both an overall decrease in LOE and a decrease in LOE per mcfe in the 2009 quarter as compared to the 2008 quarter. The lower "value based" fees are primarily the result of lower natural gas prices; such fees are normally calculated as a percentage of sales value.
Production Taxes:
Production taxes decreased $305,404 or 45% in the 2009 quarter as compared to the 2008 quarter. The decline in production tax expense is the result of a 56% decrease in oil and natural gas sales revenues and production tax credits on horizontal wells drilled in the southeast Oklahoma Woodford Shale and the Fayetteville Shale in Arkansas.
Exploration Costs:
Exploration costs increased $77,143 or 218% in the 2009 quarter as compared to the 2008 quarter. The increase is related to a $54,440 increase in leasehold expiration and abandonment costs in the 2009 quarter as compared to the 2008 quarter. One dry hole was recorded in the 2009 quarter at a cost of approximately $23,000.
Depreciation, Depletion and Amortization (DD&A):
DD&A increased $2,173,620 or 47% in the 2009 quarter. DD&A per mcfe in the 2009 quarter was $2.59 as compared to $2.36 in the 2008 quarter. A 34% increase in mcfe produced in the 2009 quarter, vs. the 2008 quarter, accounts for approximately $1.6 million of the overall DD&A increase. The remaining increase of approximately $600,000 is attributable to lower oil and natural gas reserve volumes per well, resulting from lower oil and natural gas prices, and higher costs for horizontally drilled wells primarily in the Woodford and Fayetteville Shale areas. These same wells also account for the majority of the 2009 quarter's increase in natural gas production. Provision for Impairment:
The provision for impairment increased $78,226 in the 2009 quarter. In the 2009 quarter one field was impaired a total of $115,892 as compared to the 2008 quarter which incurred impairment on one field totaling $37,666. General and Administrative Costs (G&A):
G&A costs increased $9,572 or 1% in the 2009 quarter. The G&A cost variance is negligible between the 2009 and 2008 quarters. Personnel expenses increased $19,830 and legal expenses increased $38,751 in the 2009 quarter while shareholder and stock related expenses decreased $73,189. Income Taxes:
The 2009 quarter incurred a benefit for income taxes of $1,073,000 as a result of a pre-tax loss of $2,001,512 as compared to a provision for income taxes of $3,018,000 in the 2008 quarter as a result of pre-tax income of $9,486,885. The resulting effective tax benefit rate in the 2009 quarter was 54% as compared to an effective tax provision rate of 32% in the 2008 quarter. The Company's utilization of excess percentage depletion (which is a permanent tax benefit) increased the tax benefit in the 2009 quarter, whereas it decreased the provision for income taxes in the 2008 quarter. The effect of this permanent tax benefit is that the effective tax rate is increased when recording a benefit for income taxes as in the fiscal 2009 quarter, while reducing the effective tax rate when recording a provision for income taxes as in the fiscal 2008 quarter. The benefit of excess percentage depletion is not directly related to the amount of a recorded loss or income. Accordingly, in cases where a recorded loss or income is relatively small, the proportional effect of the excess percentage depletion on the effective tax rate may become significant.
NINE MONTHS ENDED JUNE 30, 2009 - COMPARED TO NINE MONTHS ENDED JUNE 30, 2008

Overview:
The Company recorded a nine month period 2009 net loss of $2,748,397, or $.33 per share, as compared to a net income of $12,780,473 or $1.50 per share in the 2008 period. The recorded loss is primarily the result of decreased revenue caused by low oil and natural gas prices and an increase in DD&A. DD&A increased due to oil and natural gas production increases in the 2009 period and lower oil and natural gas reserves (resulting from significantly lower oil and natural gas prices in the 2009 period) as compared to the 2008 period. Expected reserves per well decrease when oil and natural gas prices decline as the lower prices result in wells reaching their economic limits earlier in time, thus shortening the wells' economic lives and increasing the DD&A rate per mcfe of production. Revenues:
Total revenues decreased $15,930,554 or 36% for the fiscal 2009 period as compared to the fiscal 2008 period. Lower revenues from oil and natural gas sales resulted from a 57% decrease in natural gas sales prices to $3.36 per mcf and a 51% decrease in oil sales prices to $48.81 per bbl. Although prices declined steeply, an increase in natural gas sales volumes of 40% partially offset the negative effect on revenues. The table below outlines the Company's sales volumes and average sales prices for oil and natural gas for the nine month periods of fiscal 2009 and 2008:

                                  BARRELS           AVERAGE               MCF             AVERAGE             MCFE             AVERAGE
                                   SOLD              PRICE               SOLD              PRICE              SOLD              PRICE
Nine months ended 6/30/09          99,149          $  48.81            6,928,003          $ 3.36            7,522,897          $ 3.74
Nine months ended 6/30/08         101,027          $ 100.12            4,932,704          $ 7.82            5,538,866          $ 8.79

The increases in natural gas sales volumes are a result of successful drilling in the Company's core areas of the southeast Oklahoma Woodford Shale, the Fayetteville Shale in Arkansas and the Anadarko Basin in western Oklahoma where the Company participates in multiple plays. Contributing to the increased natural gas sales volumes, several new wells came on line during the fiscal 2009 nine months in these core areas. Drilling in these areas has, for the most part, stabilized at a relatively low level and is expected to result in fewer new wells coming on line during the remaining three months of fiscal 2009. This will limit the potential for sales volume increases during the last quarter of fiscal 2009.
Gains (Losses) on Natural Gas Derivative Contracts:
The Company's fair value of derivative contracts was ($923,629) as of June 30, 2009 and $646,193 as of September 30, 2008. The Company had a net gain of $212,578 in the nine months ended June 30, 2009 compared to a loss of $4,391,316 for the nine months ended June 30, 2008. The Company received cash payments of $1,782,400 for the 2009 period and made payments of $777,900 for the 2008 period.
Lease Operating Expenses (LOE):
LOE increased $795,250 or 16% in the 2009 period as compared to the 2008 period. LOE per mcfe decreased in the fiscal 2009 period to $.77 per mcfe, as compared to $.90 per mcfe in the 2008 period. The accumulation of new wells which have come on line during the last year has resulted in an overall increase in LOE. The decrease on a per mcfe basis is due to the decrease in natural gas sales prices resulting in lower "value based" fees (primarily gathering and marketing costs) which are charged as a percent of natural gas sales, combined with declining prices for field services and supplies. Production Taxes:
Production taxes decreased $1,314,125 or 54% in the 2009 period as compared to the 2008 period. The decline in production tax expense is the result of a 42% decrease in oil and natural gas sales revenues and production tax credits on horizontal wells drilled in the southeast Oklahoma Woodford Shale and the Fayetteville Shale in Arkansas.
Exploration Costs:
Exploration costs decreased $82,280 or 21% in the 2009 period as compared to the 2008 period. The decrease is primarily related to a decrease in leasehold expiration and abandonment costs in the 2009 period as compared to the 2008 period of approximately $150,000. Three dry holes were recorded in the 2009 period at a cost of approximately $59,000; no dry holes were recorded in the fiscal 2008 period.

Depreciation, Depletion and Amortization (DD&A):
DD&A increased $7,506,059 or 56% in the 2009 period as compared to the 2008 period. DD&A was $2.78 per mcfe in the 2009 period as compared to $2.41 per mcfe in the 2008 period. A 36% increase in total mcfe produced in the 2009 period, vs. the 2008 period, accounts for approximately $4.8 million of the overall DD&A increase. The remaining increase of approximately $2.7 million is attributable to the increase in DD&A per mcfe which is related to lower oil and natural gas reserve volumes per well resulting from lower oil and natural gas prices, and higher costs for horizontally drilled wells primarily in the Woodford and Fayetteville Shale areas. These same wells also account for the majority of the 2009 period's increase in natural gas production. Provision for Impairment:
The provision for impairment increased $1,738,461 in the 2009 period as compared to the 2008 period. Driven by depressed oil and natural gas prices, impairment has been recorded on 19 fields during the 2009 period in the amount of $2,124,133. Two of the fields accounted for $1,729,034 of the impairment, one field in Wheeler County, Texas consisting of one deep well (drilled in 2006 and had mechanical issues during completion which dramatically increased costs) was impaired $1,070,129 and one mature field in Beckham County, Oklahoma principally consisting of wells drilled in 2006 and prior was impaired $658,905. The Company did not incur any impairment in the three primary areas of operation (Woodford Shale area, Fayetteville Shale area and the Dill City project). During the 2008 period, seven fields were impaired a total of $385,672. General and Administrative Costs (G&A):
G&A costs decreased $270,496 or 7% in the 2009 period as compared to the 2008 period due to decreased personnel related costs of approximately $378,000, which included a decrease in employee bonus costs of approximately $500,000 in the 2009 period (the result of beginning to ratably accrue for estimated 2008 annual employee bonuses during the 2008 fiscal period due to specific bonus performance criteria being established plus recording the full 2007 annual discretionary bonuses approved and paid during the 2008 fiscal period), partially offset by increases in legal fees of approximately $94,000. Income Taxes:
The fiscal 2009 period incurred a benefit for income taxes of $2,278,000 as a result of a pre-tax loss of $5,026,397 as compared to a provision for income taxes of $6,317,000 in the fiscal 2008 period as a result of pre-tax income of $19,097,473. The resulting effective tax benefit rate in the fiscal 2009 period was 45% as compared to an effective tax provision rate of 33% in the fiscal 2008 period. The Company's utilization of excess percentage depletion (which is a permanent tax benefit) increased the tax benefit in the fiscal 2009 period, whereas it decreased the provision for income taxes in the fiscal 2008 period. The effect of this permanent tax benefit is that the effective tax rate is increased when recording a benefit for income taxes as in the fiscal 2009 period, while reducing the effective tax rate when recording a provision for income taxes as in the fiscal 2008 period. The benefit of excess percentage depletion is not directly related to the amount of a recorded loss or income. Accordingly, in cases where a recorded loss or income is relatively small, the proportional effect of the excess percentage depletion on the effective tax rate may become significant. With the decline in product prices and forecasted loss in fiscal 2009, the Company established a valuation allowance on certain state tax net operating loss carryforwards (NOLs) for which the Company no longer believes are more likely than not to be realized prior to expiration. This reduced the benefit recognized during the respective period by $278,000.
CRITICAL ACCOUNTING POLICIES
Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. However, the accounting principles used by the Company generally do not change the Company's reported cash flows or liquidity. Generally, accounting rules do not involve a selection among alternatives, but involve a selection of the appropriate policies for applying the basic principles. Interpretation of the existing rules must be done and judgments made on how the specifics of a given rule apply to the Company.
The more significant reporting areas impacted by management's judgments and estimates are crude oil and natural gas reserve estimation, impairment of assets, oil and natural gas sales revenue accruals and provision for income tax.

Management's judgments and estimates in these areas are based on information available from both internal and external sources, including engineers, geologists, consultants and historical experience in similar matters. Actual results could differ from the estimates as additional information becomes known. The oil and natural gas sales revenue accrual is particularly subject to estimates due to the Company's status as a non-operator on all of its properties. Production information obtained from well operators is substantially delayed. This causes the estimation of recent production, used in the oil and natural gas revenue accrual, to be subject to some variations. Oil and Natural Gas Reserves
Management considers the estimation of crude oil and natural gas reserves to be the most significant of its judgments and estimates. These estimates affect the unaudited standardized measure disclosures, as well as DD&A and impairment calculations. Changes in crude oil and natural gas reserve estimates affect the Company's calculation of depreciation, depletion and amortization, provision for abandonment and assessment of the need for asset impairments. On an annual basis, with a semi-annual update, the Company's consulting engineer (Pinnacle Energy Services, LLC), with assistance from Company staff, prepares estimates of crude oil and natural gas reserves based on available geologic and seismic data, reservoir pressure data, core analysis reports, well logs, analogous reservoir performance history, production data and other available sources of engineering, geological and geophysical information. However, when significant oil and natural gas price changes occur between periods in which reserves would normally be calculated, the Company updates the reserve calculations utilizing a price deck current with the period. Both DD&A and impairment were calculated in the 2009 quarter based on these updated reserve calculations. As required by the guidelines and definitions established by the SEC, these estimates are based on current crude oil and natural gas pricing held flat over the life of the properties. However, projected future crude oil and natural gas pricing assumptions are used by management to prepare estimates of crude oil and natural gas reserves used in formulating management's overall operating decisions. Based on the Company's fiscal 2008 DD&A, a 10% change in the DD&A rate per mcfe would result in a corresponding $1,978,466 annual change in DD&A expense. Crude oil and natural gas prices are volatile and largely affected by worldwide production and consumption and are outside the control of management. Successful Efforts Method of Accounting
The Company has elected to utilize the successful efforts method of accounting for its oil and natural gas exploration and development activities. Exploration expenses, including geological and geophysical costs, rentals and exploratory dry holes, are charged against income as incurred. Costs of successful wells and related production equipment and developmental dry holes are capitalized and amortized by property using the unit-of-production method as oil and natural gas is produced. The Company's exploratory wells are all on-shore and primarily located in the mid-continent area. Generally, expenditures on exploratory wells comprise significantly less than 10% of the . . .