TEXAS VANGUARD OIL CO - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2001 Commission File No. 1-10437

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from to Commission File No. 1-10437

TEXAS VANGUARD OIL COMPANY
(Exact name of registrant as specified in its charter)
Texas 74-2075344
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

9811 Anderson Mill Rd., Suite 202
Austin, Texas 78750
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code (512) 331-6781

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class: None

Name of each exchange of which registered: Not applicable

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $.05 Par Value
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X or No ___.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]

As of March 9, 2002, there were 1,417,087 shares of the registrant's Common
Stock outstanding; the aggregate market value of the share of Common Stock
held by non-affiliates of the registrant (316,572 shares), based on average
bid and asked prices on the aforesaid date, was $943,385.00.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant's definitive proxy statement regarding the election of directors
at the registrant's 2001 Annual Stockholders' Meeting filed or to be filed with
the Commission on or before April 30, 2002, has been incorporated by reference
in Part III of this report.

PART I

ITEM 1. BUSINESS

General

Texas Vanguard Oil Company (the "Company" or "Registrant") was incorporated
under the laws of the state of Texas on December 4, 1979. The business of the
Company is to engage in the acquisition, exploration, development, and
operation of onshore oil and gas properties in the United States, principally
in Texas. In April 1980, the Company completed a public offering of its
securities netting approximately $1,250,000 from the sale of 1,500,000 shares
of common stock to the public.

The Company engages in oil and natural gas exploration, development and
production in Texas, New Mexico, and Wyoming. Generally, the Company
acquires operated working interests in producing oil and natural gas
properties which it further develops.

The executive offices of the Company are located at 9811 Anderson Mill Rd.,
Suite 202, Austin, Texas 78750 and its telephone number is (512) 331-6781.

Markets for Oil and Gas

The market for the Company's primary products, oil and gas, depends upon a
number of factors, including the availability of other domestic production,
crude oil imports, the proximity and size of oil and gas pipelines and general
fluctuations in the supply and demand for oil and gas. At present, the Company
sells all of its production to traditional industry purchasers,such as pipeline
and crude oil companies, who have the facilities to transport the oil and gas
from the well site. The Company has recorded revenues in excess of 10% of total
revenue from Aquila Southwest (15% in 2001 and 18% in 1999), Duke Energy/GPM
(39% in 2001, 36% in 2000 and 33% in 1999), Scurlock Permian (18% in 1999),
EOTT Energy (23% in 2000 and 22% in 1999) and Plains Marketing (32% in 2001
and 25% in 2000). The Company does not believe that the loss of major
customers would have a material adverse effect on the Company because oil
production can be sold to any other oil company at a comparable price. Oil
sales are not made under a written contract and the purchaser and price are
not specified in the division order for subject properties. The nature of the
Company's business is not seasonal except to the extent that adverse weather
conditions could affect oil and gas exploration and production activities.
The Company currently has no intention of refining or marketing its own oil
and gas. Since the Company engages independent contractors for the drilling
of any wells, it does not plan to own any significant amount of drilling
equipment. The Company does not contemplate any material product research
and development, any material acquisition of plants or equipment, or any
material changes in its number of employees in the near future.

Competition

The oil and gas industry is highly competitive in all aspects. The Company
competes with major oil companies, numerous independent oil and gas producers,
individual proprietors, and investment programs. Many of these competitors
possess financial and personnel resources substantially in excess of those which
are available to the Company and may, therefore, be able to pay greater amounts
for desirable leases and to define, evaluate, bid for, and purchase a greater
number of potential producing prospects than the Company's own resources permit.
The Company's ability to generate resources will depend not only on its ability
to develop existing properties, but also on its ability to identify and acquire
proven and unproven acreage and prospects for future exploration.

Environmental Matters

The Company's operations are subject to numerous federal, state and local
laws and regulations controlling the discharge of materials into the environment
or otherwise relating to the protection of the environment. Such matters have
not had a material effect on operations of the Company to date, but the Company
cannot predict whether such matters will have any material effect on its capital
expenditures, earnings or competitive position in the future.

Regulations

The production and sale of crude oil and natural gas are currently subject to
extensive regulation of both federal and state authorities. At the federal
level, there are price regulations, windfall profits tax, and income tax laws.
At the state level, there are severance taxes, proration of production, spacing
of wells, prevention and clean-up of pollution and permits to drill and produce
oil and gas. Although compliance with their laws and regulations has not had a
material adverse effect on the Company's operations, the Company cannot predict
whether its future operations will be adversely affected thereby.

Employees

At December 31, 2001, the executive officers and directors were as follows:

Name Offices Held

Robert N. Watson, Jr. President, Chairman of the
Board, Chief Executive Officer
and Director

Linda R. Watson Secretary, Treasurer and
Director

Robert L. Patterson Director

Robert N. Watson, Jr. (age 59), received his B.A. and B.B.A. degrees from
The University of Texas at Austin in 1966 and 1967. He is a director and
President of Robert Watson, Inc., an oil and gas and real estate development
firm, which he founded in 1969. He has been a director of the Company and its
Chief Executive Officer since 1982.

Linda R. Watson (age 58), received her B.A. degree from The University of
Texas at Austin in 1966. She has been a director and Secretary-Treasurer of
Robert Watson, Inc. for more than the last five years. Also, she is the wife of
Robert N. Watson, Jr.

Robert L. Patterson (age 62), received his B.S. and M.S. degrees from The
University of Texas at Austin in 1963 and 1964. He was employed by Union Oil
Company of California from 1965 through 1975, serving in various engineering
capacities. He was a Vice President of Argonaut Energy Corporation from 1976
through 1982. He was the President of Medallion Equipment Corporation and
President of Argonaut Energy Corporation from July, 1985 through January, 1989.
He has also been an independent consulting petroleum engineer since 1983.

The Company's officers actively manage the Company's activities. There are
no employment contracts with any officers. At December 31, 2001, the Company
had three full-time salaried employees. From time to time the Company engages
independent petroleum engineers, geologists and landmen on a fee basis.
Robert Watson is a director of a company as previously described which has
oil and gas interests. Due to this situation a conflict of interest may arise.
However, there have been no such conflicts in the past five years.

ITEM 2. PROPERTIES

The Company owns no significant properties other than oil and gas properties.
It leases approximately 2,000 square feet of space for its executive offices at
9811 Anderson Mill Rd., Suite 202, Austin, Texas 78750. The Company currently
has a one year lease with a company owned by the President of the Company for
these facilities which will expire on June 30, 2002. The rent for these
facilities is $1,800 per month which is the same as would be charged to an
unaffiliated party.

Well Activity

All of the Company's oil and gas working and royalty interests, reserves and
activities are located onshore in the continental United States. The following
table sets forth the acquisition activity of the Company, for the years ended
December 31, 1997 through 2001.

Fiscal years Oil Gas Dry
ended
December 31, Gross Net Gross Net Gross Net

1997 30 17.72 1 1.11 --- ---
1998 34 22.22 23 15.12 --- ---
1999 38 32.61 5 3.91 --- ---
2000 26 18.45 0 1.22 --- ---
2001 3 9.46 2 2.31 --- ---

(1) A gross well is a well in which the Company has an interest.

(2) A net well is 100% of the working interest in a well. If the Company has
a 12.5% working interest in a well, .125 is shown in the net well column.

(3) A dry well is a well found to be incapable of producing oil or gas in
sufficient quantities to justify completion of the well.

(4) In 1997 and 2000, the net gas interest is larger than the gross gas
interest because the Company purchased additional interests in gas
wells in which it already owned an interest.

(5) In 2001 the net oil and gas interest is larger than the gross oil and
gas interest because the Company purchased additional interest in oil
and gas wells in which it already owned an interest.

The Company is not obligated to provide a fixed and determinable quantity of
oil or gas in the future under existing contracts or agreements.

Significant Properties

Over the past three years, the Company has made investments in proven oil
and gas properties that in the aggregate have been significant to the Company.
None of the individual properties has cost more than 15% of the average
balance in oil and gas properties at the time of purchase. These investments
have been made in different fields and areas, primarily in south and west
Texas. At December 31, 2001, the Company does not have any single property
that is significant enough to materially affect its operations.

As of December 31, 2001, the Company has pledged its interest in certain
properties and well equipment against bank notes payable. None of the
individual properties are significant. Copies of the loan documents have
been included as an exhibit to the Form 10-K.

Production Wells and Acreage

The following table sets forth by Texas, Wyoming, and New Mexico counties
the Company's gross and net productive wells and developed acreage as of
December 31, 2001.

Producing Wells (a) Developed
Oil Gas Acreage (a)
County Gross Net Gross Net Gross Net

Bastrop (b) 82 60.19 41 32.99 2,453.85 1,856.70
Burleson 2 1.27 --- --- 1,258.66 617.28
Chaves (c) --- --- 1 .50 160.00 80.00
Crane (b) 9 7.86 3 .97 240.00 98.45
DeWitt (b) --- --- 2 .16 160.00 12.43
Eastland (b) --- --- 4 .09 122.00 1.30
Fayette (b) 11 10.06 --- --- 1,653.49 1,533.49
Garza (b) 3 .05 --- --- 30.00 .47
Howard (b) 1 .02 --- --- 40.00 .63
Kent (b) 9 .66 --- --- 360.00 26.50
Lea (b)(c) 2 --- 1 .07 400.00 22.25
Lee (b) 109 73.88 4 2.91 2,559.41 1,778.30
Lipscomb 1 .03 --- --- 80.00 2.50
Martin 2 1.82 --- --- 120.00 112.78
Midland 1 .02 --- --- 80.00 1.67
Nolan (b) 1 .03 --- --- 40.00 1.25
Parker (b) --- --- 1 .01 136.91 .83
Pecos 1 .70 --- --- 40.00 28.00
Ward --- --- 2 .16 720.00 29.20
Washington 1 1.00 --- --- 80.00 80.00
Weston (d) 3 .90 --- --- 120.00 36.17
Wilson (b) 1 .95 --- --- 80.00 76.00
------ ------- ----- ----- -------- --------
239 159.44 59 37.86 10,934.32 6,396.20

(a) A gross well is a well in which the Company owns a working interest. A
net well is the fractional interest owned by the Company. Gross acres are
the total acres in a lease. Net acres are gross acres times the Company's
interest.
(b) The Company owns overriding royalty interest in these counties.
(c) The Chaves, Eddy and Lea County wells are located in New Mexico.
(d) Weston County wells are located in Wyoming.

Reserve Quantity Information

For information required by Statement of Financial Accounting Standards No.
69, "Disclosures About Oil and Gas Producing Activities," see the "Supplemental
Oil and Gas Information" section included in Item 8. This section also includes
estimates of proven oil and gas reserves.

OIL AND GAS STATISTICS

The following summarizes the net oil and gas production, average sales prices
and production costs per unit for the years ended December 31, 2001, 2000
and 1999.

2001 2000 1999
Oil:
Production volume (barrels) 79,705 82,328 60,668
Average sales price per barrel $ 23.90 27.73 17.14
Gas:
Production volume (MCF) 562,341 597,100 635,687
Average sales price per MCF $ 4.04 2.89 1.87

Average production costs per
equivalent barrel $ 19.80 13.37 7.16

The worldwide crude oil prices of 2001 continue to fluctuate in 2002.
The Company cannot predict how prices will vary during 2002 and what
effect they will ultimately have on the Company.

UNDEVELOPED ACREAGE

The following table sets forth by county the Company's gross and net
undeveloped acreage as of December 31, 2001.

County Gross Net
Bastrop, TX 2,300.32 1,773.97
Crane, TX 240.00 205.76
Crosby, TX 1,120.00 560.00
DeWitt, TX 308.00 47.37
Eastland, TX 199.30 2.37
Eddy, NM 370.00 22.36
Fayette, TX 172.31 82.22
Garza, TX 3,250.00 789.28
Howard, TX 40.00 .63
Kent, TX 3,880.00 1,478.00
Lea, NM 1,094.90 629.90
Lee, TX 1,821.28 1,281.03
Martin, TX 40.00 32.78
Midland, TX 133.33 2.78
Pecos, TX 280.00 196.00
Weston, WY 600.00 104.75
Wilson, TX 129.51 123.03
Winkler, TX 701.60 701.60
--------- --------
16,680.55 8,033.99
========= ========

All of the 8,033.98 net undeveloped acres under lease are being held by
production.

ITEM 3. LEGAL PROCEEDINGS

The Company knows of no material litigation pending, threatening or
contemplated, or unsatisfied judgments against it, or any other proceeding in
which the Company is a party. The Company knows of no material legal actions
pending or threatening or judgments entered against any officers on the board
of directors of the Company in their capacity as such.

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

No matters were submitted to a vote of the security holders during the
quarter ended December 31, 2001.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

The Company's common stock is quoted on the OTC Bulletin Board with the
symbol (TVOC). The range of high and low sales price for each quarterly period
during the past two years is as follows:

Sales Price
High Low
Fiscal 2001

First Quarter 2.875 2.125
Second Quarter 4.450 2.750
Third Quarter 3.100 2.300
Fourth Quarter 2.500 2.200

Fiscal 2000

First Quarter 2.000 1.062
Second Quarter 2.750 1.750
Third Quarter 3.125 2.000
Fourth Quarter 2.750 2.063

At December 31, 2001, the approximate number of holders of record of the
Company's common stock was 510. The Company has not paid any dividends and has
no present plans to do so in the immediate future.

ITEM 6. SELECTED FINANCIAL DATA

Years ended December 31,
2001 2000 1999 1998 1997

Oil and gas sales $ 4,395,458 4,200,297 2,122,057 1,298,183 1,496,133
Total revenue 4,849,022 4,502,830 2,405,050 1,493,456 1,663,995
Total expenses (5,210,533) (4,174,514) (2,151,522) (1,279,115) (1,305,175)
Net earnings (loss) (238,597) 168,567 167,329 169,341 236,820
Net earnings (loss)
per share (.17) .12 .12 .12 .17
Total assets 6,690,772 7,524,234 5,484,246 4,332,767 3,704,635
Short-term debt 4,138,411 3,944,609 1,648,316 1,718,615 944,605
Long-term debt 239,640 691,274 1,210,588 482,606 802,396
Total liabilities 4,701,693 5,296,558 3,425,137 2,440,987 1,982,196
Stockholders equity $ 1,989,079 2,227,676 2,059,109 1,891,780 1,722,439

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

ANALYSIS OF FINANCIAL CONDITION

During the year ended December 31, 2001 cash decreased by $306,703.During
the years ended December 31, 2000 and 1999, cash increased by $2,542,337
and $705,883, respectively. The cash flow from operating activities in 2001
was approximately $577,227, a decrease of $966,544 from 2000. The cash flow
from operating activities in 2000 was approximately $1,543,771, an increase
of $595,319 from 1999. The significant use of cash, other than for operating
expenses, has been investments in producing oil and gas properties of $707,144,
$752,636, and $798,522 in 2001, 2000 and 1999, respectively. In each of the
last three years, the Company's investment in producing oil and gas properties
was provided by cash flow from operating activities, sales of other oil and
gas properties, and from borrowings on notes payable to banks.

In 2001 and 1999 the Company also increased cash by $141,481 and $1,000
respectively, through the sales of producing oil and gas properties. The
Company plans to continue to sell selected properties when it is more
economical to sell them rather than produce them. As of December 31, 2001,
the Company had a cash balance of $4,041,292 which represents approximately
92% of its notes payable as compared to the December 31, 2000, cash balance
of $4,348,022 which represented approximately 94% of its notes payable.

Working capital at December 31, 2001 decreased to .98 to 1 from 1.03 to 1
at December 31, 2000. The Company continued it's policy of making strategic
investments in producing oil and gas properties in the same or similar fields
to properties already operated by the Company, which are primarily financed
with short-term notes payable and cash from operations.

LIQUIDITY AND CAPITAL RESOURCES

During the current fiscal year, the Company's liquidity has remained strong
enough to meet its short-term cash needs. The sources of liquidity and capital
resources are generated from cash on hand, cash provided by operations and from
credit available from financial institutions. Management believes the Company
will be able to meet its current operating needs through internally generated
cash from operations. Management believes that oil and gas property investing
activities in 2002 can be financed through cash on hand, cash from operating
activities, and bank borrowings. The Company anticipates continued investments
in proven oil and gas properties in 2002 when they can be purchased at prices
that will provide a short payback period. If bank credit is not available, the
Company may not be able to continue its policy of continued investment in
strategic oil and gas properties. The Company cannot predict how oil and gas
prices will fluctuate during 2002 and what effect they will ultimately have on
the Company, but management believes that the Company will be able to generate
sufficient cash from operations to service its bank debt and provide for
maintaining current production of its oil and gas properties.The Company had
no significant commitments for capital expenditures at December 31, 2001.

As of December 31, 2001, the Company owed $667,075 and $3,000,000 to a bank
secured by producing oil and gas properties and well equipment purchased by
the Company. The notes are due in August 2003 and December 2002, respectively
(see note 2 of notes to financial statements for further explanation).

ANALYSIS OF RESULTS OF OPERATIONS

From 1998 to 1999 oil and gas sales increased by 63% from 1999 to 2000
oil and gas sales increased 98%, and from 2000 to 2001 oil and gas sales
increased 5%. In 1999, oil production volume increased by 23% at the same
time as the average price per barrel increased by 41% to 17.14. Also, in
1999, the gas production volume increased by 46% while the average price per
MCF was $1.87. In 2000, oil production volume increased by 36% at the same
time as the average price per barrel increased by 62% to $27.73. Also,
in 2000, the gas production volume decreased by 6% while the average price
per MCF increased by 55% to $2.89. In 2001, oil production volume decreased
by 3% at the same time as the average price per barrel decreased by 14% to
$23.90. Also, in 2001, the gas production volume decreased by 6% while the
average price increased 40% to $4.04 per MCF. The fluctuation in oil and gas
prices is solely attributable to changes in market prices.

Oil and gas production expenses increased in 2001, 2000 and 1999 by 41%,
104% and 64%, respectively. These increases are primarily attributable to an
increase in the number of properties owned and operated by the Company and
the higher lease operating costs associated with operating more producing
properties.

Interest expense decreased by 42% in 2001 over 2000 and 11% in 2000 over
1999 due to lower average outstanding balances.

Depreciation, depletion and amortization varies from year to year because of
changes in reserve estimates, changes in quantities of oil and gas produced, as
well as the acquisition, discovery or sale of producing properties. In 2001,
depletion decreased in conjunction with the 3% decrease in oil production
volume and the 6% decrease in gas production volume.

Total general and administrative expenses increased $104,046 in 2001 and
$58,803 in 2000, while 1999 was comparable to the prior year.

In 2001, 2000 and 1999, the Company provided provisions of approximately
$1,015,500, $738,899 and $242,389, respectively, for the impairment of value
of oil and gas properties due to less than expected production history of
specific wells and for wells that were plugged and abandoned.

Inflation is not anticipated to have a significant impact on the Company's
operations.

FORWARD-LOOKING STATEMENTS

This Management's Discussion and Analysis of Financial Condition and Results
of Operations and other sections of this Annual Report on Form 10(k) contain
forward-looking statements that are based on current expectations and estimates
about the oil and gas industry and other factors impacting the Company's
operations and financial condition. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions.
Therefore, actual outcomes and performance may differ materially from what is
expressed in such forward-looking statements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Texas Vanguard Oil Company:

We have audited the accompanying balance sheets of Texas Vanguard Oil Company
(the Company) as of December 31, 2001 and 2000, and the related statements of
earnings, stockholders' equity and cash flows for the years ended December
31, 2001, 2000 and 1999. 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 audit.

We conducted our audits in accordance with U.S generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits 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 Texas Vanguard Oil Company as
of December 31, 2001 and 2000, and the results of its operations and its cash
flows for the years ended December 31, 2001, 2000 and 1999 in conformity with
U.S. generally accepted accounting principles.

Sprouse & Anderson, L.L.P.
Austin, Texas

March 8, 2002

TEXAS VANGUARD OIL COMPANY

Balance Sheets

December 31, 2001 and 2000

ASSETS
2001 2000
Current assets:
Cash (including certificates of deposit of
$700,000 and $500,000 in 2001 and 2000,
pledged) $ 4,041,292 4,348,022
Trade accounts receivable 194,360 142,295
Other receivables 20,000 ---
---------- ---------
Total current assets 4,255,652 4,490,317
---------- ---------
Oil and gas properties, partially pledged,
successful efforts method of accounting:
Proven properties 3,474,611 3,882,968
Unproven properties 166,630 166,630
Office furniture and equipment, partially pledged 240,019 191,531
--------- ---------
3,881,260 4,241,129
Less accumulated depreciation, depletion and
amortization (1,447,140) (1,208,212)
--------- ---------
2,434,120 3,032,917
--------- ---------
Other assets 1,000 1,000
--------- ---------
TOTAL ASSETS $ 6,690,772 7,524,234
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Trade accounts payable $ 185,240 247,726
Income tax payable --- 150,090
Notes payable and current installments of
long-term debt 4,138,411 3,944,609
--------- ---------
Total current liabilities 4,323,651 4,342,425
--------- ---------
Deferred tax liability 138,402 262,859
Long-term debt, excluding current installments 239,640 691,274
--------- ---------
Total Liability 4,701,693 5,296,558

Commitments

Stockholders' equity:
Common stock, par value $.05; authorized
12,500,000 shares; 1,417,087 issued and
outstanding 70,854 70,854
Additional paid-in capital 1,890,005 1,890,005
Accumulated earnings 28,220 266,817
--------- ---------
Total stockholders' equity 1,989,079 2,227,676
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,690,772 7,524,234
========= =========

See accompanying notes to financial statements.

TEXAS VANGUARD OIL COMPANY
Statements of Earnings

Years ended December 31, 2001, 2000 and 1999

2001 2000 1999

Revenues:
Oil and gas sales $ 4,395,458 4,200,297 2,122,057
Well operation fees 180,411 183,253 176,244
Other, net 192,362 101,739 96,751
Gain on sale of oil and
gas property 41,481 --- ---
Interest income 39,310 17,541 9,998
--------- --------- ---------
Total revenues 4,849,022 4,502,830 2,405,050
--------- --------- ---------
Expenses:
Production cost 3,433,226 2,432,114 1,192,821
Depreciation, depletion
and amortization 250,902 528,451 273,960
Interest expense 93,648 161,839 181,789
General and administrative 417,257 313,211 254,408
Impairment in value of
oil and gas property 1,015,500 738,899 242,389
Loss on sale of oil
and gas property --- --- 6,155
--------- --------- ---------
Total expenses 5,210,533 4,174,514 2,151,522
--------- --------- ---------
Earnings (loss) before income tax (361,511) 328,316 253,528

Income Taxes:
Provision for income tax (benefit) (122,914) 159,749 86,199
-------- --------- ---------
Net earnings (loss) $ (238,597) 168,567 167,329
======== ========= =========
Weighted average number of
shares outstanding 1,417,087 1,417,087 1,417,087
========= ========= =========

Basic and diluted earnings
(loss) per share $ (.17) .12 .12
========= ========= =========

See accompanying notes to financial statements.

TEXAS VANGUARD OIL COMPANY
Statements of Stockholders' Equity

Years ended December 31, 2001, 2000 and 1999

Additional
Common Stock Paid-in Accumulated
Shares Amount Capital (Deficit)/
Earnings

Balances at December 31, 1998 1,417,087 70,854 1,890,005 (69,079)

Net earnings --- --- --- 167,329
--------- -------- --------- --------
Balances at December 31, 1999 1,417,087 70,854 1,890,005 98,250

Net earnings --- --- --- 168,567
--------- -------- --------- ---------
Balances at December 31, 2000 1,417,087 70,854 1,890,005 266,817

Net earnings (loss) --- --- --- (238,597)
--------- -------- --------- --------
Balances at December 31, 2001 1,417,087 70,854 1,890,005 28,220
========= ======== ========= =========

See accompanying notes to financial statements.

TEXAS VANGUARD OIL COMPANY

Statements of Cash Flows

Years ended December 31, 2001, 2000 and 1999

2001 2000 1999

Cash flows from operating activities:
Net earnings (loss) $ (238,597) 168,567 167,329
Adjustments to reconcile net earnings
to cash provided by operating
activities:
Depreciation, depletion
and amortization 250,902 528,451 273,960
(Gain) loss on sale of oil and
gas properties (41,481) --- 6,155
Impairment in value of oil and
gas property 1,015,500 738,899 242,389
Changes in assets and liabilities:
(Increase) decrease in receivables (72,065) 13,413 (67,848)
Increase (decrease) in payables (212,576) 167,896 157,154
Increase (decrease) in deferred
federal income tax (124,456) 9,659 86,199
Increase (decrease) in deferred
revenue --- (83,114) 83,114
--------- --------- ---------
Net cash provided by
operating activities 577,227 1,543,771 948,452
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of oil and
gas properties 141,481 --- 1,000
Additions to oil and gas properties (707,144) (752,636) (798,522)
Proceeds from sale of equipment 15,660 --- 6,900
Purchases of equipment (76,123) (25,776) (109,631)
--------- --------- ---------
Net cash used in investing activities (626,126) (778,412) (900,253)
--------- --------- ---------
Cash flows from financing activities:
Borrowings on notes payable 3,700,000 3,500,000 3,368,581
Repayments of notes payable (3,957,831) (1,723,022) (2,710,897)
--------- --------- ---------
Net cash provided (used) by
financing activities (257,831) 1,776,978 657,684
--------- --------- ---------
Net increase (decrease) in cash (306,730) 2,542,337 705,883

Cash and cash equivalents at
beginning of year 4,348,022 1,805,685 1,099,802
--------- -------- --------
Cash and cash equivalents at
end of year $ 4,041,292 4,348,022 1,805,685
========== ========== ==========
Supplemental disclosure of
cash flow information:
Interest paid $ 93,648 161,839 181,789
========== ========== ==========

See accompanying notes to financial statements.

TEXAS VANGUARD OIL COMPANY

Notes to Financial Statements

December 31, 2001, 2000 and 1999

(1) Significant Accounting Policies

Description of Business - Texas Vanguard Oil Company (the Company) engages in
the acquisition, exploration, development, and operation of onshore oil and gas
properties in the United States, principally in Texas. The Company owns
interests in producing properties and undeveloped oil and gas leases in Texas,
Wyoming and New Mexico. The Company sells all of its production to traditional
industry purchasers who have the facilities to transport the oil and gas from
the well site.

Oil and Gas Properties - The Company follows the "successful efforts" method of
accounting for oil and gas exploration and production operations. Accordingly,
costs incurred in the acquisition and exploratory drilling of oil and gas
properties are initially capitalized and either subsequently expensed if the
properties are determined not to have proved reserves, or reclassified as a
proven property if proved reserves are discovered. Costs of drilling development
wells are capitalized. Geological, geophysical, carrying and production costs
are charged to expense as incurred.

Costs related to acquiring unproved lease and royalty acreage are periodically
assessed for possible impairment of value. If the assessment indicates impair-
ment, the costs are charged to expense.

Depreciation, depletion and amortization of proved oil and gas property costs,
including related equipment and facilities, are provided using the units-of-
production method on a property by property basis.

Office Furniture and Equipment - Office furniture and equipment is stated at
cost. Depreciation is computed using the straight-line method, based on the
following estimated useful lives:

Office furniture and equipment 7 years
Automotive equipment 5 years

Federal Income taxes - The Company uses the "asset and liability method" of
income tax accounting which bases the amount of current and future taxes
payable on the events recognized in the financial statements and on tax laws
existing at the balance sheet date. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes enactment date.

Cash and Cash Equivalents - The Company considers cash and cash equivalents to
consist of demand deposits and certificates of deposit.

Concentration of Credit Risk - The Company sells all of its production
to traditional industry purchasers. Oil sales are not made under a written
contract and the purchaser and price are not specified in the division order
for the subject property. The Company has recorded revenues in excess of 10%
of total revenue from three customers in 2001, three customers in 2000, and
four customers in 1999 as follows: 2001 - 39%, 32%, 15%, 2000 - 36%, 25%, 23%,
and 1999 - 33%, 22%, 18%, 18%. The Company does not believe the loss of these
customers would have a material adverse effect on its operations as it could
sell its production to other gathering companies.

Use of Estimates - Consistent with the requirements of generally accepted
accounting principles, management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities in order to
prepare these financial statements. Actual results could differ from those
estimates.

(2) Notes Payable and Long-term Debt

The Company had notes payable and long-term debt to banks as follows at
December 31:
2001 2000

A note with a bank. Interest payable quarterly at
7.63%, secured by $300,000 certificate of deposit.
The note matures on April 25, 2001. $ --- 300,000

A note with a bank. Interest payable monthly at 8%
by a $200,000 certificate of deposit. The note
matures on April 25, 2001. --- 200,000

A note with a bank secured by oil and gas properties.
The original amount of the note was $1,718,028.
Interest accrues at .5% above the prime rate,
with monthly payments of principal of $36,000 plus
accrued interest. The note matures in August 2003. 667,075 1,099,075

Line of credit with a bank under which it may borrow
up to $3,000,000. Interest payable monthly at prime
rate plus .5%, secured by oil and gas properties.
The line of credit matures in December 2002. 3,000,000 ---

Line of credit with a bank under which it may borrow
up to $700,000. Interest payable quarterly at 6.75%,
secured by $700,000 of certificates of deposit. The
line of credit matures on April 25, 2002. $ 700,000 ---

Line of credit with a bank under which it may borrow
up to $3,000,000. Interest payable monthly at prime
rate plus .5%, secured by oil and gas properties.
The line of credit matures in October 2001. --- 3,000,000

Other notes payable, due on demand or in
monthly installments, maturing on various
dates through September, 2003, secured by equipment. 10,976 36,808
--------- ---------
Total debt 4,378,051 4,635,883
Less current installments (4,138,411) (3,944,609)
--------- ---------
Long-term bank debt, excluding current installments $ 239,640 691,274
========= =========

All notes and long-term debt are personally guaranteed by Robert N. Watson, Jr.
President.

Future maturities of long-term debt are as follows:

2002 $4,138,411
2003 239,640
Thereafter ---
---------
Total $4,378,051
=========

(3) Related Party Transactions

The Company and an entity owned by the President of the Company have an agree-
ment whereby the latter provides the Company general corporate management
services. The affiliated company received $201,000, $174,000, and $150,000 as
compensation for performance of those services during the years ended
December 31, 2001, 2000 and 1999, respectively. Effective January 1, 2002
the agreement was continued with terms of $17,500 per month through December
31, 2002.

The Company leases office space from a company owned by the President of the
Company under a non-cancelable operating lease expiring June 30, 2002.
Rent expense incurred under this lease was $22,800, $19,800 and $17,100
for the years ended December 31, 2001, 2000, and 1999, respectively.
Future minimum lease payments for 2002 are $10,800.

Robert Watson, Inc. owns a small interest in a number of the properties
that the Company has interests in as well as other similar properties in which
the Company does not have an interest. None of the Company's other directors
own interests in any oil and gas properties in areas in which the Company
operates. The Company presently acquires all of its own properties.

During the years ended December 31, 2001 and 2000, a Director of the Company
received $51,500 and $22,000, respectively for engineering consultant work.

In addition, the Company purchases materials and services from two businesses
in which the President of the Company owns an interest. These purchases
represent less than 10% of the Company's total oil field purchases.

(4) Federal Income Taxes

The actual federal income tax expense differs from the "expected" tax
expense computed by applying the US Federal corporate income tax rate of
34% to income before income taxes as follows:

2001 2000 1999

Current tax expense at statutory rate $ --- 150,090 ---
Deferred tax (benefit) (122,914) 9,659 86,199
_________ ________ _______
$ (122,914) 159,749 86,199
========= ======== =======

The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities at December 31, 2001 and 2000 is presented below:

2001 2000
Deferred tax asset:
Net operating loss carryforward $ --- ---
--------- ---------
Net deferred tax asset --- ---
--------- ---------

Deferred tax liability:
Office furniture and equipment and oil
and gas property, due to differences in
depreciation and abandonment (138,402) (262,859)
--------- ---------
Total deferred tax liability $ (138,402) (262,859)
========= =========

The Company has accumulated losses for Federal income tax purposes of
approximately $-0-, $-0- and $144,000 as of December 31, 2001, 2000
and 1999, respectively, which may be carried forward and used to reduce
taxable income in future years. The carryforwards begin to expire in 2009.

(5) Fair Value of Financial Instruments

Based on the borrowing rates currently available to the Company for bank loans
with similar terms and average maturities, the fair value of notes payable
approximates market value at December 31, 2001.

(6) Subsequent Events

After December 31, 2000 the Company repaid $3,000,000 under a line of credit
agreement and a note payable in the amount of $300,000.

Subsequent to December 31, 2001, the Company repaid $2,500,000 under a line
of credit agreement.

TEXAS VANGUARD OIL COMPANY

SUPPLEMENTAL OIL AND GAS INFORMATION

Years ended December 31, 2001, 2000 and 1999
(Unaudited)

Reserve Quantity Information (Unaudited)

The following reserve related information is based on estimates prepared by
management of the Company. Reserve estimates are inherently imprecise and are
continually subject to revisions based on production history, results of
additional exploration and development, price of oil and gas and other factors.
All of the Company's oil and gas reserves are located in the United States.

2001 2000 1999
Oil Gas Oil Gas Oil Gas
BBLS MCF BBLS MCF BBLS MCF

Proved developed
and undeveloped
reserves:
Beginning of year 1,065,744 7,988,672 784,268 8,074,537 532,866 6,335,643
Revisions of
previous estimate (101,367) (688,502) 94,257 (516,233) 39,906 310,080
Extensions
and Discoveries --- --- 1,953 1,167 --- ---
Purchase of
minerals in place 66,740 442,588 267,594 1,026,301 272,164 2,064,501
Sale of mineral --- --- --- --- --- ---
Production (79,705) (562,341) (82,328) (597,100) (60,668) (635,687)
--------- --------- --------- --------- ------- ---------
End of year 951,412 7,180,417 1,065,744 7,988,672 784,268 8,074,537
========= ========= ========= ========= ======= =========
Proved developed
reserves:
Beginning of year 1,065,744 7,988,672 784,268 8,074,537 532,866 6,335,643
End of year 951,412 7,180,417 1,065,744 7,988,672 784,268 8,074,537

Standardized Measure of Discounted Future Net Cash Flows (Unaudited)

The following is a standardized measure of discounted future net cash flows and
changes therein relating to proved oil and gas reserves. Future net cash flows
were computed using year-end prices and costs and relate to existing proved oil
and gas reserves in which the enterprise has mineral interests. The Company
cannot predict price fluctuations which may occur in the future. Future
income tax expenses were provided after estimated utilization of Federal
income tax loss carryforwards.

December 31,
2001 2000 1999

Future cash inflows $ 37,347,266 58,065,418 42,261,801
Future production
and development costs (19,294,773) (24,292,586) (19,548,730)
Future income tax expenses (4,840,426) ( 9,796,114) (6,032,465)
------------ ------------ ------------
Future net cash flow s 13,212,067 23,976,718 16,680,606

10% annual discount for
estimated timing of cash flows (4,955,521) (9,818,074) (6,600,380)
------------ ------------ ------------
Standardized measure of
discounted future net cash flows $ 8,256,546 14,158,644 10,080,226
============ ============ ============

TEXAS VANGUARD OIL COMPANY

SUPPLEMENTAL OIL AND GAS INFORMATION, CONTINUED
(Unaudited)

The following are the principal sources of change in the standardized measure
ofdiscounted future net cash flows:

2001 2000 1999

Changes:
Sale of oil and gas produced, net of
production costs $ (962,232) (1,772,933) (1,861,714)
Net changes in prices and production
costs (1,038,973) 363,080 664,361
Purchase of minerals in place 176,064 922,259 994,781
Extensions and discoveries --- 4,541 ---
Sales --- --- ---
Revisions of previous quantity estimates (778,521) 92,042 151,501
Accretion of discount 1,415,864 1,008,023 438,635
Other (4,714,300) 3,461,406 5,306,316
---------- ---------- ---------
Net changes (5,902,098) 4,078,418 5,693,880

Beginning balance - standardized measure
of discounted future net cash flows 14,158,644 10,080,226 4,386,346
---------- ---------- ----------
Ending balance - standardized measure
of discounted future net cash flows $ 8,256,546 14,158,644 10,080,226
========== ========== ==========

The Company has not filed with or included in reports to any Federal authority
or agency other than the Securities and Exchange Commission any estimates of
total proved net oil and gas reserves.

Capitalized Costs Relating to Oil and Gas Producing Activities

Years ended December 31,
2001 2000 1999

Unproven oil and gas properties
(including wells in progress) $ 166,630 166,630 166,630

Proven oil and gas properties 3,474,611 3,882,968 3,870,177

Accumulated depletion and amortization (1,350,377) (1,126,604) (623,516)
---------- ---------- ----------
Net capitalized costs $ 2,290,864 2,922,994 3,413,291
========== ========== ==========

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

Years ended December 31,
2001 2000 1999

Acquisition of properties - unproven $ --- --- ---
Acquisition of properties - proven 707,144 752,636 700,284
Exploration costs --- --- ---
Development costs --- --- 98,238

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

PART III

Items 10, 11, 12 and 13 constituting Part III of Form 10-K have been omitted
from this annual report pursuant to the provisions of Instruction G(3) to Form
10-K, as the Company will file a definitive proxy statement pursuant to
Regulation 14A under the Securities Exchange Act of 1934 within 120 days after
the close of its fiscal year.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1). Financial Statements.

Independent Auditors' Report, Balance Sheets at December 31, 2001 and 2000 and
the related Statements of Earnings, Stockholders' Equity, and Cash Flows for
each of the years in the three-year period ended December 31, 2001, and notes
to financial statements are included in Item 8.

(a)(2) Financial Statement Schedules

Not applicable.

(a)(3). Exhibits

Number Description of Document

3 Copies of Articles of Incorporation and Bylaws - Incorporated by
reference to Exhibits 4a and 4b to Registration Statement No. 2-66693
filed by registrant on Form S-2.

3.1 Articles of Amendment to authorize capitalization of common stock,
previously filed as exhibits to Form 8-K dated May 27, 1983.

3.2 Certificate of Amendment dated February 20, 1990 of Articles of
Incorporation and Articles of Amendment dated February 16, 1990 to the
Articles of Incorporation. Filed as Exhibit to 1989 Form 10-K.

10.1 Incentive Stock Option Plan, previously filed as Exhibit 5b to
Registration Statement No. 2-66693 filed by registrant on Form S-2.

10.2 Management contract between Texas Vanguard Oil Company and Robert Watson
Inc., previously filed with Form 8-K dated January 30, 1988.

10.4 Note payable to First State Bank dated April 25, 2001.

10.5 Note payable to Bank United dated July 29, 1999.

10.6 Note payable to Bank United dated December 1, 2001.

(b). Reports on Form 8-K

None filed during the quarter ended December 31, 2001.

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.

TEXAS VANGUARD OIL COMPANY

By: Robert N. Watson, Jr.
Robert N. Watson, Jr., President
March 25, 2002

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

Robert N. Watson, Jr.
Robert N. Watson, Jr., President,
Director, Chairman of the Board,
Principal Executive Officer and
Principal Financial and Accounting
Officer
March 25, 2002

Linda R. Watson Robert L. Patterson
Linda R. Watson, Secretary and Robert L. Patterson, Director
Treasurer, Director March 25, 2002
March 25, 2002

OFFICERS AND DIRECTORS CORPORATE INFORMATION

Robert N. Watson, Jr. CORPORATE OFFICE
President, Chief Executive 9811 Anderson Mill Road, Suite 202
Officer and Director Austin, Texas 78750

Linda R. Watson
Secretary/Treasurer INDEPENDENT ACCOUNTANTS
and Director Sprouse & Anderson, L.L.P.
Austin, Texas
Robert L. Patterson
Director TRANSFER AGENT
Computershare Trust Company, Inc.
P.O. Box 1596
Denver, Colorado 80228

COMMON STOCK
Quoted on OTC Bulletin Board
Symbol: TVOC

2001 ANNUAL SHAREHOLDERS MEETING
June 13, 2002, at 10:00 A.M.
9811 Anderson Mill Road, Suite 202
Austin, Texas 78750

EXHIBITS:

EXHIBIT 10.4

COMMERCIAL REVOLVING OR DRAW NOTE:

First State Bank ("Lender")
8045 Mesa Drive
Austin, Texas 78731
Travis County

Texas Vanguard Oil Company ("Borrower")
PO Box 202650
Austin, Texas 78720
TERMS:
Interest Rate: 6.75%
Principal Amount: $700,000.00
Funding Date: April 25, 2001
Maturity Date: April 25, 2002

Promise to Pay: Texas Vanguard Oil Company ("Borrower") promises to pay First
State Bank ("Lender"), or order, in lawful money of the United State of America
the principal sum of SEVEN-HUNDRED THOUSAND AND NO/100 DOLLARS, ($700,000.00)
or so much as may be outstanding, together at the rate of 6.75% per annum
on the unpaid outstanding principal balance of each advance. Interest shall
be calculated from the date of each advance until repayment of each advance
maturity, whichever occurs first.

Choice of Usury Ceiling and interest rate: The interest rate of this Note has
been implemented under the "Weekly Rate" as referred to in Section 303.002
and 300.003 of the Texas Finance Code.However, Lender reserves the right to
implement a different interest rate and to renew such rate, provided Lender
complies with the requirements of Sections 303.101, 102, and 103 of the Texas
Finance Code.

Payment: Borrower will pay this loan on demand, or if no demand is made, in
one payment of all outstanding principal plus all accrued unpaid interest on
April 25, 2002. In addition, Borrower will pay regular quarterly payments of
accrued unpaid interest beginning July 25, 2001, and all subsequent interest
payments are due on the same day of each quarter after that. Interest on this
note is computed on a 365/366 simple interest basis; that is, by applying the
ratio of the annual interest rate over the number of days in a year (366 during
leap years), multiplied by the outstanding principal balance, multiplied by
the actual number of days the principal balance is outstanding. Borrower will
pay Lender at Lender's address shown above or at such other place Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to accrued unpaid interest, then to principal,
and any remaining amount to any unpaid collection costs and lay charges.
Notwithstanding any other provision of this Note, Lender will not charge
interest on any undisbursed loan proceeds. No scheduled payment, whether of
principal or interest or both, will be due unless sufficient loan funds have
been disbursed by the scheduled payment date to justify the payment.

Prepayment: Borrower may pay without penalty all or a portion of the amount
owed earlier than it is due. Early payments will not, unless agreed to by
Lender in writing, relieve Borrower of Borrower's obligation to continue to
make payments of accrued unpaid interest. Rather, they will reduce the
principal balance due.

Post Maturity Rate: The Post Maturity Rate on this Note is 18.000% per annum.
Borrower will pay interest on all sums due after final maturity, whether by
acceleration or otherwise, at that rate.

Default: Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform
when due any other term, obligation, covenant, or condition contained in this
Note or any agreement related to this Note, or in any other agreement or loan
Borrower has with Lender. (c) Borrower defaults under any loan, extension of
credit, security agreement, purchase or sales agreement, or any other agreement
in favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrowers obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now
or at the time made or furnished. (e) Borrower becomes insolvent, a receiver
is appointed for any part of Borrower's property, Borrower makes an assignment
for the benefit of creditors, or any proceeding is commenced either by Borrower
or against Borrower under any bankruptcy or insolvency laws. (f) Any creditor
tries to take any of Borrower's property on or inn which Lender has a lien or
security interest. This includes a garnishment of any of Borrower's accounts
with Lender. (g) Any guarantor dies or any of the other events described in
this default section occurs with respect to any guarantor of this Note. (h)
A material adverse change occurs in Borrower's financial condition, or Lender
believes the prospect of payment or performance of the Indebtedness is
impaired. (i) Lender in good faith deems itself insecure.

Lender's Rights: Upon default, Lender may declare the entire indebtedness,
including the unpaid principal on this Note, all accrued unpaid interest, and
all other amounts, cost and expenses for which Borrower is responsible under
this Note or any other agreement with Lender pertaining to this loan,
immediately due, without notice, and then Borrower will pay that amount.

Attorney's Fees; Expenses: Upon default, Lender may hire an attorney to help
collect this Note if Borrower does not pay, and Borrower will pay Lender's
reasonable attorneys' fees. Borrower also will pay Lender all other amounts
actually incurred by Lender as court costs, lawful fees for filing, recording,
or releasing to any public office any instrument securing this loan; the
reasonable cost actually expended for repossessing, storing, preparing for
sale, and selling any security; and fees for noting a lien on or transferring
a certificate of title to any motor vehicle offered as security for this loan,
or premiums or identifiable charges received in connection with the sale of

Governing Law: This Note will be governed by, construed and enforced in
accordance with the laws of the State of Texas and applicable Federal Laws.
This note has been accepted by Lender in the State of Texas.

Choice of Venue: If there is a lawsuit, and if the transaction evidenced by
this Note occurred in Bell County, Borrower agrees upon Lender's request to
submit to the jurisdiction of the courts of Bell County, State of Texas.

Right of Setoff: To the extent permitted by applicable law, Lender reserves a
right of setoff in all Borrower's accounts with Lender (whether checking,
savings, or some other account.) This includes all accounts Borrower holds
jointly with someone else and all accounts Borrower may open in the future.
However, this does not include any IRA or Keogh accounts, or any trust accounts
for which setoff would be prohibited by law. Borrower authorized Lender, to
the extent permitted by applicable law, to charge or setoff all sums owing on
the indebtedness against any and all such accounts.

Line of Credit: This Note evidences a revolving line of credit. Advances under
this Note may be requested only in writing by Borrower or by an authorized
person. All communications, instructions, or directions by telephone or other
wise to Lender are to be directed to Lender's office shown above. The following
party or parties are authorized to request advances under the line of credit
until Lender receives from Borrower at Lender's address shown above written
notice of revocation of their authority: Robert Watson, Jr., President.
Borrower agrees to be liable for all sums either: (a) advanced in accordance
with the instructions of an authorized person or (b) credited to any of
Borrower's accounts with Lender. The unpaid principal balance owing on this
Note at any time may be evidenced by endorsements on this Note or by Lender's
internal records, including daily computer print-outs. Lender will have no
obligation to advance funds under this Note if: (a) Borrower or any guarantor
is in default under the terms of the Note or any agreement that Borrower or
any guarantor has with Lender, including this agreement made in connection with
the signing of this Note;(b) Borrower or any guarantor ceases doing business or
is insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit,
modify or revoke such guarantor's guarantee of this Note or any other loan with
Lender; (d) Borrower has applied funds provided pursuant to this Note for
purposes other than those authorized by Lender; or (e) Lender in good faith
deems itself insecure under this Note or any other agreement between Lender
and Borrower: This revolving line of credit shall not be subject to Chapter
346 of the Texas Finance Code.

Dishonored Check Charge: In the event a check offered in full or partial
payment on this loan is returned unpaid, Lender may charge a fee for the
purpose of defraying the expense incident to handling such returned check,
and borrower agrees to pay such fee. The fee shall not exceed the maximum
amount permitted under applicable law.

Prior Note: THE PROMISSORY NOTE #311100 dated 12/12/2000 & dated 04/25/2000
from TEXAS VANGUARD OIL COMPANY TO FSBCT.

Successor Interests: The terms of this Note shall be binding upon Borrower,
and upon Borrower's heirs, personal representatives, successors and assigns,
and shall inure to the benefit of Lender and its successors and assigns.

General Provisions: Notice: Under no circumstances (and not withstanding any
other provisions of this Note) shall the interest charge, collected, or
contracted for on this Note exceed the maximum rate permitted by law.
The term "maximum rate permitted by law" as used in this Note means
the greater of (a) the maximum rate of interest permitted under federal or
other law applicable to the indebtedness evidenced by this Note, or (b) the
higher, as of the date of this Note, of the "Weekly Ceiling" or the "Quarterly
Ceiling" as referred to in Sections 303.002, 303.003, and 303.006 of the
Texas Finance Code. If any part of this Note cannot be enforced, this fact
will not affect the rest of the Note. Borrower does not agree or intend to
pay, and Lender does not agree or intend to contract for, charge, collect,
take, reserve or receive (collectively referred to herein as "charge or
collect"), any amount in the nature of interest or in the nature of a fee
for this loan, which would in any way or event (including demand, prepayment,
or acceleration) cause Lender to charge or collect more for this loan than
the maximum Lender would be permitted to charge or collect by federal law or
the law of the State of Texas (as applicable). Any such excess interest or
unauthorized fee shall, instead of anything state to the contrary, be applied
first to reduce the principal balance of this loan, and when the principal has
been paid in full, be refunded to Borrower. The right to accelerate maturity
of sums due under this Note does not include the right to accelerate any
interest which has not otherwise accrued on the date of such acceleration,
and Lender does not intend to charge or collect any unearned interest in the
event of acceleration. All sums paid or agreed to be paid to Lender for the
use, forbearance or detention of sums due hereunder shall, to the extent
permitted by applicable law, be amortized, prorated, allocated and spread
throughout the full term of the loan evidenced by this Note until payment in
full so that the rate or amount of interest on account of the loan evidenced
hereby does not exceed the applicable usury ceiling. Lender may delay or
forgo enforcing any of its rights or remedies under this Note without losing
them. Borrower and any other person who signs, guarantees or endorses this
Note, to the extent allowed by law, waive presentment, demand for payment,
notice of dishonor, notice of intent to accelerate the maturity of this Note,
and notice of acceleration of the maturity of this Note. Upon any accommodation
maker or endorser, shall be released from liability. All such parties agree
that Lender may renew or extend (repeatedly and for any length of time) this
loan or release any party or guarantor or collateral; or impair, fail to
realize upon or perfect Lender's security interest in the collateral without
the consent of or notice to anyone. All such parties also agree that Lender
may modify this loan without the consent of or notice to anyone other than
the party with whom the modification is made. The obligations under this
Note are joint and several.

Prior to signing this note, Borrower read and understood all of the provisions
of this Note. Borrower agrees to the terms of the note and acknowledges receipt
of a completed copy of this Promissory Note.

Borrower:
Texas Vanguard Oil Company

Signed: Robert N.Watson, Jr., President
Texas Vanguard Oil Company

EXHIBIT 10.5

VARIABLE RATE COMMERCIAL PROMISSORY NOTE:

Bank United ("Lender")
401 West Texas
Midland, Texas 79701
Midland County

Texas Vanguard Oil Company ("Borrower")
PO Box 202650
Austin, Texas 78720
TERMS:
Interest Rate: Variable
Principal Amount: $1,718,027.98
Funding Date: July 29, 1999
Maturity Date: August 1, 2003
Customer Number: 053769
Loan Number: 700-053769-0004

PROMISE TO PAY:

For value received, Borrower promises to pay to the order of Lender indicated
above the principal amount of ONE MILLION, SEVEN-HUNDRED EIGHTEEN THOUSAND AND
TWENTY-SEVEN AND 98/100 Dollars ($1,718,027.98), together with interest from
date until maturity on the unpaid principal balance thereof from time to time
outstanding at the Stated Rate and with interest on all past due amounts, both
principal and accrued interest, at the Past Due Rate, provided, that for the
full term of this Note the interest rate produced by the aggregate of all sums
paid or agreed to be paid to the holder of this Note for the use, forbearance
or detention of the debt evidenced hereby shall not exceed the Ceiling Rate.

This Note is described in and is subject to the terms and provisions of that
certain Loan Agreement dated July 29, 1997 as amended by those certain First,
Second, and Third Amendments to Loan Agreement dated July 29, 1998, December
23, 1998, and July 29, 1999 (hereinafter collectively referred to as the
"Loan Agreement") by, between and among Bank United, Maker and Robert N. Watson
Jr. As "Guarantor". The Loan Agreement, among other things, contains provisions
regarding the "Borrowing Base," as defined in the Loan Agreement and for accel-
eration of the maturity hereof upon the happening or omission of certain stated
events upon the terms and conditions therein specified.

"Stated Rate" means, on any day, a rate per annum equal to the Prime Rate from
time to time in effect plus one-half percent (.5%), provided, that if
on any day the Stated Rate shall exceed the Ceiling Rate for that day, then the
Stated Rate shall be fixed at the Ceiling Rate on that day and on each day
thereafter until the total amount of interest accrued at the Stated Rate on the
unpaid balance of this Note equals the total amount of interest which would
have accrued if there were no Ceiling Rate.

"Prime Rate" for purposes of this Note shall mean the current rate of interest
per annum as published in the Southwest Edition of the Wall Street Journal as
the Prime Rate in effect until the next Change Date. The Prime Rate may change
and each change in the Prime Rate shall be effective on the date of publication
of said change (referred to as "Change Date") until the next Change Date. Each
change in the Prime Rate shall be effective without special notice to the Maker
or any other person or entity. The Prime Rate is a reference rate and does not
necessarily represent the lowest or best rate actually charged to any customer.
If, for any reason, the Prime Rate is no longer available at the time of the
change, the Payee will choose a new index based upon a comparable measure and
comparable information and Payee will notify Maker of the substitution of any
such new index.

"Past Due Rate" means, on any day, a rate per annum equal to eighteen percent
(18%). All past due payments shall bear interest from the due date thereof
until paid at the Past Due Rate.

"Ceiling Rate" means, on any day, the maximum nonusurious rate of interest
permitted for that day by whichever of applicable federal or Texas law permits
the higher interest rate, stated as a rate per annum. On each day, if any,
that Chapter 302 ("Chapter 302") of the Finance Code of Texas Revised Civil
Statutes (the "Texas Finance Code") establishes the Ceiling Rate, the Ceiling
Rate shall be the "indicated rate ceiling" as defined in Chapter 302 for that
day. Payee may from time to time, as to current and future balances, implement
any other ceiling under Chapter 302 by notice to Maker, if and to the extent
permitted by, Chapter 302.

Interest on the amount of this Note shall be computed from the date of this
Note. Interest shall be computed for the actual number of days elapsed and on
the basis of a year consisting of 360 days, unless the Highest Lawful Rate
would thereby be exceeded or the designation of a 360 day year is prohibited by
state or federal law as of the date of this note, in which event to the extent
necessary to avoid exceeding the Highest Lawful Rate or state or federal laws,
interest shall be computed on the basis of the actual number of days elapsed in
the applicable calendar year in which accrued.

Without notice to the Maker or any other person or entity, the Prime Rate and
the Ceiling Rate shall each automatically fluctuate upward and downward as and
in the amount by which the Prime Rate and the maximum nonusurious rate of
interest, respectively, fluctuate.

If, for any reason whatsoever, the interest paid or received on this Note during
the full term of this Note shall produce a rate which exceeds the Ceiling Rate,
the holder of this Note shall refund to the Payer or, at the holder's option,
credit against the principal of this Note such portion of said interest as
shall be necessary to cause the interest paid on this Note to produce a rate
equal to the Ceiling Rate. All sums paid or forbearance or detention of the
indebtedness evidenced hereby shall, to the extent permitted by applicable law,
be amortized, prorated, allocated and spread in equal parts throughout the
full term of this Note, so that the interest rate is uniform throughout the
full term of this Note.

The above sum and accrued interest shall be due and payable in forty-seven (47)
monthly principal installments of THIRTY-SIX THOUSAND DOLLARS ($36,000.00)
each, plus interest accrued on the unpaid principal balance to the date of
each installment, payment beginning September 1, 1999 and continuing on the
1st day of each month thereafter, until and including July 1, 2003 and then
in one installment of the entire unpaid principal balance, plus accrued
unpaid interest, on August 1, 2003.

Unless otherwise agreed to, in writing, or otherwise required by applicable
law, payments will be applied first to accrued, unpaid interest, then to
current principal, and any remaining amount to any unpaid collection costs,
late charges and other charges and the balance to the principal in inverse
order of maturity, provided, however, upon delinquency or other default,
Payee reserves the right to apply payments among principal, interest, late
charges, collection costs and other charges at its discretion. The Maker may
at any time pay the full amount or any part of this Note without the payment
of any premium or fee.

This Note along with the Revolving Line of Credit Note described below is
secured by a Deed of Trust, Mortgage, Security Agreement, Assignment of
Production and Financing Statement dated July 29, 1997 as amended by that
certain First Amendment to Deed of Trust dated July 29, 1998, as amended by
that certain Second Amendment to Deed of Trust dated December 23, 1998 and
as amended by that certain Third Amendment to Deed of Trust dated July 29,
1999 (hereinafter collectively referred to as "Deed of Trust"), from Maker
(herein also sometimes referred to as "Grantor") originally to John E. Grist,
Trustee and now to Randolph C. Henson, as Substitute Trustee, for the benefit
of Payee, covering any and all of Maker's interest, whether now owned or
hereafter acquired, in and to various oil and gas interests including leasehold
royalty, mineral and overriding royalty interests, located in Bastrop, Crane,
DeWitt, Fayette, Kent and Lee Counties, Texas, a portion of which properties
have been acquired with funds advanced under the terms of this Note.
Additionally, this Note is subject to the terms and conditions of the Loan
Agreement set out above. Failure to describe all or part of the security
shall not be considered as a waiver of such security.

At the option of the owner or holder hereof, all amounts due and unpaid
hereunder shall be accelerated and shall become immediately due and payable
upon the occurrence of any of the following events: default in the making of
any payment as herein agreed or in the payment of any principal or interest
due under any other indebtedness of Maker, whether primary or secondary, to
Payee including, but not limited to, that certain Revolving Line of Credit
Note dated July 29, 1999 have an original commitment amount of $1,000,000.00
executed by Maker and payable to Payee ("Revolving Line of Credit Note");
the failure of Maker to keep and perform any covenants herein or in the Deed
of Trust and Loan Agreement described above or any other agreements otherwise
made with Payee; any event that threatens the value of the collateral; any
event that cast doubt on the ability of Maker to repay the loan;the dissolution
of Maker; any proceedings or arrangements in bankruptcy by or against Maker;
Maker becomes insolvent; or any assignments or receiverships, whether in or
out of court, of Maker or any of Maker's property for the benefit of Maker's
creditors.

Payee may exercise any other available remedies, and failure to exercise any
remedy shall not constitute a waiver at any other time.

In addition to all principal and accrued interest on this Note, the Maker agrees
to pay (a) all reasonable costs and expenses incurred by all owners and holders
of this Note in any probate, reorganization, bankruptcy or any other proceeding
for the establishment or collection or any amount hereunder, or in collecting
this Note through any such proceedings, and (b) reasonable attorney's fees
when and if this Note is placed in the hands of an attorney for collection
after default.

The Maker and all Co-Makers, Sureties and Guarantors severally waive notice
(including but not limited to, notice of intent to accelerate and notice of
acceleration), demand, presentment for payment, protest and the filing of suit
for the purpose of fixing liability and consent that the time of payment hereof
may be extended and re-extended from time to time without notice to him, and
they agree that his, her or its liability on or with respect to this Note shall
note be affected by any release of or change in any security at any time
existing or by any failure to perfect or to maintain perfection or any lien
on or security interest in any such security.

If all or any part of the property securing this Note or any interest in it is
sold or transferred without Payee's prior written consent, Payee may, at its
option, require immediate payment in full of all sums secured by the Deed of
Trust securing this Note. However, this options shall not be exercised by
Payee if exercise is prohibited by state or federal law as of the date of this
Note and the Deed of Trust.

If any word, phrase, clause, paragraph, part, portion or provision hereof is
held to be invalid, the remainder hereof shall nevertheless be valid as
though it had been entered into without such invalid word, phrase, clause,
paragraph, part, portion or provision.

Payee reserves the right, exercisable in Payee's sole discretion and without
notice to Maker or any other person, to sell participations, to assign its
interest or both, in all or any part of this Note or the debt evidenced by
this Note.

When this instrument is executed by more than one person, corporation or other
legal entity, it shall be construed as though "Maker" were written "Makers"
and as though the pronouns and verbs in their number were changed to correspond
and in such case, each of the Makers shall be bound jointly and severally with
one another to keep, observe and perform the covenants, agreements, obligations
and liabilities imposed by this instrument upon the "Maker".

This Note is given in renewal, extension and consolidation, but expressly not
in extinguishment, of those certain Promissory Notes (1) dated July 29, 1997
as amended on July 29, 1998 and December 23, 1998 in the original principal
amount of $1,232,699.87, (2) dated July 29, 1998 as amended on December 23, 1998
having an original commitment amount of $600,000.00 and (3) dated December 23,
1998 in the original principal amount of $600,000.00, executed by Maker for
the benefit of Midland American Bank now known as Bank United ("Original
Notes"), which Original Notes are secured by the Deed of Trust described above.
Any liens, assignments and security interests securing the payment of said
Original Notes are hereby ratified, confirmed, renewed, extended, rearranged
and brought forward as security for the payment of this Note.

Unless otherwise specified below, this Note shall be construed under and
governed by the laws of the State of Texas (including applicable federal law),
but in any event Chapter 346 of the Finance Code of Tex. Rev. Civ. Stat. Ann.
(which regulates certain revolving loan accounts and revolving triparty
accounts) shall not apply to the loan evidenced by this Note.

The Maker warrants and represents to the Payee, and to all other owners and/or
holders of the indebtedness evidenced hereby, that (1) all loans evidenced by
the Note are and shall be "business loans" as such term is used in the
Depository Institution Regulation and Monetary Control Act of 1980 as amended,
and (2) such loans are for business, commercial, investment or similar purposes
and not primarily for personal, family, household or agricultural use as such
terms are used in Chapter 1 of the Texas Credit Code.

This loan is payable in full on August 1, 2003 or upon acceleration for any
reason. At maturity you must repay the entire principal balance of the loan
and unpaid interest then due. The Bank is under no obligation to refinance the
loan at that time. You will therefore, be required to make payment out of other
assets that you may own or you will have to find a lender, which may be the
bank you have this loan with, willing to lend you the money. If you refinance
this loan at maturity, you may have to pay some or all of the closing costs
normally associated with a new loan even if you obtain refinancing from the
same bank.

NOTICE: This term promissory note and the revolving line of credit note, the
Deed of Trust and accompanying crude oil and gas purchaser letters, UCC-1
Financing Statements, guaranties and loan agreement constitute a loan agreement
as defined in section 26.02(a) of the Texas Business & Commerce Code, and
represents the final agreement between the parties and may note be contradicted
by evidence to prior, contemporaneous or subsequent oral agreements of the
parties. There are no unwritten oral agreements between the Parties.

Dated the 29th day of July, 1999 although executed on the 25th day of August,
1999.

By: TEXAS VANGUARD OIL COMPANY
ROBERT N. WATSON, JR.
PRESIDENT

EXHIBIT 10.6

PROMISSORY NOTE (REVOLVING LINE OF CREDIT):

Bank United ("Lender")
401 West Texas
Midland, Texas 79701
Midland County

Texas Vanguard Oil Company ("Borrower")
PO Box 202650
Austin, Texas 78720

TERMS:
Interest Rate: Variable
Principal Amount: $3,000,000.00
Funding Date: December 1, 2001
Maturity Date: December 1, 2002
Loan Number: 700-053769-0006

For value received, Borrower promises to pay to the order of Lender indicated
above the principal amount of THREE MILLION DOLLARS ($3,000,000.00), or so much
thereof as may be advanced hereunder prior to maturity, together with interest
from date until maturity on the unpaid principal balance thereof from time to
time outstanding at the Stated Rate and with interest on all past due amounts,
both principal and accrued interest, at the Past Due Rate, provided, that for
the full term of this Note the interest rate produced by the aggregate of all
sums paid or agreed to be paid to the holder of this Note for the use, for-
bearance or detention of the debt evidenced hereby shall not exceed the Ceiling
Rate.

This Note is described in and is subject to the terms and provisions of that
certain Loan Agreement dated July 29, 1997 as amended by those certain First,
Second,Third and Fourth Amendments to Loan Agreement dated July 29, 1998,
December 23, 1998, July 29, 1999 and October 1, 2000 (hereinafter collectively
referred to as the "Loan Agreement") by, between and among Bank United, Maker
and Robert N. Watson Jr.as "Guarantor". The Loan Agreement, among other things,
contains provisions regarding the "Borrowing Base," as defined in the Loan
Agreement and for acceleration of the maturity hereof upon the happening or
omission of certain stated events upon the terms and conditions therein
specified.

"Stated Rate" means, on any day, a rate per annum equal to the Prime Rate from
time to time in effect plus one-half percent (.5%), provided, that if
on any day the Stated Rate shall exceed the Ceiling Rate for that day, then the
Stated Rate shall be fixed at the Ceiling Rate on that day and on each day
thereafter until the total amount of interest accrued at the Stated Rate on the
unpaid balance of this Note equals the total amount of interest which would
have accrued if there were no Ceiling Rate.

"Prime Rate" for purposes of this Note shall mean the current rate of interest
per annum as published in the Southwest Edition of the Wall Street Journal as
the Prime Rate in effect until the next Change Date. The Prime Rate may change
and each change in the Prime Rate shall be effective on the date of publication
of said change (referred to as "Change Date") until the next Change Date. Each
change in the Prime Rate shall be effective without special notice to the Maker
or any other person or entity. The Prime Rate is a reference rate and does not
necessarily represent the lowest or best rate actually charged to any customer.
If, for any reason, the Prime Rate is no longer available at the time of the
change, the Payee will choose a new index based upon a comparable measure and
comparable information and Payee will notify Maker of the substitution of any
such new index.

"Past Due Rate" means, on any day, a rate per annum equal to eighteen percent
(18%). All past due payments shall bear interest from the due date thereof
until paid at the Past Due Rate.

"Ceiling Rate" means, on any day, the maximum nonusurious rate of interest
permitted for that day by whichever of applicable federal or Texas law permits
the higher interest rate, stated as a rate per annum. On each day, if any,
that Chapter 302 ("Chapter 302") of the Finance Code of Texas Revised Civil
Statutes (the "Texas Finance Code") establishes the Ceiling Rate, the Ceiling
Rate shall be the "indicated rate ceiling" as defined in Chapter 302 for that
day. Payee may from time to time, as to current and future balances, implement
any other ceiling under Chapter 302 by notice to Maker, if and to the extent
permitted by, Chapter 302.

Interest on the amount of each advance of this note shall be computed on the
amount of each advance from the date of each advance. Interest shall be
computed for the actual number of days elapsed and on the basis of a year
consisting of 360 days, unless the Highest Lawful Rate would thereby be
exceeded or the designation of a 360 day year is prohibited by state or federal
law as of the date of this note, in which event to the extent necessary to
avoid exceeding the Highest Lawful Rate or state or federal laws, interest
shall be computed on the basis of the actual number of days elapsed in the
applicable calendar year in which accrued.

Without notice to the Maker or any other person or entity, the Prime Rate and
the Ceiling Rate shall each automatically fluctuate upward and downward as and
in the amount by which the Prime Rate and the maximum nonusurious rate of
interest, respectively, fluctuate.

If, for any reason whatsoever the interest paid or received on this Note during
the full term of this Note shall produce a rate which exceeds the Ceiling Rate,
the holder of this Note shall refund to the Payer or, at the holder's option,
credit against the principal of this Note such portion of said interest as
shall be necessary to cause the interest paid on this Note to produce a rate
equal to the Ceiling Rate. All sums paid or forbearance or detention of the
indebtedness evidenced hereby shall, to the extent permitted by applicable law,
be amortized, prorated, allocated and spread in equal parts throughout the
full term of this Note, so that the interest rate is uniform throughout the
full term of this Note.

The above sum and accrued interest shall be due and payable as follows:

(a) Interest shall be due and payable monthly as it accrues on the unpaid
principal balance to the date of each installment, payment beginning
November 1, 2000 and continuing on the 1st day of each month thereafter
until and including September 1, 2001.

(b) On October 1, 2001, the remaining balance, including principal and
interest, then remaining unpaid on this Note shall be due and payable.

This note is a revolving line of credit having an original commitment amount
of $3,000,000.00. The unpaid principal balance of this Note at any time shall
be the total of amounts loaned or advanced by the holder hereof less the amount
of all payments or prepayments of principal made herein by or for Maker. Maker
may use all or any part of the credit provided for herein at any time before
December 1, 2002. Maker may borrow, repay and reborrow hereunder and there is no
limitation on the number of advances made hereunder so long as the total unpaid
balance, at any time outstanding, does not exceed $3,000,000.00.

Unless otherwise agreed to, in writing, or otherwise required by applicable
law, payments will be applied first to accrued, unpaid interest, then to
current principal, and any remaining amount to any unpaid collection costs,
late charges and other charges and the balance to the principal in inverse
order of maturity, provided, however, upon delinquency or other default,
Payee reserves the right to apply payments among principal, interest, late
charges, collection costs and other charges at its discretion. The Maker may
at any time pay the full amount or any part of this Note without the payment
of any premium or fee.

This Note along with the Term Promissory Note described below is
secured by a Deed of Trust, Mortgage, Security Agreement, Assignment of
Production and Financing Statement dated July 29, 1997 as amended by that
certain First Amendment to Deed of Trust dated July 29, 1998, as amended by
that certain Second Amendment to Deed of Trust dated December 23, 1998
as amended by that certain Third Amendment to Deed of Trust dated July 29,
1999 and as amended by that certain Fourth Amendment to Deed of Trust dated
October 1, 2000 (hereinafter collectively referred to as "Deed of Trust"),
from Maker (herein also sometimes referred to as "Grantor") originally to John
E. Grist, Trustee and now to Randolph C. Henson, as Substitute Trustee, for the
benefit of Payee, covering any and all of Maker's interest, whether now owned
or hereafter acquired, in and to various oil and gas interests including
leasehold royalty, mineral and overriding royalty interests,located in Bastrop,
Crane, DeWitt, Fayette, Kent and Lee Counties, Texas. Additionally, this Note
is subject to the terms and conditions of the Loan Agreement set out above.
Failure to describe all or part of the security shall not be considered as a
waiver of such security.

At the option of the owner or holder hereof, all amounts due and unpaid
hereunder shall be accelerated and shall become immediately due and payable
upon the occurrence of any of the following events: default in the making of
any payment as herein agreed or in the payment of any principal or interest
due under any other indebtedness of Maker, whether primary or secondary, to
Payee including, but not limited to, that certain Revolving Line of Credit
Note dated July 29, 1999 as amended on October 1, 2000, executed by Maker and
payable to Payee in the original principal amount of $1,718,027.98 (hereinafter
referred to collectively as "Term Note"); the failure of Maker to keep and
perform any covenants herein or in the Deed of Trust and Loan Agreement
described above or any other agreements otherwise made with Payee; any event
that threatens the value of the collateral; any event that cast doubt on the
ability of Maker to repay the loan;the dissolution of Maker; any proceedings
or arrangements in bankruptcy by or against Maker; Maker becomes insolvent; or
any assignments or receiverships, whether in or out of court, of Maker or any
of Maker's property for the benefit of Maker's creditors. Payee may exercise
any other available remedies, and failure to exercise any remedy shall not
constitute a waiver at any other time.

In addition to all principal and accrued interest on this Note the Maker agrees
to pay (a) all reasonable costs and expenses incurred by all owners and holders
of this Note in any probate, reorganization, bankruptcy or any other proceeding
for the establishment or collection or any amount hereunder, or in collecting
this Note through any such proceedings, and (b) reasonable attorney's fees
when and if this Note is placed in the hands of an attorney for collection
after default.

The Maker and all Co-Makers, Sureties and Guarantors severally waive notice
(including but not limited to, notice of intent to accelerate and notice of
acceleration), demand, presentment for payment, protest and the filing of suit
for the purpose of fixing liability and consent that the time of payment hereof
may be extended and re-extended from time to time without notice to him, and
they agree that his, her or its liability on or with respect to this Note shall
note be affected by any release of or change in any security at any time
existing or by any failure to perfect or to maintain perfection or any lien
on or security interest in any such security.

If all or any part of the property securing this Note or any interest in it is
sold or transferred without Payee's prior written consent, Payee may, at its
option, require immediate payment in full of all sums secured by the Deed of
Trust securing this Note. However, this options shall not be exercised by
Payee if exercise is prohibited by state or federal law as of the date of this
Note and the Deed of Trust.

If any word, phrase, clause, paragraph, part, portion or provision hereof is
held to be invalid, the remainder hereof shall nevertheless be valid as
though it had been entered into without such invalid word, phrase, clause,
paragraph, part, portion or provision.

Payee reserves the right, exercisable in Payee's sole discretion and without
notice to Maker or any other person, to sell participations, to assign its
interest or both, in all or any part of this Note or the debt evidenced by
this Note.

When this instrument is executed by more than one person, corporation or other
legal entity, it shall be construed as though "Maker" were written "Makers"
and as though the pronouns and verbs in their number were changed to correspond
and in such case, each of the Makers shall be bound jointly and severally with
one another to keep, observe and perform the covenants, agreements, obligations
and liabilities imposed by this instrument upon the "Maker".

This note is given in renewal and extension, but expressly not in
extinguishment, of that certain Promissory Note dated July 29, 1999 having an
original commitment amount of $1,000,000.00 executed by Maker and payable to
Payee ("Original Note"), which Note is secured by the Deed of Trust described
above. All liens, assignments and security interests securing the payment of
said Original Note are hereby ratified, confirmed, renewed, extended,
rearranged and brought forward as security for the payment of this Note.

Unless otherwise specified below, this Note shall be construed under and
governed by the laws of the State of Texas (including applicable federal law),
but in any event Chapter 346 of the Finance Code of Tex. Rev. Civ. Stat. Ann.
(which regulates certain revolving loan accounts and revolving triparty
accounts) shall not apply to the loan evidenced by this Note.

The Maker warrants and represents to the Payee, and to all other owners and/or
holders of the indebtedness evidenced hereby, that (1) all loans evidenced by
the Note are and shall be "business loans" as such term is used in the
Depository Institution Regulation and Monetary Control Act of 1980 as amended,
and (2) such loans are for business, commercial, investment or similar purposes
and not primarily for personal, family, household or agricultural use as such
terms are used in Chapter 1 of the Texas Credit Code.

This loan is payable in full on December 1,2002 or upon acceleration for any
reason. At maturity you must repay the entire principal balance of the loan
and unpaid interest then due. The Bank is under no obligation to refinance the
loan at that time. You will therefore, be required to make payment out of other
assets that you may own or you will have to find a lender, which may be the
bank you have this loan with, willing to lend you the money. If you refinance
this loan at maturity, you may have to pay some or all of the closing costs
normally associated with a new loan even if you obtain refinancing from the
same bank.

NOTICE: This Revolving Line of Credit Note, The Term Promissory Note, The
Deed of Trust and accompanying crude oil and gas purchaser letters, UCC-1
Financing Statements, guaranties and loan agreement constitute a loan agreement
as defined in section 26.02(a) of the Texas Business & Commerce Code, and
represents the final agreement between the parties and may note be contradicted
by evidence to prior, contemporaneous or subsequent oral agreements of the
parties. There are no unwritten oral agreements between the Parties.

Dated the 1st day of December, 2001.

BORROWER: TEXAS VANGUARD OIL COMPANY
ROBERT N. WATSON, JR.
PRESIDENT