Bayou City Exploration 10K 2008 Annual report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

(MARK ONE)


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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008


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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-27443

BAYOU CITY EXPLORATION, INC.

(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)


NEVADA		61-1306702

(STATE OR OTHER JURISDICTION OF		(I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)

632 Adams Street — Suite 700, Bowling Green, KY		42101

(ADDRESS OF PRINCIPLE EXECUTIVE OFFICES)		(ZIP CODE)

(832) 358-3900
(ISSUER’S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE

SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK PAR VALUE $.005 PER SHARE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

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

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

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

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company þ

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

State issuer’s revenues for its most recent fiscal year: $287,808

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $266,536 as of March 30, 2009 based upon the closing price of the common stock on the OTC “Bulletin Board” on March 30, 2009 of $0.01 per share. As of March 30, 2009 the registrant had 26,653,633 shares of Common Stock, par value $0.005 per share, and 0 shares of Preferred Stock, par value $0.001 per share, subscribed or outstanding.

APPLICABLE ONLY TO CORPORATE REGISTRANTS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.

26,653,633 Shares of Common Stock Outstanding at March 30, 2009; 0 Shares of Preferred Stock Outstanding at March 30, 2009.

DOCUMENTS INCORPORATED BY REFERENCE

None.

FORM 10-K

Amendment No. 1

TABLE OF CONTENTS


PART I

1.	Description of Business	1
2.	Description of Properties	5
3.	Legal Proceedings	9
4.	Submission of Matters to a Vote of Security Holders	9

PART II

5.	Market Price for Common Equity and Related Stockholder Matters	9
6.	Management’s Discussion and Financial Analysis of Financial Condition	10
7.	Financial Statements	14
8.	Change in and Disagreements with Accountants on Accounting and Financial Disclosure	14
8A.	Controls and Procedures	15
8B.	Other Information	16

PART III

9.	Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act	17
10.	Executive Compensation	18
11.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	21
12.	Certain Relationships and Related Transactions	22
13.	Exhibits	23
14.	Principal Accountant Fees and Services	23

PART IV

Signatures		24
EX-31.1
EX-31.2
EX-32.1
EX-32.2


FINANCIAL STATEMENTS

Independent Auditor’s Report
Killman, Murrell, & Company, P.C.			F-1

Balance Sheets			F-2
Statements of Operations			F-3
Statements of Changes in Stockholders’ Equity			F-4
Statements of Cash Flows			F-5
Notes to Financial Statements			F-6
Supplemental Information on Oil and Gas Exploration and Production Activities (Unaudited)			F-20
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I

1. DESCRIPTION OF BUSINESS

General Description

Bayou City Exploration, Inc., (the “Company”), a Nevada corporation, was organized in November 1994, as Gem Source, Incorporated (“Gem Source”), and subsequently changed the name to Blue Ridge Energy, Inc. in May 1996. In September 2005, the Company changed its name to Bayou City Exploration, Inc.

On April 4, 2007, the Company announced the relocation of their corporate headquarters to 632 Adams Street, Suite 700, Bowling Green, Kentucky 42101 in order to decrease overhead, consolidate operations and reduce the number of personnel on staff. This move was completed in May, 2007. The Company’s executive office in the year 2006 was located at 10777 Westheimer, Suite 170, Houston, Texas, 77042. Since relocating the Company’s headquarters to Bowling Green, Kentucky the Company maintained only the geological contract staff in the Houston office for the development and sale of the Company’s prospects until June 2008 the Company eliminated all paid staff and closed the office.

On April 4, 2007, the Company announced the resignation of W. Wayne Hardin as President and Chief Executive officer. D. Edwin Suhr, Jr. was given thirty days notice of termination as of April 1, 2007, as Senior Vice President of Land and Operations/Secretary and Richard M. Hewitt resigned as a Director. Mr. Hardin’s resignation was effective as of April 3, 2007. Mr. Hewitt’s resignation became effective May 1, 2007. The three remaining employees and other contract personnel located in the Houston, Texas office were given thirty days notice of termination of their employment as of April 1, 2007. Since June 2008, the company has eliminated all paid staff and relocated it’s offices to Bowling Green, Kentucky.

The Company also announced that Robert D. Burr has been appointed President and Chief Executive Officer of the Company by the Board on an interim basis as of April 3, 2007 while the Company continues to search for new executive management during this transitional phase of the Company. Mr. Burr remains the sole officer of the Company through the date of this filing.

Our financial statements have been presented on the basis that we are a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The independent registered public accounting firms’ reports on our financial statements as of and for the years ended December 31, 2008 and 2007 includes an explanatory paragraph that states that we have experienced recurring losses from operations without establishing a sufficient ongoing source of revenues that raises a substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. For the years ended December 31, 2008 and 2007 our statement of operations reflects a net loss from continued operations of $175,000 and $1,464,000, respectively.

Our ability to meet future cash and liquidity requirements is dependent on a variety of factors, including our ability to raise more capital, successfully negotiate settlements or extended payment terms with our creditors and holders of the Company’s notes payable and the implementation of a restructuring plan for the Company. The presence of the going concern note may have an adverse impact on our relationship with third parties such as potential investors. If we are unable to continue as a going concern we would have to liquidate our remaining assets, if any. This would have a material adverse effect on your investment with the Company.

All of our periodic report filings with the Securities and Exchange Commission (“SEC”) pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934, as amended, are available through the SEC web site located at www.sec.gov, including our annual report on Form 10-K, quarterly reports on Form 10-QSB, current reports on Form 8-K and any amendments to those reports. The Company will also make available to any stockholder, without charge, copies of its Annual Report on Form 10-K as filed with the SEC and a copy of its Code of Ethics. For copies of this, or any other filings, please contact: Robert D. Burr at Bayou City Exploration, Inc., 632 Adams Street — Suite 700, Bowling Green, KY 42101 or call (800)-798-3389.

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The Company is engaged in the oil and gas business primarily in the gulf coast of Texas, east Texas, south Texas, and Louisiana. The Company develops oil and gas prospects for the drilling of oil and gas wells and attempts to sell the prospects to oil and gas exploration companies under terms that provide the participating company will provide the funds necessary to drill and complete a well on the prospect, reimburse the Company for any leasehold or exploration costs associated with the prospect, pay the Company a prospect fee for developing the oil and gas prospect, and allow the Company to retain a carried interest in the well to be drilled. The wells drilled by the Company included both exploratory and development wells.

Prior to May 1, 2007, the Company operated many of the wells for which it owned an interest. The Company no longer intends to operate properties. The Company will seek to sell a portion of the interest in each prospect it generates to an operator that will be responsible for the drilling and operating of the oil and gas properties. In prior years the Company has been licensed as an oil and gas operator with the Texas Railroad Commission in the state of Texas. During the second quarter 2007 the Company’s license with the Texas Railroad Commission to be an operator in the state of Texas was not renewed. The Company operated two wells in Texas and one in Louisiana. All three wells are now plugged and abandoned. The Company’s ownership in all remaining wells is through non-operated working interests.

The Company plans to pursue other sources of capital through either the issuance or restructuring of debt or equity securities. The Company also owns certain oil and gas interests as of December 31, 2008 that have developed into revenue producing properties it intends use to generate cash flow sufficient to cover its ongoing operations and restructuring of the Balance Sheet.

On July 17, 2007 the Company renewed a line of credit from Blue Ridge Group, Inc. (“BR Group”) in the amount of $500,000 to finance the Company’s operations. As of December 31, 2008 the Company has a liability balance under this line of credit arrangement due BR Group in the amount of $393,000. The line of credit provides for interest at the rate of 8% per annum on the unpaid outstanding balance and is due upon demand. If no demand for payment is made by BR Group, the line of credit balance plus all accrued unpaid interest is due July 17, 2009.

During the 2^nd and 3^rd quarters, 2007, a minority shareholder loaned the Company $85,000 to finance the Company’s operations. No loan documents were executed.

During the 4^th quarter, 2007, Peter Chen, a minority shareholder loaned the Company $100,000 to finance the Company’s operations. The Company executed a promissory note on October 4, 2007; the note is due on demand and bears an interest rate of 0%.

During the fourth quarter 2007, the Company sold 256,000 common shares of common stock at $0.25 per share for total proceeds to the Company of $64,000 under an exempt private placement basis pursuant to Regulation S. This offering was made outside the United States to eligible sophisticated investors.

On December 31, 2007, the Company’s 23,300 shares of Series E preferred shares were automatically converted into 116,500 shares of common shares on the basis of 5 shares of common for 1 share of preferred in accordance with the original terms of the offering.

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Competition, Markets and Regulations

Competition: The oil and gas industry is highly competitive in all its phases. The Company encounters strong competition from other independent oil and gas companies. Major and independent oil and gas companies actively bid for desirable oil and gas properties, as well as for the equipment and labor required to operate and develop such properties. Many of its competitors possess substantially greater financial resources, personnel and budgets than the Company, which may affect its ability to compete with companies in Kentucky, Texas, Louisiana, or West Virginia.

Markets: The price obtainable for oil and gas production from the Company’s properties is affected by market factors beyond the control of the Company. Such factors include the extent of domestic production, the level of imports of foreign oil and gas, the general level of market demand on a regional, national and worldwide basis, domestic and foreign economic conditions that determine levels of industrial production, political events in foreign oil-producing regions, variations in governmental regulations and tax laws and the imposition of new governmental requirements upon the oil and gas industry. There can be no assurance that oil and gas prices will not decrease in the future, thereby decreasing net revenues from the Company properties. Changes in oil and gas prices can impact the Company’s determination of proved reserves and the Company’s calculation of the standardized measure of discounted future net cash flows relating to oil and gas reserves. In addition, demand for oil and gas in the United States and worldwide may affect the Company’s level of production. From time to time, a surplus of gas or oil supplies may exist, the effect of which may be to reduce the amount of hydrocarbons that the Company may produce and sell, while such an oversupply exists. In recent years, initial steps have been taken to provide additional gas pipelines from Canada to the United States. If additional Canadian gas is brought to the United States market, it could create downward pressure on United States gas prices.

Regulations:

Environmental Regulation

The federal government and various state and local governments have adopted laws and regulations regarding the control of contamination of the environment by the oil and gas industry. These laws and regulations may require the acquisition of permits by oil and gas operators before drilling commences, prohibit drilling activities on certain lands lying within wilderness areas or where pollution arises and impose substantial liabilities for pollution resulting from operations, particularly operations near or in onshore and offshore waters or on submerged lands. These laws and regulations may also increase the costs of routine drilling and operation of wells. Because these laws and regulations change frequently and are becoming increasingly more stringent, the costs to the Company of compliance with existing and future environmental regulations and the overall impact on the Company’s operations or financial condition cannot be predicted, but are likely to increase.

The Company currently owns or leases one property that for many years has been used for the exploration and production of oil and natural gas. Although the Company believes that it has utilized good operating and waste disposal practices, prior owners and operators of these properties may not have utilized similar practices, and hydrocarbons or other wastes may have been disposed of or released on or under the properties owned or leased by the Company or on or under locations where such wastes have been taken for disposal. These properties and the wastes disposed thereon may be subject to the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), RCRA and analogous state laws, as well as state laws governing the management of oil and natural gas wastes. Under such laws, the Company could be required to remove or remediate previously disposed wastes (including wastes disposed of or released by prior owners or operators) or property contamination (including groundwater contamination) or to perform remedial plugging operations to prevent future contamination.

CERCLA and similar state laws impose liability, without regard to fault or the legality of the original conduct, on certain classes of persons that are considered to have contributed to the release of a “hazardous substance” into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed of or arranged for the disposal of the hazardous substances found at the site. Persons who are or were responsible for the waste of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources, and it is not uncommon for neighboring landowners and third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.

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Federal Regulation of Natural Gas

The transportation and sale of natural gas in interstate commerce is heavily regulated by agencies of the federal government. The following discussion is intended only as a summary of the principal statutes, regulations and orders that may affect the production and sale of natural gas from the Company properties.

FERC Orders

Several major regulatory changes have been implemented by the Federal Energy Regulatory Commission (“FERC”) from 1985 to the present that affect the economics of natural gas production, transportation and sales. In addition, the FERC continues to promulgate revisions to various aspects of the rules and regulations affecting those segments of the natural gas industry that remain subject to the FERC’s jurisdiction. In April 1992, the FERC issued Order No. 636 pertaining to pipeline restructuring. This rule requires interstate pipelines to unbundle transportation and sales services by separately stating the price of each service and by providing customers only the particular service desired, without regard to the source for purchase of the gas. The rule also requires pipelines to (i) provide nondiscriminatory “no-notice” service allowing firm commitment shippers to receive delivery of gas on demand up to certain limits without penalties, (ii) establish a basis for release and reallocation of firm upstream pipeline capacity and (iii) provide non-discriminatory access to capacity by firm transportation shippers on a downstream pipeline. The rule requires interstate pipelines to use a straight fixed variable rate design. The rule imposes these same requirements upon storage facilities. FERC Order No. 500 affects the transportation and marketability of natural gas. Traditionally, natural gas has been sold by producers to pipeline companies, which then resell the gas to end-users. FERC Order No. 500 alters this market structure by requiring interstate pipelines that transport gas for others to provide transportation service to producers, distributors and all other shippers of natural gas on a nondiscriminatory, “first-come, first-served” basis (“open access transportation”), so that producers and other shippers can sell natural gas directly to end-users. FERC Order No. 500 contains additional provisions intended to promote greater competition in natural gas markets.

It is not anticipated that the marketability of and price obtainable for natural gas production from the Company’s properties will be significantly affected by FERC Order No. 500. Gas produced from the Company’s properties normally will be sold to intermediaries who have entered into transportation arrangements with pipeline companies. These intermediaries will accumulate gas purchased from a number of producers and sell the gas to end-users through open access pipeline transportation.

State Regulations

Production of any oil and gas from the Company’s property is affected by state regulations. States in which the Company operates have statutory provisions regulating the production and sale of oil and gas, including provisions regarding deliverability. Such statutes, and the regulations promulgated in connection therewith, are generally intended to prevent waste of oil and gas and to protect correlative rights to produce oil and gas between owners of a common reservoir. State regulatory authorities also regulate the amount of oil and gas produced by assigning allowable rates of production to each well or proration unit.

Operating Hazards and Insurance

General: The oil and gas business involves a variety of operating risks, including the risk of fire, explosions, blow-outs, pipe failure, casing collapse, abnormally pressured formations and environmental hazards such as oil spills, gas leaks, ruptures and discharges of toxic gases. The occurrence of any of these events could result in substantial losses to the Company due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of operations. In accordance with customary industry practice, we maintain insurance against some, but not all, of the risks described above. However, there can be no assurance that any insurance obtained by us will be adequate to cover any losses or liabilities. We cannot predict the continued availability of insurance or the availability of insurance at premium levels that justify its purchase. The occurrence of a significant event, not fully insured or indemnified against, could materially and adversely affect our financial condition and operations.

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Recent Terrorist Activities and the Potential for Military and Other Actions: The continued threat of terrorism and the impact of retaliatory military and other action by the United States and its allies might lead to increased political, economic and financial market instability and volatility in prices for oil and natural gas, which could affect the market for our exploration and production operations. In addition, future acts of terrorism could be directed against companies operating in the United States, and it has been reported that terrorists might be targeting domestic energy facilities. While we believe that the risk to our energy assets is minimal, there is no assurance that we can completely secure our assets or completely protect them against a terrorist attack. These developments have subjected our operations to increased risks and, depending on their ultimate magnitude, could have a material adverse effect on our business. In particular, we might experience increased capital or operating costs to implement increased security for our energy assets.

Employees

Since May 2007 the Company has had only one employee, Mr. Robert D. Burr, serving as President and Acting Chief Financial Officer. From May 2007 to March 2008 the company also had two full time contractors working in exploration and prospect development whose services were terminated at that time. Prior to May, 2007 the Company had five full time employees and two full time contractors. There was a significant turnover of the major officers of the Company during 2006.

On April 4, 2007, the Company announced the resignation of W. Wayne Hardin as President and Chief Executive officer, D. Edwin Suhr, Jr. was given thirty days notice of termination as of April 1, 2007, as Senior Vice President of Land and Operations/Secretary and Richard M. Hewitt resigned as a Director. Mr. Hardin’s resignation was effective as of April 3, 2007. Mr. Hewitt’s resignation became effective May 1, 2007. The three remaining employees and other contract personnel located in the Houston, Texas office were given thirty days notice of termination of their employment as of April 1, 2007.

From May 2007 until February 2008, only the exploration contract personnel have remained in the Houston, Texas office. At the time of notice of termination, the Company had employment and consulting agreements with three persons. One of the agreements was with an exploration and prospect development contractor. This contractor worked for the Company until February 2008 when his services were terminated.

The two remaining employment and consulting agreements are with employees no longer associated with the Company. No releases have been obtained but no action has been taken by any parties. The ultimate outcome of these contracts is unknown at this time.

The Company’s headquarters is now the same as the corporate office of one of its major stockholders, Blue Ridge Group, Inc. (BR Group”). Since moving the Company’s headquarters to Bowling Green Kentucky the Company has not started any new projects except for the exploration contractors in Houston continuing the research and development of new oil and gas prospects. Mr. Burr has been in charge of all administrative matters of the Company and all other business matters of the Company have been fulfilled through independent contractors. Mr. Burr has served the Company without salary during this period. Annually, the Board of Directors determines if any of the executive officers of the Company are eligible for a performance bonus. No performance bonuses were paid during 2008 and 2007.

2. DESCRIPTION OF PROPERTIES

During 2008, the Company did not participate in the drilling of any new wells and several of its existing wells have been plugged and abandoned.

As of December 31, 2008, the Company owns a direct working interest in only 1 producing well, being the Pedigo #1 in Texas. All other wells in which the Company previously owned direct participation working interest have been abandoned and plugged. The Company owns a small indirect interest in 1 well in Texas through two different partnership managed by BR Group. The Company also owns a small royalty interest in 1 well in Texas.

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The following tables summarize by geographic area the Company’s developed and undeveloped acreage and gross and net interests in producing oil and gas wells as of December 31, 2008. Productive wells are producing wells and wells capable of production. Wells that are dually completed in more than one producing horizon are counted as one well.

DEVELOPED AND UNDEVELOPED ACREAGE


	Developed Acreage				Undeveloped Acreage
Geographic Area:	Gross Acres		Net Acres		Gross Acres		Net Acres
Texas		-0-		-0-		-0-		-0-

Totals		-0-		-0-		-0-		-0-

PRODUCTIVE WELLS


	Gross Wells				Net Wells
Geographic Area:	Oil		Gas		Oil		Gas
Texas		1		3		.08		.22
Kentucky		-0-		-0-		-0-		-0-
West Virginia		-0-		-0-		-0-		.-0-

Totals		1		3		.08		.22

Key Properties

The working interest owned by the Company, either directly or indirectly through oil and gas partnerships, is owned jointly with other working interest partners. Management does not believe any of these burdens materially detract from the value of the properties or materially interfere with their use. The following are the primary properties held by the Company as of December 31, 2008:

Developed Properties:

Pedigo #1 well drilled on the Pepperbush Prospect: The Company owns a 13.9% working interest, with a 10.6% net revenue interest in 1 well located in Polk County, Texas which began producing in the second quarter of 2003. The well produces approximately 50 Mcf per day when in production but has experienced periods of time when the well has been shut in for maintenance and repairs for several months.

Bridges #1 well in Shelby County, Texas: The Company owns a 0.7% indirect working interest in this well through two partnerships managed by BR Group.

In March 2003, the Company transferred all of its rights and interest in the Boon’s Camp Partnership, the BR Development 2001-II Partnership, the BR Development Plus 2000 Partnership and the BR Private Development 2001-A Partnership to Eagle Energy, Inc. (a company formed by the Company’s former president) in exchange for a 1% interest in these four limited partnerships. In addition, the Company still retains its 25% ownership as a limited partner through its direct investment in the BR Development Plus 2000 Partnership.

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In February 2008, the Company sold the mineral rights on approximately 460 acres in Aransas, Texas to an operating company for $350,000 and retained a royalty interest of 12% in the property. The operating company subsequently developed a producing well that went to production in November 2008. In 2008 the Company received approximately $206,000 from the royalty interest.

During 2008 & 2007 the Company received total cash flow of approximately $8,000 and $14,000 from its interest in the partnerships operated by BR Group and Eagle Energy respectively.

Undeveloped Properties:

McAllen Project: The Company has identified a prospect in South Texas containing approximately 875 acres. The Company has seismic data in the area and has determined a viable drilling prospect exists. The Company purchased approximately 427 mineral acres and had secured paid up oil and gas leases covering an additional 448 acres on this prospect. The Company subsequently sold this property in February, 2008.

The Company had nine other undeveloped properties that they let the lease options expire in 2008 and thus have been written off as abandoned for a total write off of $25,000.

Dry Holes and Abandonment of Properties during 2008

The Company had nine undeveloped properties that they had lease options on at 12/31/07, however all expired in 2008 without the options being exercised. Thus these properties have been written off as abandoned in 2008, for a total write off of $25,000.

Title to Properties

In the normal course of business, the operator of each lease has the responsibility of examining the title on behalf of all working interest partners. Title to substantially all significant producing properties of the Company has been examined by various attorneys. The properties are subject to royalty, overriding royalty and other interests customary in the industry.

The working interest owned by the Company, either directly or indirectly through the oil and gas partnerships, is owned jointly with other working interest partners and is subject to various royalty and overriding royalty interest, which generally range in total between 20%-30% on each property. Management does not believe any of these burdens materially detract from the value of the properties or materially interfere with their use.

Production and Sales Price

The following table summarizes the sales volumes of the Company’s net oil and gas production expressed in barrels of oil. Equivalent barrels of oil were obtained by converting gas to oil on the basis of their relative energy content — six thousand cubic feet of gas equals one barrel of oil. During 2008 and 2007, the average selling price for natural gas was $9.11 and $6.38 per Mcf, respectively, and the average selling price for oil was $99.65 and $63.52 per barrel, respectively.


	Net		Net
	Production		Production
	For the Year		For the Year
	12/31/08		12/31/07
Net Volumes (Equivalent Barrels)		6,833		1,152
Average Sales Price per Equivalent Barrel	$	42.12	$	44.04
Average Production Cost per Equivalent Barrel (includes production taxes)	$	3.12	$	32.59

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The Average Production Cost per Equivalent Barrel represents the Lease Operating Expenses divided by the Net Volumes in equivalent barrels. Lease Operating Expenses includes normal operating costs such as pumper fees, operator overhead, salt water disposal, repairs and maintenance, chemicals, equipment rentals, production taxes and ad valorem taxes.

Net Proved Oil and Gas Reserves

Presented below are the estimates of the Company’s proved reserves. All of the Company’s proved reserves are located in the United States.

Proved Developed and Undeveloped Reserves:


	December 31, 2008						December 31, 2007
				Natural						Natural
	Oil			Gas			Oil			Gas
	(Bbls)			(Mcf)			(Bbls)			(Mcf)
Balance, Beginning of Year		24,286			1,089,000			39,364			1,103,000
Extensions, discoveries and other additions Revisions of previous estimates								(7,797	)		(8,659	)

Leases lapsed during the year		(24,286	)		(1,083,000	)		(7,019	)
Production					(6,000	)		(262	)		(5,341	)

Balance, End of Year					1,089,000			24,286			1,089,000


Proved Developed Reserves		—			—			—			6,000


Bbls:		Barrels of oil

Mcf:		Thousand cubic feet of gas

In estimating the oil and natural gas reserves, the Company, in accordance with criteria prescribed by the SEC, uses a December 31, 2008 and 2007 price, without escalation; however, gas prices are adjusted for heating value content (Btu) and oil prices are adjusted for any transportation costs. The SEC allows exceptions in those instances where fixed and determinable gas price escalations are covered by long-term contracts but the Company does not have any such contracts. Future prices received for the sale of product may be higher or lower than the prices used in the evaluation described above and the operating costs relating to such production may also increase or decrease from existing levels.

As of December 31, 2008 the Company choose not to get a Reserve Report since the only potential reserves left are on the Pedigo well and are considered immaterial.

Drilling Activities

The Company drilled 0 wells in years 2008 and 2007. As of December 31, 2008 there were no wells in progress being drilled or completed.

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3. LEGAL PROCEEDINGS

The Company has liabilities to various vendors with past due amounts. Due to this, the company has one judgment against it for $23,000 and one active lawsuit against it for $55,000. The Company is currently in negotiations to settle these claims and feels that resolution will be obtained in early 2009. No other action against it is known at this time. The Company also has significant monthly payments for notes payable which will all mature and be due in full during the year 2009. The Company will seek to renegotiate and extend the term of its existing notes payable but may be unable to negotiate revised due dates for its various debt obligations. This may result in collection litigation and potential future judgments against the Company. Other than the potential claims from vendors and the current lenders of the Company’s long term debt, neither the Company nor any of its properties is subject to any material pending legal proceedings.

4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

PART II

5. MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

The Common Stock of the Company is thinly traded on the OTC Bulletin Board with “BYCX” as its stock symbol. The range of high and low bid information for each quarter since January 1, 2007 is as follows:


	High Bid		Low Bid
March 31, 2007	$	0.99	$	0.40
June 30, 2007		0.49		0.12
September 30, 2007		0.31		0.21
December 31, 2007		0.48		0.22

March 31, 2008	$	0.25	$	0.14
June 30, 2008		0.15		0.03
September 30, 2008		0.08		0.03
December 31, 2008		0.08		0.01

These quotations reflect inter dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.

Dividend Information

No cash dividends have been declared or paid on the Company’s Common Stock since the Company’s inception. The Company has not paid, nor does it intend to pay, cash dividends on its Common Stock in the foreseeable future. We intend to retain earnings, if any, for the future operation and development of our business. The Company’s dividend policy will be subject to any restrictions placed on it in connection with any debt offering or significant long-term borrowing.

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Cash dividends of 12% per annum have been paid quarterly on the Company’s Series E Preferred Stock since the date of issuance. As of December 31, 2007, a payable for the fourth quarter dividend was recorded as a component of accounts payable and accrued expenses on the balance sheet and there are no unpaid cumulative dividends. The Series E Preferred Stock was automatically converted to common stock effective December 31, 2007. The accrued dividend payable as of December 31, 2007 was paid in January, 2008 and represented the final dividend payment on the Company’s preferred stock.

Recent Sales of Unregistered Securities

The Company did not issue any stock during 2008.

Shareholder Information

As of December 31, 2008, there were approximately 600 shareholders of record of the Company’s Common Stock.

6. MANAGEMENT’S DISCUSSION AND FINANCIAL ANALYSIS OF FINANCIAL CONDITION

The following discussion is intended to assist in an understanding of the Company’s financial position and results of operations for each year of the two year periods ended December 31, 2008 and 2007. The financial statements and the notes thereto, which follow, contain detailed information that should be referred to in conjunction with the following discussion.

Financial Overview

On April 4, 2007, the Company announced the relocation of their corporate headquarters to 632 Adams Street, Suite 700, Bowling Green, Kentucky 42101 in order to decrease overhead, consolidate operations and reduce the number of personnel on staff. This move was completed in May, 2007. Prior to that the Company’s executive office was located at 10777 Westheimer, Suite 170, Houston, Texas, 77042. After relocating the Company’s headquarters to Bowling Green, Kentucky the Company has maintain only the geological contract staff in the Houston office for the continued development and sale of the Company’s prospects until June 2008 when the office was closed and all remaining staff was terminated.

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Our ability to meet future cash and liquidity requirements is dependent on a variety of factors, including our ability to raise more capital, successfully negotiate extended payment terms with our creditors and holders of the Company’s notes payable and the implementation of a restructuring plan for the Company. The presence of the going concern note may have an adverse impact on our relationship with third parties such as potential investors. If we are unable to continue as a going concern we would have to liquidate our remaining assets, if any. This would have a material adverse effect on your investment with the Company.

Critical Accounting Policies and Estimates

Financial Statements and Use of Estimates: In preparing financial statements, management is required to select appropriate accounting policies and make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates.

Stock Options: Effective January 1, 2006, the Company accounts for stock options in accordance with revised Statement of Financial Accounting Standards (SFAS) No. 123,Share-Based Payment(SFAS 123(R)). Accordingly, stock compensation expense has been recognized in the statement of operations based on the grant date fair value of the options for the period ended December 31, 2006. No stock compensation expense was required to be recognized in the year ended December 31, 2007. Prior to January 1, 2006, the Company accounted for stock compensation cost in accordance with Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, (APB 25) as permitted by SFAS 123 as originally issued. Under APB 25, stock compensation expense was recognized only if the options had intrinsic value (difference between option exercise price and the fair market value of the underlying stock) at the date of grant. As the Company issued all options with an exercise price equal to the grant date market value of the underlying stock, no compensation expense had previously been recorded by the Company.

Under SFAS 123(R), the fair value of options is estimated at the date of grant using a Black-Scholes-Merton (“Black-Scholes”) option-pricing model, which requires the input of highly subjective assumptions including the expected stock price volatility. Volatility is determined using historical stock prices over a period consistent with the expected term of the option. The Company utilizes the guidelines of Staff Accounting Bulletin No. 107 (SAB 107) of the Securities and Exchange Commission relative to “plain vanilla” options in determining the expected term of option grants. SAB 107 permits the expected term of “plain vanilla” options to be calculated as the average of the option’s vesting term and contractual period. The Company has used this method in determining the expected term of all options. The Company has several awards that provide for graded vesting. The Company recognizes compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The amount of compensation expense recognized at any date is at least equal to the portion of the grant date value of the award that is vested at that date.

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Oil and Gas Activities: The accounting for upstream oil and gas activities (exploration and production) is subject to special accounting rules that are unique to the oil and gas business. There are two methods to account for oil and gas business activities, the successful efforts method and the full cost method. The Company has elected to use the successful efforts method. A description of our policies for oil and gas properties, impairment and direct expenses is located in Note 1 to our financial statements.

The successful efforts method reflects the volatility that is inherent in exploring for oil and gas resources in that costs of unsuccessful exploratory efforts are charged to expense as they are incurred. These costs primarily include seismic costs (G&G costs), other exploratory costs (carrying costs) and exploratory dry hole costs. Under the full cost method, these costs would be capitalized and then expensed (depreciated/amortized) over time.

Oil and Gas Reserves: Proved oil and gas reserves, as defined by SEC Regulation S-X Rule 4-10(a) (2i), (2ii), (2iii), (3) and (4), are the estimated quantities of crude oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. Engineering estimates of the Company’s oil and gas reserves are made using all available geological and reservoir data, as well as production performance data, and these are inherently imprecise and represent only approximate amounts because of the subjective judgments involved in developing such information. There are authoritative guidelines regarding the engineering criteria that have to be met before estimated oil and gas reserves can be designated as “proved.” Proved reserve estimates are updated at least annually and take into account recent production and technical information about each field. In addition, as prices and cost levels change from year to year, the estimate of proved reserves also changes. This change is considered a change in estimate for accounting purposes and is reflected on a prospective basis in related depreciation, depletion and amortization rates.

Despite the inherent imprecision in these engineering estimates, these estimates are used in determining depreciation, depletion and amortization (DDA) expense and impairment expense, and in disclosing the supplemental standardized measure of discounted future net cash flows relating to proved oil and gas properties. Producing properties’ DDA rates for capitalized costs are determined based on the units of oil or gas produced. Therefore, assuming all other variables are held constant, an increase in estimated proved reserves decreases the DDA expense. Also, estimated reserves are often used to calculate future cash flows from our oil and gas operations, which serve as an indicator of fair value in determining whether a property is impaired or not. The larger the estimated reserve, the less likely the property is impaired. Further, material changes in the estimated volumes of reserves could have an impact on the DD&A rate calculation and the financial statements.

Capitalized Prospect Costs: The Property and Equipment balance on the Company’s balance sheets include oil and gas property costs that are excluded from capitalized costs being amortized. These amounts represent investments in undeveloped leasehold acreage and work-in-progress exploratory wells. The Company excludes these costs on a property-by-property basis until proved reserves are found, until the lease term expires or if it is determined that the costs are impaired. All costs excluded are reviewed annually to determine if any of these conditions have occurred; if so, the capitalized amount is transferred to abandonment expense and recorded to the statement of operations.

Impairments: If circumstances indicate that the carrying amount of an asset or investment, including oil and gas properties, may not be recoverable, this asset may be considered “impaired,” and an impairment loss may be recognized in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The amount of impairment loss is the difference between the carrying amount of the asset and its fair value. It is difficult to precisely estimate fair value because quoted market prices for our assets are not easily available. We use all readily available information in determining an amount that is a reasonable approximation of fair value, including the net present value of future net cash flows based on reserve quantities as indicated above. Once impairment is identified, the impairment expense is calculated based on the difference between the net book value of the asset and the discounted future net cash flows estimated utilizing a 10% discount rate, as required by SFAS No. 69, “Disclosures about Oil and Gas Producing Activities.”

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Results of Operations

The Company reported a net loss of $175,000 in 2008, as compared to a net loss of $1,464,000 in 2007. The decrease in the net loss is primarily due to the Company’s decision to terminate all employees at the end of April, 2007 and move its corporate headquarters to Bowling Green, Kentucky and close the Houston office as of June 2008. On a per share basis, which takes into account cash dividends paid on the Series E Preferred Stock, the Company had a net loss of $0.01 and $0.06 per share in 2008 and 2007, respectively.

Operating Revenues: Operating revenues totaled $288,000 in 2008 as compared to $50,000 in 2007 which is a 532% increase from 2007. The increase is mainly the result of the production of a new well in the county of Nueces, Texas called the Sien #1 GU. The Company sold these leases in February 2008 and retained an 8% royalty interest in the land. Wells were subsequently drilled on the property and produced approximately $206,000 of income for the Company in November and December of 2008.

Direct Operating Costs: Direct operating costs for the producing oil and gas wells totaled $21 in 2008 compared to $38,000 in 2007. This decrease in expenses is a result of the wells being abandoned in 2007, minor adjustments in expenses from 2007 received in 2008 and the fact that the Company has a royalty interest in the new well in Nueces Texas, thus the Company bears no operating expense for their share.

Other Operating Expenses: Other operating expenses includes impairment, abandonment, and dry hole costs, exploration costs, depreciation, depletion and amortization expense, accretion expense, and marketing costs. Other operating expenses decrease by 88% to $77,000 in 2008 compared to $612,000 in 2007. This decrease of $605,000 is primarily due to the decrease of $264,000 in impairment abandonment, and dry hole costs, and a decrease of $238,000 in exploration costs. Because of a lack of operation funds the Company eliminated all paid staff, and has, at least temporarily, suspended exploration efforts due to lack of available funds. Marketing costs were eliminated for the year 2008.

General And Administrative Costs: General and administrative costs were $330,000 in 2008 compared to $850,000 for 2007, a decrease of $520,000, or 61%. The reduction is a result of the elimination of all paid employees and contractors in June 2008 and the consolidation of the offices to Bowling Green, Kentucky.

Other Expenses, Net: Other expense increased $33,000 in 2008 from 2007 due mainly to increase in interest costs and a loss on sale of assets in 2008.

Income Taxes: The Company had no federal or state income tax benefit in 2008 or in 2007, as a result of its continued net loss. Based on the continued net losses, a full valuation allowance has been recorded against the deferred tax assets associated with the net operating loss carry forwards. The Company has an estimated net operating loss carry forward of 9,421,000 and $8,804,000 as of December 31, 2008 and 2007 respectively. Under Internal Revenue Code (IRC) Section 382, a change in ownership occurred on December 31, 2004 with the issue of the additional shares from the private stock placement. This rule will limit the NOL carry forward amount to $267,000 per year. These NOLs begin expiring in 2017 if not utilized.

Balance Sheet Review

Assets: The Company’s total assets decreased $302,000 from $537,000 as of December 31, 2007 to $235,000 as of December 31, 2008. Property costs decreased $496,000 primarily due to the sale of the Companies Furniture & Fixtures after the close of the Houston office and the abandonment of various undeveloped lease costs. The Company’s current assets increased $194,000 from $35,000 as of December 31, 2007 to $229,000 as of December 31, 2008 due to the income receivable from the Sien #1 GU well at year-end. In addition the Company reduced its reserve for potentially uncollectible accounts receivable as of December 31, 2008 by $19,000 to $222,000.

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Liabilities: The Company’s liabilities decreased to $1,313,000 as of December 31, 2008 compared to $1,448,000 as of December 31, 2007. The Company reduced is accounts payable and accrued expenses by $200,000 but increased loans from BR Group and other related parties during 2008 by $77,000. During 2008, BR Group loaned the Company $77,000 under a line of credit These funds were used to finance the Company’s operating overhead and the payment of accounts payable.

The Company’s liabilities to third parties as of December 31, 2008 included $355,000 in trade payables and accrued expenses, and $51,000 in drilling advances. The Company’s liabilities to related parties includes $246,000 in trade payables and accrued expenses, $617,000 in notes payable due to related parties as of December 31, 2008. In addition, the long-term P&A Cost liability was $44,000 at December 31, 2008.

Stockholders’ Equity: Total stockholder’s equity of the Company decreased $167,000 to a deficit of $1,078,000 at December 31, 2008. This decrease is as a result of the 2008 net operating loss of $175,000 and an increase in Additional paid in Capital or $8,000 due to imputed interest being calculated on a related party loan that bears no interest rate and being credited to Additional paid in Capital.

Capital Resources and Liquidity: The Company’s current ratio (current assets / current liabilities) was .18 to 1 as of December 31, 2008 compared to .03 to 1 as of December 31, 2007. The change in the current ratio from 2007 to 2008 is a result a significant increase in accounts receivables due to the Sien #1 GU revenue that started producing in November 2008.

The Company’s sources of cash during 2008 were from $409,000 in sales of assets, plus $77,000 in loans from BR Group and other related parties, and to the $69,000 in oil and gas sales receipts. The Company’s sources of cash during 2007 were $64,000 in proceeds from the sale of common stock, plus $501,000 in loans from BR Group and other related parties, and $50,000 is oil and gas sales.

During 2008 the Company relied primarily upon sales of assets while in 2007 the Company relied primarily upon loans from related parties to fund its operations. Management intends to fund further growth with the revenue from the Sien #1 GU well and the future development of oil and gas prospects for a profit. Given the Company’s current financial condition, there is no assurance the Company will be able to raise any cash for future operations through the issuance of debt or equity securities.

As of December 31, 2008 the Company has no contractual obligations that will encumber their cash flow into the future.

7. FINANCIAL STATEMENTS

The response to this item is set forth herein in a separate section of this Report, beginning on Page F-1.

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

The Company elected to change auditors for its 2007 financial statements. The accounting firm of Killman, Murrell & Company, PC was retained to audit its December 31, 2008 and 2007 financial statements. The Company had no disagreements with its previous auditors, Mountjoy & Bressler, LLP who audited the Company’s December 31, 2006 financial statements.

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8A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 15d-15(e) under the Securities and Exchange Act of 1934 (the “Exchange Act”) promulgated there under, our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report (the “Evaluation Date”). Based on such evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective, at a reasonable assurance level, as of the Evaluation Date, to ensure that information required to be disclosed in reports that we file or submit under that Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, in a manner that allows timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting

The Company maintains a system of internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. There was no change in our internal control over financial reporting, that occurred during the year ended December 31, 2008, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Annual Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined rule 13a-15(f) of the Exchange Act. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.

An evaluation was preformed under the supervision and with the participation of the Company’s management, including the CEO and CFO, of the effectiveness of the design and operation of the Company’s procedures and internal control over financial reporting. In making this assessment, the Company used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control-Integrated Framework. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principals as of December 31, 2008

This Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in their annual report.

Inherent Limitations of Internal Controls

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention and overriding of controls and procedures. A control system, no matter how well conceived and operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of the control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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8B. OTHER INFORMATION

On January 1, 2006, the Company entered into an employment agreement with D. Edwin Suhr, Jr. to serve as Senior Vice President Land as well as the Corporate Secretary (“2006 Contract”). Mr. Suhr’s contract was for a one year period and was automatically extended for one additional year at the end of the initial term and each extension period, unless either party gives at least 90 days prior notice, prior to the end of the applicable term. Mr. Suhr’s annual base salary was $120,000. On January 1, 2007, the Company entered into a revised three year employment agreement with Mr. Suhr (“2007 Contract”). The 2007 Contract provides for automatic extensions for one additional year at the end of the initial term and each extension period, unless either party gives at least 30 days prior notice, prior to the end of the applicable term. Mr. Suhr’s annual base salary was increased to $180,000. Mr. Suhr’s 2007 Contract also provided that the Company would grant him the number of shares of restricted Company common stock equal to $30,000 divided by the previous 30 day trading price of the Company stock on each of the anniversary dates of the agreement in 2008, 2009, 2010.

On December 1, 2006, the Company entered into an employment agreement with James G. Brown to serve as the Drilling and Production Manager. Mr. Brown’s contract is for a three year period and provides for automatic extensions for one additional year at the end of the initial term and each extension period, unless either party gives at least 30 days prior notice, prior to the end of the applicable term. Mr. Brown’s annual base salary was $168,000. Mr. Brown’s employment contract also provided that the Company would grant him the number of shares of restricted Company common stock equal to $20,000 divided by the previous 30 day trading price of the Company stock on each of the anniversary dates of the agreement in 2007, 2008, 2009.

Both employment agreements may be terminated by the Company on the death or disability of the officer or in the event the officer engages in any act constituting “cause,” as defined in the agreements. Mr. Suhr’s 2006 Contract also contained a provision allowing the Company to terminate his employment at any time with or without cause on 30 days’ written notice. Both agreements also provide that the officers will be entitled to participate in any other individual or group health insurance, which the Company may from time to time make available to similarly situated employees. The employment agreements contain provisions providing for non-disclosure of proprietary information and surrender or records and contains a covenant not to solicit, divert or appropriate any Restricted Clients (as defined in the agreements) of Company during their employment and for two years following the termination of their employment.

On September 18, 2006, the Company entered into a Consulting Agreement with Bart Birdsall to provide consulting services to evaluate geology and geophysical data in areas of interest to the Company and to identify certain drilling prospects. The Consulting Agreement provides that Mr. Birdsall would be paid $700 per day as well as 1% overriding royalty interest reduced to the net mineral interest acquired in each oil and gas prospect identified by Mr. Birdsall and accepted by the Company. The term of the agreement is until December 31, 2009 and the contract will be automatically extended for additional one year terms unless either party gives at least 30 days prior notice, prior to the end of the applicable term. The full text of the three employment agreements and the consulting agreement were filed as Exhibits 10.1, 10.2, 10.3 and 10.4, respectively, with its Form 10-KSB filed for the year ended December 31, 2007.

The Company gave Messrs. Suhr, Brown and Birdsall 30 days notice of termination of their employment or agreement with the Company as of May 1, 2007. Messrs. Suhr and Brown are no longer associated with the Company. Messr. Birdsall has continued to provide exploration efforts to the Company on a contract basis since May 1, 2007. The Company has not obtained a release from these contracts. The ultimate outcome of these contracts is unknown at this time.

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PART III

9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act

The directors of the Company as of December 31, 2008 are as follows:


Director	Age		Company Position or Office	Director Since

Robert D. Burr		63	Chairman, President and CEO		1996

Harry J. Peters		65	Director		2000

Gregory B. Shea		46	Director		1999

ROBERT D. BURR, age 62, Bowling Green, Kentucky, was named interim president and Chief Executive Officer in April, 2007, and has been Chairman of the Board of the Company since May 1996. He served as President and Chief Executive Officer from May 1996 until March 1, 2000. Mr. Burr has also been the Chairman of the Board, President and Chief Executive Officer of Blue Ridge Group, Inc. (“BR Group”) since August 1993. Mr. Burr is a native of Port Arthur, Texas and attended McNeese State College, Lake Charles, Louisiana. He has been active for over 25 years in the oil and gas business with a myriad of companies.

HARRY J. PETERS, age 64, Bowling Green, Kentucky, served as Senior Vice President and Chief Operating Officer (COO) from May 2003 through September 2005. He was Senior Vice President-Acquisitions from August 2000 to April 2003. Mr. Peters served the Company as Senior Vice President-Sales and Marketing from April 2000 to July 2000 and has served as a Director since April 2000. A native of New York, he has over 30 years of experience in sales and marketing, both domestic and international. Over the years, he has developed close working relationships with investment bankers, institutional investors and securities dealers while directing market financing of reserve purchases, and raising drilling risk capital and venture capital for wells in Texas, Kentucky, Oklahoma, Louisiana, Colorado, West Virginia and Utah. Mr. Peters has been a director and Senior Vice President-Sales and Marketing of BR Group since April of 1999. He is a graduate of St. Michaels College in Sante Fe, New Mexico.

GREGORY B. SHEA, age 45, Bowling Green, Kentucky, has been a Director since 1999. From 1999 through June 2005, Mr. Shea served as Senior Vice President-Operations of the Company and from May 2002 through June 2005 he also served as Secretary-Treasurer. Mr. Shea has previously managed BR Group’s and Bayou City Exploration, Inc.’s Kentucky drilling and field operations, drilling over 350 wells from 1997 to 2002. During that time, Mr. Shea was also President of Blue Ridge Builders, Inc., a residential and commercial construction company in Bowling Green, Kentucky and a majority-owned subsidiary of BR Group since November 1994. Blue Ridge Builders, Inc. is responsible for the construction of over 70 properties in Kentucky and Tennessee. He was elected a Director of BR Group in February 1995. Between 1981 and 1986, he attended North Texas State University. Mr. Shea is also the son-in-law of Mr. Burr.

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COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s officers and directors and persons who own more than 10% of a registered class of the Company’s equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission (“SEC”). Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms filed by them.

The Company believes that during the 2008 fiscal year, its officers, directors and 10% shareholders complied with the Section 16(a) filing requirements in a timely fashion.

REPORT OF THE AUDIT COMMITTEE

As of the date of this filing, the Company has not appointed members to an audit committee and an audit committee does not exist. Therefore, the role of an audit committee has been conducted by the Board of Directors of the Company.

The Company intends to establish an audit committee. When established, the audit committee will be comprised of at least two disinterested members. The audit committee’s primary function will be to provide advice with respect to the Company’s financial matters and to assist the Board of Directors in fulfilling its oversight responsibilities regarding finance, accounting, tax and legal compliance. The audit committee’s primary duties and responsibilities will be: (i) to serve as an independent and objective party to monitor the Company’s financial reporting process and internal control system; (ii) to review and appraise the audit efforts of the Company’s independent accountants; (iii) to evaluate the Company’s quarterly financial performance as well as its compliance with laws and regulations; (iv) to oversee management’s establishment and enforcement of financial policies and business practices; and (v) to provide an open avenue of communication among the independent accountants, management and the Board of Directors.

Currently, the entire Board of Directors performs the duties of an Audit Committee and oversees the Company’s financial reporting process. Management has the primary responsibility for the financial statements and the reporting process including the systems of internal controls. In fulfilling its oversight responsibilities, the Board of Directors reviewed the interim financial statements filed quarterly and the audited financial statements in the Annual Report with management including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements. At this time, the Board of Directors does not have a financial expert because of its small company size, however, the Board of Directors intends to appoint a financial expert in the future.

10. Executive Compensation

The following table shows information for the year ended December 31, 2008 regarding the compensation of both our Chief Executive Officers, and each of our two other most highly compensated executive officers as of December 31, 2008, whom we refer to collectively as the “Named Executive Officers,” for service in all capacities with our company and our subsidiaries.

SUMMARY COMPENSATION TABLE

Change in

pension value

and non-

Non-equity

qualified

Name and

Stock

Option

incentive plan

deferred

All other

Principal

Salary

Bonus

Awards

compensation

Total

Position

Year

($)

Non-Equipty

earnings ($)

($)

Robert D. Burr
President and CEO (1)

2008

—


(1)		Mr. Burr has served as President and CEO since April 4, 2007 with no compensation.

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Employment Agreements

See Part II, Section 8B., page 15 for Employment contract data.

STOCK OPTION PLAN

On February 22, 2005, the Board of Directors approved the Bayou City Exploration, Inc. (formerly Blue Ridge Energy, Inc.) 2005 Stock Option and Incentive Plan (the “Stock Option Plan”). The Stock Option Plan allows for the granting of stock options to eligible directors, officers, employees, consultants and advisors.

Effective January 1, 2006, the Company accounts for the Plan in accordance with revised Statement of Financial Accounting Standards (SFAS) No. 123,Share-Based Payment(SFAS 123(R)). Accordingly, stock compensation expense has been recognized in the statement of operations based on the grant date fair value of the options for the period ended December 31, 2008. Prior to January 1, 2006, the Company accounted for stock compensation cost under the Plan in accordance with Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, (APB 25) as permitted by SFAS 123 as originally issued. Under APB 25, stock compensation expense was recognized only if the options had intrinsic value (difference between option exercise price and the fair market value of the underlying stock) at the date of grant. As the Company issued all options with an exercise price equal to the grant date market value of the underlying stock, no compensation expense had previously been recorded by the Company.

The maximum number of shares with respect to which options may be awarded under the Stock Option Plan is seven million (7,000,000) common shares of which approximately 3,900,000 shares remain available for grant as of December 31, 2008. The following table shows more information about our Stock Option Plan.

EQUITY COMPENSATION PLAN INFORMATION

Number of securities

remaining available for

future issuance under

equity compensation

plans (excluding

Number of securities to

Weighted-average

securities to be issued

be issued upon exercise

exercise price of

upon exercise of

of outstanding options,

outstanding options,

Plan category

warrants and rights

warrants, and rights)

Equity compensation plans approved by security holders

3,068,750

0.428

3,900,000

Equity compensation plans not approved by security holders

None

n/a

None

Total

3,068,750

0.428

3,900,000

The following table shows information regarding awards granted to each of our Named Executive Officers under our Stock Option Plan outstanding as of December 31, 2008.

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

OPTION AWARDS


	Number of		Number of
	Securities		Securities		Equity Incentive Plan
	Underlying		Underlying		Awards: Number of
	Unexercised		Unexercised		Securities Underlying
	Options		Options		Unexercised		Option Exercise		Option
	(#)		(#)		Unearned Options		Price		Expiration
Name	Exercisable		Unexerciseable		(#)		($)		Date

Robert D. Burr President and CEO⁽¹⁾		75,000		—		—	$	1.70		04/30/11
		281,250		—		—	$	0.40		04/30/12
		967,500		—		—	$	0.30		02/22/10
Harry J. Peters Director		50,000		—		—	$	1.70		04/30/11
		187,500		—		—	$	0.40		04/30/12
		710,000		—		—	$	0.30		02/22/10
Gregory B. Shea Director		50,000		—		—	$	1.70		04/30/11
		187,500		—		—	$	0.40		04/30/12
		460,000		—		—	$	0.30		02/22/10

BOARD MEETINGS AND COMPENSATION

During the year ended December 31, 2008, the Board of Directors of the Company met on one occasion. Each of the Company’s directors attended the meeting of the Board of Directors. While the Company has no formal policy, directors are encouraged to attend the Company’s annual meeting of stockholders. The Company does not have an Audit, Nomination or Compensation Committee.

Based on the Company’s history and experience without a nominating committee, the Board of Directors believes it is appropriate for the Company to continue operations without a standing nominating committee. Historically, there have not been many vacancies on the Board and the entire Board has identified available, qualified candidates. All directors participate in the consideration of the director nominees. Qualifications for consideration as a director nominee may vary according to the skills and experience being sought to complement the existing Board’s composition. However, in making nominations the Board will consider the individual’s integrity, business experience, industry experience, financial background, time availability and other skills and experience possessed by the individual. The Board of Directors will consider persons for director nomination who are proposed by stockholders. The Board of Directors will evaluate nominees for director on the same basis regardless of whether the nominee is recommended by an officer, director or stockholder. Stockholders who wish to propose a person for consideration by the Board of Directors as a director nominee should send the name of such person, together with information concerning such person’s qualifications and experience, in writing to the Chairman of the Board at the Company’s address.

During 2008, the directors of the Company received the following compensation for their services as directors of the Company.

DIRECTOR COMPENSATION

Fees

Non-

Earned

Qualified

Non-Equity

Deferred

Paid in

Stock

Option

Incentive Plan

Compensation

All Other

Cash

Awards

Compensation

Earnings

Compensation

Total

Name

($)

Robert D. Burr

—

Harry J. Peters

—

Gregory B. Shea

—

-20-

11. SECURITIES OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT

The table below sets forth each stockholder who is known to the Company to be the beneficial owner of more than 5% of the Common Stock of the Company at December 31, 2008. The Securities Exchange Act of 1934 requires certain persons, including the Company’s directors and executive officers, to file reports with the SEC regarding beneficial ownership of certain equity securities of the Company. The Company has relied upon information known to the Company and these SEC beneficial ownership filings in disclosing the following information regarding security ownership of 5% beneficial owners and management.


Name and Address	Amount and Nature of
of Beneficial Owner	Beneficial Ownership			Percent of Class


Robert D. Burr		3,907,721	⁽¹⁾		14.0	%
632 Adams Street, Suite 710 Bowling Green, KY 42101

Blue Ridge Group, Inc.		3,638,371	⁽²⁾		13.7	%
632 Adams Street, Suite 710 Bowling Green, KY 42101


(1)		Mr. Burr’s beneficial ownership includes vested options of 1,323,750 shares and 2,583,971 shares (71.02% of 3,638,371) of BR Group’s direct ownership of common shares. By virtue of his position as Chairman of the Board of BR Group, Mr. Burr may be deemed to beneficially own the 3,638,371 shares of the Company’s Common Stock beneficially owned by BR Group Mr. Burr disclaims beneficial ownership of these shares except to the extent described in the following sentence. Mr. Burr beneficially owns approximately 71.02% of the outstanding shares of BR Group, which beneficially owns approximately 13.8% of the Company.

(2)		BR Group’s beneficial ownership is attributable to its direct ownership of 3,638,371 shares of the Company’s Common Stock.

The table below sets forth the beneficial ownership of the Company’s Common Stock by each executive officer, director and director nominee of the Company as of December 31, 2008.


Name of	Amount and Nature of		Percent
Beneficial Owner	Beneficial Ownership⁽⁴⁾		of Class


Robert D. Burr⁽¹⁾		3,907,721	14.0%

Harry J. Peters⁽²⁾		1,012,263	3.7 %

Gregory B. Shea⁽³⁾		762,263	2.8 %

All directors, nominees and officers as a group (3 persons)		5,682,247	20.2%


(1)		Mr. Burr’s beneficial ownership includes vested options of 1,323,750 shares and 2,583,971 shares (71.02% of 3,638,371) of BR Group’s direct ownership of common shares. By virtue of his position as Chairman of the Board of BR Group, Mr. Burr may be deemed to beneficially own the 3,638,371 shares of the Company’s Common Stock beneficially owned by BR Group however, Mr. Burr disclaims beneficial ownership of these shares except to the extent described in the following sentence. Mr. Burr beneficially owns approximately 71.02% of the outstanding shares of BR Group, which beneficially owns approximately 13.8% of the Company.

-21-


(2)		Mr. Peters’ beneficial ownership includes vested options of 947,500 shares and 64,763 shares (1.78% of 3,638,371) of BR Group’s direct ownership of common shares.

(3)		Mr. Shea’s beneficial ownership includes vested options of 697,500 shares and 64,763 shares (1.78% of 3,638,371) of BR Group’s direct ownership of common shares.

(4)		These beneficial ownerships represent vested stock options and options exercisable within 60 days of July 31, 2008.

12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

A. Common Stock Transactions

As of December 31, 2008, there are 26,653,633 shares of common stock issued and outstanding. A total of 3,638,371 shares are held by Blue Ridge Group, Inc. and the remaining 23,015,262 shares are held by approximately 600 shareholders of record.

B. Payables and Notes Payable to Related Parties.

As of December 31, 2008 and December 31, 2007 the Company had the following debts and obligations to related parties:


	December		December
	30, 2008		31, 2007
Trade payable to BR Group	$	3,000	$	3,000
Payable to BR Group for proceeds from sale of asset		-0-		23,000
Drilling Advances payable to Gulf Coast Drilling Co.		104,000		154,000
Payable to minority shareholders for operating capital		85,000		85,000
Note payable to BR Group		123,000		123,000
Line of Credit payable to BR Group for operating capital		393,000		316,000
Note payable to Peter Chen — a minority shareholder		100,000		100,000
Accrued Interest		55,000		18,000


Total Payable or Notes Payable to Related Parties	$	863,000	$	822,000

The promissory note payable to BR Group was originally entered into October 1, 2004, for $123,000 to settle outstanding cash advances received from BR Group during prior periods. The note bears interest at 7.95% and is payable in full on or before July 17, 2009. The note is secured by all oil and gas production income that the Company holds until the note has been paid in full. The Company has failed to make payments on the note since February, 2007. The accrued interest amount includes the unpaid interest on this note as of December 31, 2008 in the amount of $17,000.

The line of credit payable to BR Group was executed by the Company on July 17, 2008, in the amount of $500,000 to finance the Company’s operations. As of December 31, 2008 the Company has a liability balance under this line of credit arrangement due BR Group in the amount of 393,000. The line of credit provides for interest at the rate of 8% per annum on the unpaid outstanding balance and is due upon demand. If no demand for payment is made by BR Group, the line of credit balance plus all accrued unpaid interest is due July 17, 2009. Accrued interest on the note as of December 31, 2008 was $38,000.

-22-

The fee mineral acres of the McAllen West Prospect previously secured the line of credit from BR Group. In February, 2008, the Company was successful in selling its McAllen West Prospect and received $358,000. The Company had costs of $300,000 associated with this prospect previously included in property and equipment on the Company’s balance sheet resulting in a $58,000 gain on sale of assets recognized in the Company’s statement of operations. The sales proceeds from the secured property have not been paid to BR Group. BR Group has not yet demanded the proceeds from the sale to be paid on the secured indebtedness but instead has allowed the sales proceeds to remain in Bayou to be used for operating capital.

During the 2^nd and 3^rd quarters, 2007, a minority shareholder loaned the Company $85,000 to finance the Company’s operations. No loan documents were executed.

During the 4^th quarter, 2007, Peter Chen, a minority shareholder loaned the Company $100,000 to finance the Company’s operations. The Company executed a promissory note on October 4, 2007, the note is due on demand and bears an interest rate of 0%.

As of December 31, 2008 and 2007, the Company owed Gulf Coast Drilling Company (an affiliate of BR Group) $104,000 and 154,000, respectively, in drilling advances received for the King Unit #1 well that were in excess of BR Group’s participation interest in the well.

As of December 31, 2008 and 2007, the Company had a trade payable due to BR Group in the amount of $3,000.

13. EXHIBITS

A) EXHIBITS


31.1		Section 302 Certification of Chief Executive Officer’s

31.2		Section 302 Certification of Chief Financial Officer’s

32.1		Section 906 Certification of Chief Executive Officer

32.2		Section 906 Certification of Chief Financial Officer

14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

INDEPENDENT AUDITORS

On March 18, 2008, the Company hired Killman, Murrell & Company, PC (“Killman”) as its independent auditors for auditing the Company’s financial statements for the year ended December 31, 2008 and December 31, 2007. It is not anticipated that the auditors will be present at the Annual Meeting.

-23-

AUDIT FEES

The Company incurred $16,000 in fees from Killman for the review of three 2008 quarterly 10-Q reports and approximately $30,000 for its annual December 31, 2008 audit. The Company incurred $14,000 in fees from Mountjoy & Bressler, LLP for the review of the three 2007 quarterly 10-QSB reports and $36,000 from Killman for auditing the Company’s financial statements for December 31, 2007.

TAX FEES

During 2008 the Company engaged an independent CPA firm other than its independent auditors to prepare its 2007 federal and state tax returns. Danny W. Looney, PC billed the Company $4,000 during 2008 for the preparation of the Company’s 2007 federal and state income tax filings. During 2007 Danny W. Looney, PC billed the Company $3,000 for the preparation of the Company’s 2006 federal and state income tax filings. No other fees were charged by Killmann during 2008 and 2007. The Board of Directors has considered the scope of the above services and concludes these services do not impair the auditor’s independence.

PART IV

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Bowling Green, State of Kentucky on March 30, 2009.


	Bayou City Exploration, Inc.
	By:	/s/ Robert D. Burr
		Chief Executive Officer and President

	By:	/s/ Robert D. Burr
		Acting Chief Financial Officer

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

Bayou City Exploration, Inc., Registrant

Date: March 30, 2009


By:	/s/ ROBERT D. BURR
	ROBERT D. BURR
	Director, Chairman of the Board

By:	/s/ Gregory B. Shea	By:	/s/ HARRY J. PETERS

	Gregory B. Shea Director		HARRY J. PETERS Director

-24-

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Bayou City Exploration, Inc.
Bowling Green, Kentucky

We have audited the accompanying balance sheets of Bayou City Exploration, Inc. as of December 31, 2008 and 2007, and the related statements of operations, stockholders’ (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bayou City Exploration, Inc. as of December 31, 2008 and 2007, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and its limited capital resources raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.



/s/ Killman, Murrell & Company, P.C.
Killman, Murrell & Company, P.C.
Odessa, Texas

March 20, 2009

-F-1-

BAYOU CITY EXPLORATION, INC.
BALANCE SHEETS
DECEMBER 31, 2008 AND 2007


	2008			2007

ASSETS

CURRENT ASSETS:
Cash	$	18,042		$	21,714
Accounts receivable:
Trade and other (net of reserves — $222,011 as of December 31, 2008 and 241,363 as of December 31, 2007).		210,674			13,457

TOTAL CURRENT ASSETS		228,716			35,171

PROPERTY, PLANT, AND EQUIPMENT, NET		5,834			494,718

OTHER NONCURRENT ASSETS		—			7,024


TOTAL ASSETS	$	234,550		$	536,913


LIABILITIES AND STOCKHOLDERS’ DEFICIT

CURRENT LIABILITIES:
Accounts payable and accrued expenses	$	354,789		$	519,051
Accounts payable — related party		246,298			281,965
AFE advances from JIB owners		51,186			51,186
Notes payable — related parties		616,569			539,895
Current portion of long-term debt — other		—			12,243


TOTAL CURRENT LIABILITIES		1,268,842			1,404,340

LONG TERM LIABILITY — P&A COSTS		43,806			43,806


TOTAL LIABILITIES		1,312,648			1,448,146


COMMITMENTS AND CONTINGENCIES		—			—

STOCKHOLDERS’ DEFICIT:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding as of December 31, 2008 and 2007		—			—
Common stock, $0.005 par value; 150,000,000 shares authorized; 26,653,633 shares issued and outstanding at December 31, 2008 and 2007		133,268			133,268
Additional paid in capital		13,284,765			13,276,765
Accumulated deficit		(14,496,131	)		(14,321,266	)


TOTAL STOCKHOLDERS’ DEFICIT		(1,078,098	)		(911,233	)


TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT	$	234,550		$	536,913

The accompanying notes are an integral part
of these financial statements

-F-2-

BAYOU CITY EXPLORATION, INC.
STATEMENTS OF OPERATIONS


	Years Ended December 31
	2008			2007
OPERATING REVENUES:
Oil and gas sales	$	287,808		$	49,946

TOTAL OPERATING REVENUES		287,808			49,946


OPERATING COSTS AND EXPENSES:
Lease operating expenses and production taxes		21,329			37,539
Impairment, abandonment and dry hole costs		28,311			292,403
Exploration costs		14,899			252,596
Depreciation, depletion and amortization		33,484			67,437
Marketing costs		—			12,779
General and administrative costs		329,927			849,647


TOTAL OPERATING COSTS		427,950			1,512,401


OPERATING LOSS		(140,142	)		(1,462,455	)


OTHER INCOME (EXPENSE):
Interest expense		(45,108	)		(20,885	)
Gain (loss) on sale of assets		(22,129	)		19,485
Forgiveness of debt		32,514			—

NET LOSS BEFORE INCOME TAX		(174,865	)		(1,463,855	)


Income Tax Provision		—			—


NET LOSS		(174,865	)		(1,463,855	)

Series E Preferred Stock Cash Dividends		—			(27,960	)


NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(174,865	)	$	(1,491,815	)


NET LOSS PER COMMON SHARE	$	(0.01	)	$	(0.06	)


Weighted Average Common Shares Outstanding — Basic and Diluted		26,653,633			26,309,726

The accompanying notes are an integral part
of these financial statements

-F-3-

Bayou City Exploration Inc
Statement of Stockholders’ Deficit
For the years ended December 31, 2008 and 2007


		Preferred Stock						Common Stock				Additional			Accumulated
		Shares			Amount			Shares		Amount		Paid-in-Capital			Deficit			Total

Balance at December 31, 2006			23,300		$	23			26,276,943	$	131,385	$	13,214,625		$	(12,829,451	)	$	516,582
Correction in common stock shares	1 QTR 07		—			—			4,190		21		(21	)		—			—
Conversion of series E preferred to common	4 QTR 07		(23,300	)		(23	)		116,500		582		(559	)		—			—
2007 regulation S offering at $.25 per share	4 QTR 07		—			—			256,000		1,280		62,720			—			64,000
Dividends paid-preferred stock			—			—			—		—		—			(27,960	)		(27,960	)
Net loss			—			—			—		—		—			(1,463,855	)		(1,463,855	)

Balance at December 31, 2007			—			—			26,653,633		133,268		13,276,765			(14,321,266	)		(911,233	)
Interest on non-interest bearing note payable to shareholder			—			—			—		—		8,000			—			8,000
Net loss			—			—			—		—		—			(174,865	)		(174,865	)

Balance at December 31, 2008			—		$	—			26,653,633	$	133,268	$	13,284,765		$	(14,496,131	)	$	(1,078,098	)

The accompanying notes are an integral part
of these financial statements

-F-4-

BAYOU CITY EXPLORATION, INC.

STATEMENTS OF CASH FLOWS

FOR YEARS ENDED DECEMBER 31, 2008 AND 2007


	2008			2007

CASH FLOW FROM OPERATING ACTIVITIES:

Net Loss	$	(174,865	)	$	(1,463,855	)
Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation, depletion, and amortization		33,484			67,437
Impairment, abandonment, and dry hole costs		28,311			292,403
Reserve for accounts receivable		(19,352	)		(241,363	)
Loss on sale of assets		22,129			(19,485	)
Interest contributed by shareholder		8,000			—
Forgiveness of debt		(32,514	)		—
Change in operating assets and liabilities:
Accounts receivable — trade		(177,865	)		523,703
Accounts receivable — related party		—			19,081
Prepaid expense and other assets		7,024			33,909
AFE advances — JIB owners		—			(326,253	)
Accounts payable — related party		(35,667	)		58,234
Accounts payable and accrued liabilities		(139,364	)		(515,488	)
Long term liability — P&A costs		—			(23,485	)


NET CASH USED IN OPERATING ACTIVITIES		(480,679	)		(1,595,162	)


CASH FLOW FROM INVESTING ACTIVITIES:

Purchase of furniture and computer equipment		(3,977	)		(7,821	)
Purchase of oil and gas properties		—			(60,095	)
Proceeds from sale of assets		408,937			69,450


NET CASH PROVIDED BY INVESTING ACTIVITIES		404,960			1,534


CASH FLOWS FROM FINANCIANG ACTIVITIES:

Payments on long term debt		(4,627	)		(16,051	)
Increase in long term debt — related parties		76,674			416,407
Proceeds from 2007 Regulation S Offering		—			64,000
Dividends paid		—			(27,960	)


NET CASH PROVIDED BY FINANCING ACTIVITIES		72,047			436,396


NET (DECREASE) IN CASH		(3,672	)		(1,157,232	)

CASH AT BEGINNING OF PERIOD		21,714			1,178,946


CASH AT END OF PERIOD	$	18,042		$	21,714


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid for interest	$	242		$	20,855


Cash paid for federal income taxes	$	—		$	—

The accompanying notes are an integral part
of these financial statements

-F-5-

BAYOU CITY EXPLORATION, INC.

NOTES TO FINANCIAL STATEMENTS
December 31, 2008 and 2007

1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

On April 4, 2007, the Company announced the relocation of their corporate headquarters to 632 Adams Street, Suite 700, Bowling Green, Kentucky 42101 in order to decrease overhead, consolidate operations and reduce the number of personnel on staff. This move was completed in May, 2007. The Company’s executive office in the year 2006 was located at 10777 Westheimer, Suite 170, Houston, Texas, 77042. Since relocating the Company’s headquarters to Bowling Green, Kentucky the Company has maintain only the geological contract staff in the Houston office for the continued development and sale of the Company’s prospects until June of 2008 when they eliminated the staff and closed the office.

Basis of Presentation

The Company has suffered recurring losses from operations in recent years. In addition, the Company has yet to generate an internal cash flow from its business operations. These factors raise substantial doubt about its ability to continue as a going concern. (See NOTE 2) The accompanying financial statements do not include any adjustments that might result from the outcome of these risks and uncertainty.

-F-6-

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Recently Issued Accounting Standards

Share-Based Payment: Financial Accounting Standards Board Statement (FASB) 123(R),Share-Based Paymentwas issued in December 2004. This Statement eliminates the alternative to use Opinion 25’s intrinsic value method of accounting that was provided in FASB Statement 123 as originally issued. Under Opinion 25, issuing stock options to employees generally resulted in recognition of no compensation cost. Statement 123(R) requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. This statement is effective for public entities that file as small business issuers as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. This statement was adopted on January 1, 2006 using the modified prospective application. Under this method, only new awards and awards modified, repurchased, or cancelled after the required effective date will be subject to requirements of FAS 123(R). No restatement of prior periods was necessary. The stock based compensation expense recognized in 2006 by the Company was $833,221, which is reflected as a part of the Company’s general and administrative expenses. There was no stock based compensation expense in 2008 or 2007.

In June 2006, the FASB issued Interpretation 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (FIN 48). This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In addition, FIN 48 expands the disclosure requirements concerning unrecognized tax benefits as well as any significant changes that may occur in the next twelve months associated with such unrecognized tax benefits. FIN 48 is effective for fiscal years beginning after December 15, 2006. FIN 48 is not expected to have a significant impact on future financial statements of the Company.

In September 2006, the FASB issued Statement No. 157,Fair Value Measures. This statement defines and establishes a framework for determining fair value and expands disclosures about fair value measurements. This standard does not require new fair value measurements but defines fair value for implementation of other standards that permit or require fair value measurement. This statement is effective for fiscal years beginning after November 15, 2007. This statement is not expected to have a significant impact on future financial statements of the Company.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115. This standard permits fair value measurement of certain financial assets and liabilities in an effort to eliminate volatility of earnings created by current practice. Most of the Statement applies only to companies that elect fair value. However, the amendment to FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. This statement is effective for the first fiscal period beginning after November 15, 2007. This statement is not expected to have a significant impact on future financial statements of the Company.

In April 2005, the FASB issued FSP FAS 19-1Accounting For Suspended Well Costs. The FASB Staff concluded that well costs should continue to be capitalized when the well has found a sufficient quantity of reserves to justify completion as a producing well and the company is making progress assessing reserves and the economic viability of the project. In effect, the Staff concluded that the 1-year period for assessing reserves as proved be waived provided that the two criteria discussed above are consistently met. The FSP was effective for the first interim period beginning after April 4, 2005. This FSP did not have a material impact on the Company’s 2007 or 2008 financial statements.

-F-7-

In July 2005, the FASB issued FSP SOP 78-9-1Interaction of AICPA Statement of Position 78-9 and EITF Issue No. 04-5. The FASB amended SOP 78-9 so that guidance in determining when a general partner controls a limited partnership is consistent with guidance provided in EITF Issue No. 04-5. This FSP was effective after June 29, 2005 for all newly formed partnerships and for the first reporting period after December 15, 2005 for all other partnerships. This FSP did not have a material impact on the Company’s 2006 or 2007 financial statements.

In May 2005, the FASB issued FASB No. 154Accounting Changes and Error Corrections. This statement requires retrospective application to prior periods’ financial statements for changes in accounting principle. Previously, under APB 20, all such changes were recorded as a line item on the statement of operations only in the period of change. This statement is effective for fiscal years beginning after December 15, 2005 and did not have a material affect on the company’s 2006 or 2007 financial statements.

In March 2005, the FASB issued Interpretation 47Accounting for Conditional Asset Retirement Obligations — an Interpretation of FASB 143. This interpretation addresses contingent legal obligations and clarified that uncertainty of timing regarding resolution of a legal obligation does not preclude measurement of the liability at the time it is incurred. The Interpretation is effective for periods ending after December 15, 2005 and did not have a material affect on the company’s 2006 or 2007 financial statements. This does not impact the Company’s accounting for its plugging and abandonment costs.

Revenue Recognition

Under the sales method, oil and gas revenue is recognized when produced and sold. Management fees are recognized under the accrual method and recorded when earned. Prospect fees charged under joint participation agreements are recorded after execution.

Accounts Receivable

Accounts receivable are from oil and gas sales produced and sold during the reporting period but awaiting cash payment, from expenditures paid on behalf of the limited partnerships, from expenditures on behalf of non-operators, including related parties and on oil and gas properties operated by the Company. Based upon a review of trade receivables as of December 31, 2008, a total of $222,000 was considered potentially uncollectible, This compares to $241,000 at December 31, 2007. A reserve for uncollectible receivables was recognized for this amount and is included in abandonment costs of the Company’s 2008 and 2007 statement of operations. Receivables are reviewed quarterly, and if any are deemed uncollectible, they are written off as bad debts.

Managed Limited Partnerships

Prior to 2004, the Company sponsored limited partnerships for which it serves as the Managing General Partner. The Company normally participates for 1% of the Limited Partnerships as the Managing General Partner and accounts for the investment under the equity method. Revenues received and changes in the partnership investment is recorded as oil and gas revenue and net assets, respectively.

Property and Equipment

Property and equipment (other than oil and gas) are stated at cost. Depreciation is recognized on the straight line method, after considering salvage value, over the estimated useful lives of the assets as follows:


Computer Equipment and Software		5 years
Furniture and Fixtures		10 years

-F-8-

The Company follows the successful efforts method of accounting for oil and gas producing activities. Under the successful efforts method of accounting, costs which relate directly to the discovery of oil and gas reserves are capitalized. These capitalized costs include:

	(1)		the costs of acquiring mineral interest in properties,

	(2)		costs to drill and equip exploratory wells that find proved reserves,

	(3)		costs to drill and equip development wells, and

	(4)		costs for support equipment and facilities used in oil and gas producing activities.

These costs are depreciated, depleted or amortized on the unit of productions method, based on estimates of recoverable proved developed oil and gas reserves. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed.

The costs of acquiring unproved properties are capitalized as incurred and carried until the property is reclassified as a producing oil and gas property, or considered impaired as discussed below. The Company annually assesses its unproved properties to determine whether they have been impaired. If the results of this assessment indicate impairment, a loss is recognized by providing a valuation allowance. When an unproved property is surrendered, the costs related thereto are first charged to the valuation allowance, with any additional balance expensed to operations.

The costs of drilling exploration wells are capitalized as wells in progress pending determination of whether the well has proved reserves. Once a determination is made, the capitalized costs are charged to expense if no reserves are found or, otherwise reclassified as part of the costs of the Company’s wells and related equipment. In the absence of a determination as to whether the reserves that have been found can be classified as proved, the costs of drilling such an exploratory well are not carried as an asset for more than one year following completion of drilling. If after a year has passed, and the Company is unable to determine that proved reserves have been found, the well is assumed to be impaired, and its costs are charged to expense. At December 31, 2008, the Company had no costs capitalized pending determination.

Accounting for Asset Retirement Obligations

The Company follows the provisions of Statement of Financial Accounting Standards (SFAS) No. 143,Accounting for Asset Retirement Obligations. SFAS No. 143 requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time that the obligations are incurred. Upon initial recognition of a liability, that cost is capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. Prior to 2005, management determined that any future costs related to plugging and abandonment of producing wells would be substantially offset by the value of equipment removed from the well site and such estimates were immaterial to the financial statements. Therefore, no liability was recorded prior to 2005. Due to continued rising rig and fuel costs, a detailed estimate was made in the second quarter of 2005 to determine how these rising service costs would affect future plugging and abandonment costs. As a result of this analysis, management concluded that a liability should be recorded within the financial statements under the provisions of SFAS 143 and recorded the following during 2005: 1) an asset of $61,000, 2) accumulated amortization and amortization expense of $36,000, 3) a long-term liability of $78,000 and 4) accretion expense of $17,000. These costs are evaluated annually and adjusted accordingly under the guidelines of SFAS 143. As of December 31, 2008 and 2007, the assets have been fully impaired. The balance of the long term liability is $44,000 for each year respectively. There was no accretion expense in either 2008 and 2007. The balance of the liability is for a well operated by another operator. Management believes the liability accrued for future obligation on this well is adequate.

-F-9-

Surrender or Abandonment of Developed Properties

Normally, no separate gain or loss is recognized if only an individual item of equipment is abandoned or retired or if only a single lease or other part of a group of proved properties constituting the amortization base is abandoned or retired as long as the remainder of the property or group of properties continues to produce oil or gas. The asset being abandoned or retired is deemed to be fully amortized, and its cost is charged to accumulated depreciation, depletion or amortization. When the last well on an individual property or group of properties with common geological structures ceases to produce and the entire property or property group is abandoned, gain or loss, if any, is recognized. Abandonment and dry hole costs were $43,000 and $545,000 for the years ended December 31, 2008 and 2007, respectively.

Other Dispositions

Upon disposition or retirement of property and equipment other than oil and gas properties, the cost and related accumulated depreciation are removed from the accounts and the gain or loss thereon, if any, is credited or charged to expense. The Company recognizes the gain or loss on the sale of either a part of a proved oil and gas property or of an entire proved oil and gas property constituting a part of a field upon the sale or other disposition of such. The unamortized cost of the property or group of properties, a part of which was sold or otherwise disposed of, is apportioned to the interest sold and interest retained on the basis of the fair value of those interests.

Impairment of Long-Lived Assets

The Company follows the provisions of SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” Consequently, the Company reviews its long-lived assets to be held and used, including oil and gas properties accounted for under the successful efforts method of accounting. Whenever events or circumstances indicate the carrying value of those assets may not be recoverable, an impairment loss for proved properties and capitalized exploration and development costs is recognized. The Company assesses impairment of capitalized costs, or carrying amount, of proved oil and gas properties by comparing net capitalized costs to undiscounted future net cash flows on a field-by-field basis using known expected prices, based on set agreements. If impairment is indicated based on undiscounted expected future cash flows, then an impairment is recognizable to the extent that net capitalized costs exceed the estimated fair value of the property. Fair value of the property is estimated by the Company using the present value of future cash flows discounted at 10%, in accordance with SFAS No. 69, “Disclosures about Oil and Gas Producing Activities,”

The following expected future prices were used in 2008 and 2007 to estimate future cash flows to assess properties for impairment.


Oil Price Per Bbbl	2008		2007
Year 1	$	45.00	$	96.00
Year 2	$	50.00	$	96.00
Year 3	$	50.00	$	96.00
Year 4	$	50.00	$	96.00
Thereafter	$	50.00	$	96.00
Maximum	$	50.00	$	96.00


Gas Price Per Mcf	2008		2007
Year 1	$	4.25	$	6.44
Year 2	$	4.50	$	7.15
Year 3	$	4.50	$	7.17
Year 4	$	4.50	$	7.17
Thereafter	$	4.50	$	7.17
Maximum	$	4.50	$	7.17

Oil and gas expected future price estimates were based on prices at each year-end. These prices were applied to production profiles of proved developed reserves at December 31, 2008 and 2007.

-F-10-

Income (Loss) Per Common Share

The Company calculates basic earnings per common share (“Basic EPS”) using the weighted average number of common shares outstanding for the period. The income available to common shareholders is computed after deducting dividends on the Series E Preferred Stock. The convertible preferred stock and outstanding stock warrants are considered anti-dilutive and therefore, excluded from the earnings per share calculations. As the Company recorded a loss in 2008 and 2007, common share equivalents outstanding would be anti-dilutive, therefore, have not been included in the weighted average shares outstanding.

The following table provides the numerators and denominators used in the calculation of Basic EPS for the years ended December 31, 2008 and 2007:


	2008			2007
Loss from operations	$	(175,000	)	$	(1,464,000	)
Less preferred stock dividends		-0-			(28,000	)


Loss available to common stockholders	$	(175,000	)	$	(1,492,000	)


Common stock outstanding for the full year		26,653,633			26,276,943

Weighted average of private stock issuance and exercise of stock warrants and stock options		-0-			32,783


Weighted average common shares outstanding		26,653,633			26,309,726

Stock Options

Effective January 1, 2006, the Company accounts for stock options in accordance with revised Statement of Financial Accounting Standards (SFAS) No. 123,Share-Based Payment(SFAS 123(R)). Accordingly, stock compensation expense has been recognized in the statement of operations based on the grant date fair value of the options for the period ended December 31, 2006. Prior to January 1, 2006, the Company accounted for stock compensation cost in accordance with Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, (APB 25) as permitted by SFAS 123 as originally issued.

Under APB 25, stock compensation expense was recognized only if the options had intrinsic value (difference between option exercise price and the fair market value of the underlying stock) at the date of grant. As the Company issued all options with an exercise price equal to the grant date market value of the underlying stock, no compensation expense had previously been recorded by the Company.

The Company has used this method in determining the expected term of all options. The Company has several awards that provide for graded vesting. The Company recognizes compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The amount of compensation expense recognized at any date is at least equal to the portion of the grant date value of the award that is vested at that date.

-F-11-

Concentrations of Credit Risk Arising From Cash Deposits in Excess of Insured Limits

The Company maintains its cash balances in two financial institutions located in Houston, Texas and Bowling Green, Kentucky. The balances are insured by the Federal Deposit Insurance Corporation for up to $250,000. At December 31, 2008 all cash balances were under $250,000.

Advertising

The Company expenses advertising costs as these are incurred. For the year ended December 31, 2007, these costs are included in the statement of operations as marketing costs. There were no advertising costs incurred in 2008.

Income Taxes

There is no provision for income taxes for the years ended December 31, 2008 and 2007. Income taxes are provided for under the liability method in accordance with SFAS No. 109, “Accounting for Income Taxes,” which takes into account the differences between financial statement treatment and tax treatment of certain transactions. It is uncertain as to whether the Company will generate sufficient future taxable income to utilize the net deferred tax assets, therefore for financial reporting purposes, a valuation allowance of $3,960,000 and $3,647,000 has been recognized to offset the net deferred tax assets at December 31, 2008 and December 31, 2007, respectively. See Note 9 for additional information.

2. GOING CONCERN AND MANAGEMENT’S PLANS

The Company has continued to incur recurring losses from operations and has not generated an internal cash flow from its business operations in recent years. The Company’s operations in 2008 were financed mainly from previous years cash reserves, loans from related parties, and the sale of assets. The Company’s operations prior to 2008 have been financed mainly from the sale of equity interest in the Company with proceeds from the sale of common stock, common warrants, and common stock options and loans from related parties. Given the Company’s current cash position, its obligations in trade payables and loans from related parties, and the uncertainty of additional future cash proceeds from the sale of equity interests in the Company there now exists substantial doubt about the Company’s ability to continue as a going concern.

The Company’s financial statements have been presented on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The independent registered public accounting firm’s report on our financial statements as of and for the year ended December 31, 2008 and 2007 includes an explanatory paragraph that states that the Company has experienced recurring losses from operations without establishing a sufficient ongoing source of revenues that raises a substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. For the years ended December 31, 2008 and 2007 our statement of operations reflects a net loss from continued operations of $175,000 and 1,464,000, respectively.

The Company’s ability to meet future cash and liquidity requirements is dependent on a variety of factors, including our ability to raise more capital, successfully negotiate extended payment terms with our creditors and holders of the Company’s notes payable and the implementation of a restructuring plan for the Company. The presence of the going concern note may have an adverse impact on our relationship with third parties such as potential investors. If we are unable to continue as a going concern we would have to liquidate our remaining assets, if any. This would have a material adverse effect on a stockholder’s investment in the Company.

Management’s plans with regard to these matters include the following actions: 1) attempting to obtain funding from the issuance of new debt or equity instruments, 2) implementing a plan to generate additional operating income sufficient to cover ongoing re-occurring operating costs, and 3) restructuring or negotiating settlements on third party liabilities. The Company’s

-F-12-

continued existence is dependent upon its ability to accomplish these objectives. However, the outcome of management’s plans cannot be ascertained with any degree of certainty. The accompanying financial statements do not include any adjustments that might result from the outcome of these risks and uncertainties.

3. SALE OF MCALLEN WEST PROSPECT

In February, 2008 the Company successfully sold its McAllen West Prospect and received proceeds of $358,000, plus retained a term royalty deed for 12% interest for a period of seven years and as long as production continues from the property. If there is no production at the end of seven years or the production subsequently ceases from the property the term royalty deed interest shall terminate. The Company recognized a gain of $58,000 on the sale of its McAllen West Prospect.

4. RELATED PARTY TRANSACTIONS

A. Common Stock Transactions

As of December 31, 2008, there are 26,653,633 shares of common stock issued and outstanding. A total of 3,638,371 shares are held by Blue Ridge Group, Inc., a related company, and the remaining 23,015,262 shares are held by approximately 600 shareholders of record.

B. Payables and Notes Payable to Related Parties.

As of December 31, 2008 and December 31, 2007 the Company had the following debts and obligations to related parties:


	December 30, 2008		December 31, 2007
Trade payable to BR Group	$	3,000	$	3,000
Payable to BR Group for proceeds from sale of asset		-0-		23,000
Drilling Advances payable to Gulf Coast Drilling Co.		104,000		154,000
Payable to minority shareholders for operating capital		85,000		85,000
Note payable to BR Group		123,000		123,000
Line of Credit payable to BR Group for operating capital		393,000		316,000
Note payable to Peter Chen — a minority shareholder		100,000		100,000
Accrued Interest		55,000		18,000


Total Payable or Notes Payable to Related Parties	$	863,000	$	822,000

The promissory note payable to BR Group was originally entered into October 1, 2004, for $500,000 to settle outstanding cash advances received from BR Group during prior periods. The note bears interest at 7.95% and is payable in full on or before July 17, 2009. The note is secured by all oil and gas production income that the Company holds until the note has been paid in full. The Company has failed to make the monthly payments on the note since February, 2007. The accrued interest amount includes the unpaid interest on this note as of December 31, 2008 in the amount of $20,000.

The line of credit payable to BR Group was executed by the Company on July 17, 2008, in the amount of $500,000 to finance the Company’s operations. The line of credit provides for interest at the rate of 8% per annum on the unpaid outstanding balance and is due upon demand. If no demand for payment is made by BR Group, the line of credit balance plus all accrued unpaid interest is due July 17, 2009. The balance of the line of credit was $393,000 and $316,000 for the years ended December 31, 2008 and 2007 respectively. The accrued interest amount includes the unpaid interest on this line of credit in the amount of $34,000 and $10,500 as of December 31, 2008 and 2007, respectively.

-F-13-

During the 2^nd and 3^rd quarters, 2007, a minority shareholder loaned the Company $85,000 to finance the Company’s operations. No loan documents were executed.

During the 4^th quarter, 2007, Peter Chen, a minority shareholder loaned the Company $100,000 to finance the Company’s operations. The Company executed a promissory note on October 4, 2007, the note is due on demand and bears an interest rate of 0%.

On August 1, 2006, the Company sold 18.75% of its original 25% carried interest in the Neches Townsite prospect to BRG in exchange for a reduction of $198,188 in the note payable balance to BR Group. This value was determined based upon 18.75% of the estimated drilling costs of the King #1 well. The King Unit #1 well was drilled on the Neches Townsite prospect and was a dry hole. As of December 31, 2008 and 2007, the Company owed Gulf Coast Drilling Company (an affiliate of BR Group) $104,000 and 154,000, respectively, in drilling advances received for the King Unit #1 well that were in excess of BR Group’s participation interest in the well.

As of December 31, 2008 and 2007, the Company had a trade payable due to BR Group in the amount of $3,000.

5. PROPERTY AND EQUIPMENT

Property and equipment, stated at cost, consisted of the following:


	December 31
	2008			2007
Proved oil and gas properties	$	98,000		$	84,000
Investment in partnerships		21,000			21,000
Unproved oil and gas properties		-0-			338,000
Furniture and computer equipment		-0-			358,000

Total property and equipment	$	119,000		$	801,000

Less accumulated depletion, depreciation and amortization		(113,000	)		(306,000	)
Less impairment		—			—


Net property and equipment	$	6,000		$	495,000

Depreciation, depletion and amortization expense was $33,000 and $67,000 during the years ended 2008 and 2007, respectively.

During 2008 and 2007, the Company provided for impairment, abandonment and dry hole costs of $28,000 and $292,000, respectively. The 2008 amount was for abandonment of undeveloped properties. The 2007 amount was includes $51,000 for abandonment of oil and gas properties and $241,000 reserve for uncollectable receivable from joint owners related to plugging and abandonment expenses on wells.

6. SEISMIC LICENSE

The Company entered into a “lifetime participation” membership in the Echo 3-D Gulf Coast, Permian Basin, Rocky Mountain and Mid- Continent Programs on July 1, 2004. There are 56 3-D data sets and 13,000 miles of 2-D data available for use in generating drilling prospects. The Board is considering various options to fully exploit this dataset for the greatest benefit to the Company.

-F-14-

This seismic license and any related “prospecting costs” such as geological and geophysical (G&G) consulting and G&G studies are defined as Exploration Costs under FASB Statement 19 and such expenditures are to be expensed as incurred. During 2008 and 2007, $15,000 and $253,000, respectively, was incurred for exploration costs and charged to expense.

7. OPERATING LEASE

The Company entered into an operating lease for its administrative office in Houston, Texas on April 1, 2003. The lease expired on June 30, 2008 and was not renewed. Total rental expense was approximately $58,000 for 2008 and $116,000 for 2007.

8. INCOME TAXES

The tax effect of significant temporary differences representing the net deferred tax liability at December 31, 2008 and 2007 were as follows:


	2008			2007
Net operating loss carry forward	$	3,647,000		$	3,067,000
Intangible drilling costs		-0-			(419,000	)
Depletion, depreciation and amortization		(3,000	)		416,000
Impairment of property		-0-			267,000
Stock based compensation		316,000			316,000
Valuation allowance		(3,960,000	)		(3,647,000	)

Net deferred tax liability	$	—		$	—

The Company recorded $-0- as income tax expense for the years ended December 31, 2008 and 2007, as a result of the net loss recognized in each of these years. Further, an income tax benefit was not recognized in either of the years due to the uncertainty of the Company’s ability to recognize the benefit from the net operating losses and, therefore, has recorded a full valuation allowance against the deferred tax assets.

The benefit for income taxes is different from the amount computed by applying the U.S. statutory corporate federal income tax rate to pre-tax loss as follows:


	2008						2007
	Amount			Percent			Amount			Percent
Income tax benefit computed at the statutory rate	$	59,000			34.0	%	$	497,000			34.0	%
Increase (reduction) in tax benefit resulting from:
State and local income taxes, net of federal tax effect		7,000			4.0	%		59,000			4.0	%
Adjustment for prior year book to tax changes		(32,000	)		(38.0)	%		(128,000	)		(38.0)	%
Permanent items		—			(0.0)	%		(1,000	)		(0.1)	%
Valuation allowance		(34,000	)		(38.0)	%		(427,000	)		(37.9)	%

Income tax benefit	$	—			—		$	—			—

The Company has an estimated net operating loss carry forward of $9,421,000 and $8,804,000 as of December 31, 2008 and 2007 respectively. These net operating loss carry forwards will begin expiring in 2017 unless utilized sooner. Under Internal Revenue Code (IRC) Section 382, a change in ownership occurred on December 31, 2004 with the issuance of the additional shares from the private stock placement. As of December 31, 2004, the net operating loss (NOL) carry forward amount was $3,341,000. The Section 382 rule will limit the use of this December 31, 2004 NOL carry forward to $267,000 per year.

-F-15-

9. COMMITMENTS AND CONTINGENCIES

Commitments

The Company has liabilities to various vendors with past due amounts including a judgment against it for $23,000 and an active lawsuit against it for $55,000. These liabilities are recorded in the financial statements in accounts payable. Unless the Company secures additional funds from additional debt or equity instruments the Company will not be able to meet the timely payment of its liabilities. The Company also has significant payments for notes payable due in 2009 it is currently unable to pay. All the Company notes payable will mature and be due in full during the year 2009. The Company will seek to renegotiate and extend the term of its existing notes payable but may be unable to negotiate revised due dates for its various debt obligations. This may result in collection litigation and potential future judgments against the Company. Other than the potential claims from vendors and the current lenders of the Company’s notes payable, neither the Company nor any of its properties is subject to any material pending legal proceedings.

Contingencies

The Company’s oil and gas exploration and production operations are subject to inherent risks, including blowouts, fire and explosions which could result in personal injury or death, suspended drilling operations, damage to or destruction of equipment, damage to producing formations and pollution or other environmental hazards. Previously the Company was an operator of oil and gas wells and carried general and umbrella liability insurance coverage of approximately $10 million per occurrence and in the aggregate to protect against these hazards. This coverage was in place through June, 2007, but the policies have now been cancelled due to expense of the policies, the lack of Company cash flow, the Company’s decision to no longer be an operator of oil and gas wells, and the plugging and abandoning of all wells operated by the Company. At the time of this filing the Company is not insured for public liability and property damage to others with respect to its operations, except to the extent the Company may be covered as a non-operator in specific wells through the liability insurance policies of other operators.

The Company had employment contracts with two employees and one independent contractor whose services were terminated effective April 1, 2007. All employment and consulting agreements are with employees no longer associated with the Company. No releases have been obtained but no action has been taken by any parties. The ultimate outcome of these contracts is unknown at this time.

10. STOCKHOLDERS’ EQUITY

Authorization to Issue Shares — Preferred and Common

The Company is authorized to issue two classes of stock that are designated as common and preferred stock. On October 8, 2004, a Special Meeting of Stockholders was held requesting the approval of an Amendment to the Company’s Articles of Incorporation to increase the authorized shares of Common Stock from 20,000,000 shares to 150,000,000 shares. The amendment was approved at the Special Meeting of Stockholders. As of December 31, 2008, the Company was authorized to issue 155,000,000 shares of stock, 150,000,000 being designated as common stock and 5,000,000 shares designated as preferred stock.

Series E Preferred Stock

In June 2002, the Company authorized the issuance and sale of 750,000 shares of Series E Preferred Stock, which has a par value of $0.001 per share at $10.00 per share. The Series E Preferred Stock bears a 12% per annum dividend payable quarterly and a participating dividend equal to 3% of the net profits from the oil and gas properties acquired with the proceeds of the offering, also payable quarterly. The proceeds from the offering, after deducting expenses, were used to drill three dry holes in September 2002, October 2002 and February 2003; therefore, no participating dividends will be payable to stockholders. Each share of the Series E Preferred Stock shall be converted automatically into five shares of common stock five years after the closing

-F-16-

of the offering, or at such time as the Company’s registered common stock has traded at $12.50 per share average for a 30 day period, but in any event no earlier than three years after the final closing of the offering, which was December 31, 2002. As of December 31, 2007, the 23,300 shares of preferred stock were automatically converted into 116,500 shares of common stock as per the terms of the original offering.

Stock Options

On August 8, 2001, the shareholders of the Company approved the Blue Ridge Energy Stock Option Plan (the 2001 Plan) which allows for the granting of stock options to eligible employees and directors. The stock option plan originally authorized the issuance to officers, directors, and key employees of up to 1,000,000 options to purchase shares of common stock at the fair value of the common stock on the date of grant. These options generally become exercisable 33% annually beginning on the date of grant and expire not later than ten years from the date of grant. The 2001 Plan allows for the options available for granting to increase at 10% of the additional shares outstanding. In 2002, the available stock options were increased by 144,580 shares when there was an increase in common shares issued. The Non-U.S. Regulation S Offering in 2004 increased the authorized stock option grants by another 1,375,000 under the plan’s provisions. The requisite service has been provided under the 2001 Plan. Grants and the shares available under the plan have been consolidated into the “Blue Ridge Energy, Inc. 2005 Stock Option and Incentive Plan” (the 2005 Plan).

On February 22, 2005, the Board of Directors adopted the 2005 Plan, the purposes of which are to (i) attract and retain the best available personnel for positions of responsibility within the Company, (ii) provide additional incentives to employees of the Company, (iii) provide directors, consultants and advisors of the Company with an opportunity to acquire a proprietary interest in the Company to encourage their continuance of service to the Company and to provide such persons with incentives and rewards for superior performance more directly linked to the profitability of the Company’s business and increases in shareholder value, and (iv) generally to promote the success of the Company’s business and the interests of the Company and all of its stockholders, through the grant of options to purchase shares of the Company’s Common Stock and other incentives. Incentive benefits granted hereunder may be either Incentive Stock Options, Non-qualified Stock Options, stock awards, Restricted Shares, cash awards or other incentives determined by the board, as such terms are hereinafter defined. The types of options or other incentives granted shall be reflected in the terms of written agreements. Subject to adjustments upon changes in capitalization or merger, the maximum aggregate number of shares which may be optioned and sold or otherwise awarded under the 2005 Plan is seven million (7,000,000) common shares which includes options previously granted under the 2001 Plan. Any common shares available for grants and awards at the end of any calendar year shall be carried over and shall be available for grants and awards in the subsequent calendar year. The Board of Directors has all power to administer the 2005 Plan and is the body responsible for the Plan. Generally, awards of options under the 2005 plan vest immediately or on a graded basis over a 5 year term. The maximum contractual period of options granted is 10 years. The 2005 Plan will terminate on February 22, 2015. As of December 31, 2008, approximately 3,900,000 shares are available for grant. Issuance of common stock from the exercise of stock options will be made with new shares from authorized shares of the Company.

There were no stock options granted during the year 2008 or 2007.

At December 31, 2008, there were options, fully vested and expected to vest, to purchase 3,068,750 shares with a weighted average exercise price of $0.428, an intrinsic value of $0.00 and a weighted average contractual term of 1.786 years.

At December 31, 2007, there were options, fully vested and expected to vest, to purchase 3,068,750 shares with a weighted average exercise price of $0.428, an intrinsic value of $0.00 and a weighted average contractual term of 2.786 years.

At December 31, 2008, there were options, fully vested and currently exercisable, to purchase 3,068,750 shares with a weighted average exercisable price of $0.428, an intrinsic value of $0.00 and a weighted average contractual term of 1.786 years.

At December 31, 2007, there were options, fully vested and currently exercisable, to purchase 3,068,750 shares with a weighted average exercisable price of $0.428, an intrinsic value of $0.00 and a weighted average contractual term of 2.786 years.

-F-17-

At December 31, 2008 and 2007, there was $0 in unrecognized stock-based compensation costs related to non-vested stock options.

For the years ended December 31, 2008 and 2007 there was $0 stock based compensation expense.

When calculating stock-based compensation expense the Company must estimate the percentage of non-vested stock options that will be forfeited due to normal employee turnover. Since its adoption of SFAS 123(R) on January 1, 2006, the Company initially used a forfeiture rate of 20% and increased its forfeiture rate to 50% during the third quarter 2006. This was due to the Company experiencing a number of resignations of senior management personnel, each of whom had been awarded options which, in many cases, had not vested and therefore will be forfeited. In the future the Company will use an appropriate estimate for the forfeiture rate at the time of options the being granted, if any.

The Company did not record any tax benefit for stock based compensation expense in accordance with its current policy on providing for a full income tax valuation allowance more fully explained in the “Income Taxes” note below.

The following table provides a summary of the stock option activity for all options for the year ended December 31, 2008.


	Number of		Options Exercise
	Weighted Average		Price

Options at December 31, 2007		3,068,750	$	0.428

Options expired		-0-


Options at December 31, 2008		3,068,750	$	0.428


Options exercisable at December 31, 2008		3,068,750		0.428

-F-18-

There were no stock option grants made during the years ended December 31, 2008 or 2007.

Common Stock Warrants

In 2006, there were 110,000 US Exempt Offering warrants issued and 315,000 Regulation S Offering warrants issued. None of the US Exempt Offering or Regulation S Offering warrants were exercised during 2008 or 2007. These warrants expired on June 30, 2008.

In 2006, the Company issued 52,500 warrants under the Regulation S offering. Each warrant granted the holder the right to purchase one share of the Company’s common stock at a price of $2.00 at any time up to two years from the date of issuance of the warrant. None of the 2006 Regulation S Offering warrants were exercised during 2008 or 2007. These warrants expired on August 31, 2008.

The following table discloses warrants issued and outstanding as of December 31, 2008. All warrants expire at the end of the exercisable period. These warrants have not been registered with the SEC and accordingly, are restricted from sale under Rule 144 or Regulation S.


	AGGREGATE AMOUNT
TITLE OF	OF SECURITIES	DATE FROM	PRICE AT	ISSUED IN
ISSUE OF	CALLED FOR BY	WHICH WARRANTS	WHICH WARRANTS	CONNECTION WITH
SECURITIES	WARRANTS	ARE EXERCISABLE	ARE EXERCISABLE	WARRANTS ISSUED

Series K Stock Warrants	110,000 Warrants	Expired June 30, 2008	N/A	2005 US Exempt Offering

Series L Stock Warrants	315,000 Warrants	Expired June 30, 2008	N/A	2005 Regulation S Offering

Common Stock Warrants	52,500 Warrants	Expired August 31, 2008	N/A	2006 Regulation S Offering

11. SUBSEQUENT EVENTS:

During February and March of 2009, the Company is in the process of negotiating settlements with many of it’s third party creditors. The Company has settled with some creditors and is still in negotiations with several others. The Company believes a settlement will be obtained in most cases by the end of the second quarter of 2009 but has no estimate of the total savings at this time.

-F-19-

BAYOU CITY EXPLORATION, INC.
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED)

Costs Incurred in Oil and Gas Acquisition, Exploration and Development Activities:


	December 31
	2008		2007
Acquisition of properties
Proved	$	—	$	—
Unproved		—		60,000
Exploration costs		15,000		253,000
Development costs		—		—

Total oil and gas acquisitions	$	15,000	$	313,000

Capitalized Costs of Oil and Gas Properties:


	December 31
	2008			2007
Proved oil and gas properties	$	98,000		$	84,000
Investment in partnerships		21,000			21,000
Unproved oil and gas properties		—			338,000

Total oil and gas properties		119,000			443,000
Less accumulated depreciation, depletion and amortization		(113,000	)		(107,000	)

Net oil and gas properties	$	6,000		$	336,000

Results of Operations from Oil and Gas Producing Activities:


	December 31
	2008			2007
Oil and gas sales	$	277,000		$	36,000
Oil and gas sales from partnerships		11,000			14,000
Production costs		(21,000	)		(38,000	)
Accretion Expense		—			—
Exploration, abandonment and dry hole expenses		(43,000	)		(545,000	)
Depreciation, depletion and amortization and valuation provision		(5,000	)		(7,000	)

Net operating loss from oil and gas activity before income taxes		219,000			(540,000	)
Income tax effect		—			—

Results of operations from oil and gas producing activities (excluding corporate overhead and financing cost)	$	219,000		$	(540,000	)

F-20

Proved Oil and Gas Reserve Quantities

The following table present estimates of the Company’s proved oil and gas reserves. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, the estimates are expected to change as future information becomes available. All of the Company’s reserves reported below are located in the United States. Proved reserves are estimated reserves of crude oil (including condensate and natural gas liquids) and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those expected to be recovered through existing wells, equipment and operating methods. At the end of December 2008 the Company choose not to get a reserve report due to the fact that the only remaining property the Company has is the Pedigo and remaining reserves are deemed to be immaterial and thus shown as zero below.


	Oil (Bbls)			Gas (Mcf)
Reserves, December 31, 2007		24,286			1,089,000
Revisions		—			—
Sale of minerals in place		(24,286	)		(1,083,000	)
Discoveries and extensions		—			—
Production		—			(6,000	)

Reserves, December 31, 2008		-0-			-0-

Proved developed reserves

December 31, 2007		—			6,000

December 31, 2008		—			—

-F-21-

Standardized Measure of Discounted Future Net Cash Flows

The following table presents the standardized measure of discounted future net cash flows relating to proved oil and gas reserves in accordance with SFAS No. 69:


	December 31
	2008		2007
Future cash inflows	$	—	$	10,136,000
Future development costs		—		(69,000	)
Future production costs		—		(754,000	)
Future income taxes		—		(3,166,000	)

Future net cash flows	$	—	$	6,147,000
10% annual discount for estimated timing of cash flow		—		(2,403,000	)

Standardized measure of discounted future net cash flows	$	—	$	3,744,000


	December 31
	2008		2007
Changes in standardized measure of discounted future net cash flows:
Standardized measure of discounted future net cash flows (beginning)	$	—	$	3,149,000
Sales of oil and gas, net of production costs		—		(12,407	)
Net changes in prices, net of production cost		—		941,894
Revisions of previous quantity estimates		—		(130,366	)
Change in future income taxes		—		(199,000	)
Accretion of discount		—		—
Discoveries and extensions, net of production and development costs		—		—
Sales of reserves in place		—		(17,121	)
Changes in future development costs		—		12,000
Development costs incurred during the period that reduced future development costs		—		—
Changes in production rates and other		—		—

Standardized measure of discounted future net cash flows (ending)	$	—	$	3,744,000

The standardized measure of discounted future net cash flows is computed by applying year-end prices of oil and gas (with consideration of prices changed only to the extent provided by contractual arrangements) to the estimated future production of proved oil and gas reserves, less estimated future expenditures (based on year-end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax expenses (based on year-end statutory tax rates, with consideration of future tax rates already legislated) to be incurred on pretax net cash flows less tax basis of the properties and available credits, and assuming continuation of existing economic conditions. The estimated future net cash flows are then discounted using a rate of 10 percent a year to reflect the estimated timing of the future cash flows.

-F-22-

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

Bayou City Exploration (BYCX) Inactive 10-K2008 FY Annual report

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