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, 2003 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 4, 2004, there were 1,416,587 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 (314,347 shares), based on average
bid and asked prices on the aforesaid date, was $936,754.00.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant's definitive proxy statement regarding the election of directors
at the registrant's 2004 Annual Stockholders' Meeting filed or to be filed with
the Commission on or before April 30, 2004, 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 ETC Texas/Aquila Southwest (10% in 2003 and 15%
in 2001), Duke Energy/GPM (36% in 2003, 32% in 2002 and 39% in 2001), and
Plains Marketing (43% in 2003, 46% in 2002 and 32% in 2001). 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 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, 2003, the executive officers and directors were as follows:

Name Offices Held

Linda R. Watson Chairman of the Board
and Director

William G. Watson President, Chief Executive
Officer and Director

Teresa N. Nuckols Secretary

Robert L. Patterson Director

William G. Watson, (age 55), received his B.A. degree from Texas Tech
University in 1970 and his M.S. degree from The University of Texas at
Arlington in 1974. He has been a director or Robert Watson, Inc., and is
a director and President of William Watson, Inc., an independent geological
consulting firm, which he founded in 1983, for more than the last five years.
He was a director and Vice President of the Company from 1982 until 1997. He
was elected President of the Company on September 27, 2002, after the untimely
death of the Company's President and CEO, Robert N. Watson, Jr.

Linda R. Watson (age 60), 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 and is now President
of Robert Watson, Inc. She has been a Director of the Company since 1982.
Also, she was the wife of Robert N. Watson, Jr.

Teresa N. Nuckols (age 44), received her B.B.A. degree from Saint Edwards
University in 1988. She has been an employee of the Company since 1989. She
was elected Secretary of the Company in 2002.

Robert L. Patterson (age 64), 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, 2003, the Company
had two full-time salaried employees. From time to time the Company engages
independent petroleum engineers, geologists and landmen on a fee basis.
Both William Watson and Linda Watson are directors of companies as previously
described which have 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 month-to-month lease with a company owned by the Chairman of the Company
for these facilities, which began on July 1, 2002. The rent for these
facilities is $1,900 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, 1999 through 2003.

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

1999 38 32.61 5 3.91 --- ---
2000 26 18.45 0 1.22 --- ---
2001 3 9.46 2 2.31 --- ---
2002* 5 7.08 2 2.00 --- ---
2003# 4 7.45 2 0.35 1 0.1

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

(2) A net well is made up of 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 2000, 2001, 2002, and 2003, the net oil interest and/or the net gas
interest is larger than the gross oil interest or gross gas interest
because the Company purchased additional interests in oil and/or gas
wells in which it already owned an interest.

(*) In 2002, the Company participated in the drilling of 5 new wells. All
5 wells are classified as oil wells (5 gross oil, 2.45 net oil).

(#) In 2003, the Company participated in the drilling of one new well. The
well was deemed non-commercial and was plugged.

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, 2003, the Company does not have any single property
that is significant enough to materially affect its operations.

As of December 31, 2003, 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, 2003.

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

Bastrop (b) 87 64.85 41 34.99 3,154.81 2,609.74
Burleson 2 1.30 --- --- 1,258.66 618.48
Chaves (c) --- --- 1 .50 160.00 80.00
Crane (b) 9 8.00 1 .02 160.00 60.41
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
Grimes 1 1.00 --- --- 319.05 319.05
Hidalgo --- --- 2 .25 320.00 40.38
Howard (b) 1 .02 --- --- 40.00 .63
Kent (b) 27 .67 --- --- 360.00 26.61
Lea (b)(c) 2 --- 1 .07 400.00 22.25
Lee (b) 112 83.59 4 3.48 2,846.41 1,994.15
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
Ward --- --- 2 .16 720.00 29.20
Washington (b) 3 1.11 --- --- 853.98 157.40
Weston (d) 3 .90 --- --- 120.00 36.17
Wilson (b) 1 .95 --- --- 80.00 76.00
------ ------- ----- ----- -------- --------
267 174.40 59 39.73 13,215.31 7,737.19

(a) A gross well is a well in which the Company owns either a working
interest or a royalty interest. A net well is the fractional interest
owned by the Company. Gross acres are the total acres in a lease. Net
acres are the gross acres times the Company's interest.
(b) The Company owns overriding royalty interest in these counties.
(c) Chaves and Lea Counties are located in New Mexico.
(d) Weston County is 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, 2003, 2002
and 2001.

2003 2002 2001
Oil:
Production volume (barrels) 63,058 73,006 79,705
Average sales price per barrel $ 28.88 22.57 23.90
Gas:
Production volume (MCF) 395,234 461,115 562,341
Average sales price per MCF $ 4.47 2.45 4.04

Average production costs per
equivalent barrel $ 18.75 17.86 19.80

The worldwide crude oil prices of 2003 continue to fluctuate in 2004.
The Company cannot predict how prices will vary during 2004 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, 2003.

County Gross Net
Bastrop, TX 2,240.00 1,768.00
Crane, TX 240.00 209.00
Crosby, TX 1,120.00 560.00
DeWitt, TX 308.00 47.00
Eastland, TX 199.00 2.00
Eddy, NM 370.00 22.00
Fayette, TX 172.00 82.00
Garza, TX 3,250.00 789.00
Howard, TX 40.00 1.00
Kent, TX 4,905.00 1,500.00
Lea, NM 1,095.00 630.00
Lee, TX 1,861.00 1,414.00
Martin, TX 40.00 33.00
Midland, TX 133.00 3.00
Weston, WY 600.00 105.00
Wilson, TX 130.00 123.00
Winkler, TX 702.00 702.00
--------- --------
17,405.00 7,990.00
========= ========

All of the 7,990.00 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, 2003.

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 2003

First Quarter 3.000 2.050
Second Quarter 2.950 2.050
Third Quarter 2.050 1.900
Fourth Quarter 3.060 1.700

Fiscal 2002

First Quarter 2.255 2.200
Second Quarter 3.250 2.300
Third Quarter 2.250 2.050
Fourth Quarter 2.070 2.050

At December 31, 2003, the approximate number of holders of record of the
Company's common stock was 503. 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,
2003 2002 2001 2000 1999

Oil and gas sales $ 3,757,649 3,086,950 4,395,458 4,200,297 2,122,057
Total revenue 4,366,554 3,557,542 4,849,022 4,502,830 2,405,050
Total expenses (3,392,218) (3,775,572) (5,210,533) (4,174,514) (2,151,522)
Net earnings (loss) 711,061 (143,900) (238,597) 168,567 167,329
Net earnings (loss)
per share .50 (.10) (.17) .12 .12
Total assets 6,993,288 5,169,673 6,690,772 7,524,234 5,484,246
Short-term debt 874,094 939,664 4,138,411 3,944,609 1,648,316
Long-term debt 2,832,579 2,000,000 239,640 691,274 1,210,588
Total liabilities 4,438,548 3,325,994 4,701,693 5,296,558 3,425,137
Stockholders equity 2,554,740 1,843,679 1,989,079 2,227,676 2,059,109

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

ANALYSIS OF FINANCIAL CONDITION

During the year ended December 31, 2003 cash increased by $1,742,641.
During the years ended December 31, 2002 and 2001 cash decreased by $1,369,472
and $306,703, respectively. The cash flow from operating activities in 2003
was approximately $1,445,027, and increase of $1,024,000 from 2002. The cash
flow from operating activities in 2002 was approximately $421,027, a decrease
of $156,200 from 2001. The significant use of cash, other than for operating
expenses, has been investments in producing oil and gas properties of
$524,562, $306,570, and $707,144 in 2003, 2002 and 2001, 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 2002 and 2001 the Company increased cash by $28,000 and $141,481,
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, 2003,
the Company had a cash balance of $4,414,461 which represents approximately
119% of its notes payable as compared to the December 31, 2002, cash balance
of $2,671,820 which represented approximately 91% of its notes payable.

Working capital at December 31, 2003 increased to 3.39 to 1 from 2.47 to 1
at December 31, 2002. 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 2004 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 2004 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 2004 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, 2003.

As of December 31, 2003, the Company owed $428,794 and $2,750,000 to a bank
secured by producing oil and gas properties and well equipment purchased by
the Company. The notes are due in February 2005 (see note 3 of notes to
financial statements for further explanation).

ANALYSIS OF RESULTS OF OPERATIONS

From 2000 to 2001 oil and gas sales increased 5%, from 2001 to 2002 oil
and gas sales decreased 30%, and from 2002 to 2003 oil and gas sales increased
by 22%. 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. In 2002, oil production volume decreased by 8% at the same
time as the average price per barrel decreased by 6% to $22.57. Also, in 2002,
the gas production volume decreased by 18% while the average price decreased
39% to $2.45 per MCF. In 2003, oil production volume decreased by 14% at the
same time as the average price per barrel increased by 28% to $28.88. Also,
in 2003, the gas production volume decreased by 14% while the average price
per MCF increased by 82% to $4.47. The fluctuation in oil and gas prices is
solely attributable to changes in market prices.

Oil and gas production expenses decreased in 2003 and 2002 by 8% and 20%,
respectively, while oil and gas production expenses increased in 2001 by 41%.
This increase was 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 17% in 2003 over 2002 due to lower average
outstanding balances while interest expense increased by 43% in 2002 over
2001 due to higher 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. Depletion
increased 16% in 2003 as compared to a 26% decrease in depletion in 2002.

Total general and administrative expenses decreased $33,759 in 2003 and
increased $29,843 in 2002 and $104,046 in 2001.

In 2003, 2002 and 2001, the Company provided provisions of approximately
$149,986, $275,000 and $1,015,500, 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, 2003 and 2002, and the related statements of
earnings, stockholders' equity and cash flows for the years ended December
31, 2003, 2002 and 2001. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with 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, 2003 and 2002, and the results of its operations and its cash
flows for the years ended December 31, 2003, 2002 and 2001 in conformity with
U.S. generally accepted accounting principles.

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

March 10, 2004

TEXAS VANGUARD OIL COMPANY

Balance Sheets

December 31, 2003 and 2002

ASSETS
2003 2002
Current assets:
Cash (including certificates of deposit of
$700,000 in 2003 and 2002, pledged) $ 4,414,461 2,671,820
Trade accounts receivable, net of allowance
for doubtful accounts of $0 and $0 in
2003 and 2002, respectively 119,654 143,961
---------- ---------
Total current assets 4,534,115 2,815,781
---------- ---------
Oil and gas properties, partially pledged,
successful efforts method of accounting:
Proven properties 3,880,756 3,506,181
Unproven properties 166,630 166,630
Office furniture and equipment, partially pledged 186,698 204,446
--------- ---------
4,234,084 3,877,257
Less accumulated depreciation, depletion and
amortization (1,776,411) (1,624,865)
--------- ---------
2,457,673 2,252,392
--------- ---------
Investments 500 100,500
--------- ---------
Other assets 1,000 1,000
--------- ---------
TOTAL ASSETS $ 6,993,288 5,169,673
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Trade accounts payable $ 269,178 195,115
Taxes payable 192,730 4,973
Notes payable and current installments of
long-term debt 874,094 939,664
--------- ---------
Total current liabilities 1,336,002 1,139,752
--------- ---------
Deferred tax liability 269,967 186,242
Long-term debt, excluding current installments 2,832,579 2,000,000
--------- ---------
Total Liabilities 4,438,548 3,325,994

Commitments

Stockholders' equity:
Common stock, par value $.05; authorized
12,500,000 shares; 1,416,587 in 2003 and 2002,
respectively, issued and outstanding 70,829 70,829
Additional paid-in capital 1,888,530 1,888,530
Accumulated earnings (deficit) 595,381 (115,680)
--------- ---------
Total stockholders' equity 2,554,740 1,843,679
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,993,288 5,169,673
========= =========

See accompanying notes to financial statements.

TEXAS VANGUARD OIL COMPANY
Statements of Earnings

Years ended December 31, 2003, 2002 and 2001

2003 2002 2001

Revenues:
Oil and gas sales $ 3,757,649 3,086,950 4,395,458
Well operation fees 156,544 163,959 180,411
Other, net 399,578 228,291 192,362
Gain on sale of oil and
gas property --- 28,000 41,481
Interest income 52,783 50,342 39,310
--------- --------- ---------
Total revenues 4,366,554 3,557,542 4,849,022
--------- --------- ---------
Expenses:
Production cost 2,503,009 2,734,791 3,433,226
Depreciation, depletion
and amortization 214,128 184,840 250,902
Interest expense 111,754 133,841 93,648
General and administrative 413,341 447,100 417,257
Impairment in value of
oil and gas property 149,986 275,000 1,015,500
--------- --------- ---------
Total expenses 3,392,218 3,775,572 5,210,533
--------- --------- ---------
Earnings (loss) before income tax 974,336 (218,030) (361,511)

Income Taxes:
Provision for income tax (benefit) 263,275 (74,130) (122,914)
-------- --------- ---------
Net earnings (loss) $ 711,061 (143,900) (238,597)
======== ========= =========
Weighted average number of
shares outstanding 1,416,587 1,416,864 1,417,087
========= ========= =========

Basic and diluted earnings
(loss) per share $ .50 (.10) (.17)
========= ========= =========

See accompanying notes to financial statements.

TEXAS VANGUARD OIL COMPANY
Statements of Stockholders' Equity

Years ended December 31, 2003, 2002 and 2001

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

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

Repurchase and cancellation
of common stock (500) (25) (1,475) ---

Net earnings (loss) --- --- --- (143,900)
--------- -------- --------- --------
Balances at December 31, 2002 1,416,587 70,829 1,888,530 (115,680)

Net earnings --- --- --- 711,061
--------- -------- --------- ---------
Balances at December 31, 2003 1,416,587 70,829 1,888,530 595,381
========= ======== ========= =========

See accompanying notes to financial statements.

TEXAS VANGUARD OIL COMPANY

Statements of Cash Flows

Years ended December 31, 2003, 2002 and 2001

2003 2002 2001

Cash flows from operating activities:
Net earnings (loss) $ 711,061 (143,900) (238,597)
Adjustments to reconcile net earnings
to cash provided by operating
activities:
Depreciation, depletion
and amortization 214,128 184,840 250,902
(Gain) loss on sale of oil and
gas properties --- (28,000) (41,481)
Impairment in value of oil and
gas property 149,986 275,000 1,015,500
Changes in assets and liabilities:
(Increase) decrease in receivables 24,307 70,399 (72,065)
Increase (decrease) in payables 261,820 14,848 (212,576)
Increase (decrease) in deferred
federal income tax 83,725 47,840 (124,456)
--------- --------- ---------
Net cash provided by
operating activities 1,445,027 421,027 577,227
--------- --------- ---------
Cash flows from investing activities:
Purchase of investments --- (100,500) ---
Proceeds from disposal of investments 100,000 --- ---
Proceeds from sale of oil and
gas properties --- 28,000 141,481
Additions to oil and gas properties (524,562) (306,570) (707,144)
Proceeds from sale of equipment 21,743 28,458 15,660
Purchases of equipment (66,576) --- (76,123)
--------- --------- ---------
Net cash used in investing activities (469,395) (350,612) (626,126)
--------- --------- ---------
Cash flows from financing activities:
Borrowings on notes payable 3,763,489 1,600,000 3,700,000
Repayments of notes payable (2,996,480) (3,038,387) (3,957,831)
Repurchase of common stock --- (1,500) ---
--------- --------- ---------
Net cash provided (used) by
financing activities 767,009 (1,439,887) (257,831)
--------- --------- ---------
Net increase (decrease) in cash 1,742,641 (1,369,472) (306,730)

Cash and cash equivalents at
beginning of year 2,671,820 4,041,292 4,348,022
--------- -------- --------
Cash and cash equivalents at
end of year $ 4,414,461 2,671,820 4,041,292
========== ========== ==========
Supplemental disclosure of
cash flow information:
Interest paid $ 101,769 133,841 93,648
========== ========== ==========

See accompanying notes to financial statements.

TEXAS VANGUARD OIL COMPANY

Notes to Financial Statements

December 31, 2003, 2002 and 2001

(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. During the years ended December 31,
2003, 2002, and 2001 the Company recognized impairment losses of $149,986,
$275,000 and $1,015,500, respectively.

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

Investments - The Company has an investment in a private, closely held
corporation that is valued at fair value for financial statement purposes.
Fair value is based on capitalized earnings and return on investment.

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 2003, two customers in 2002, and
three customers in 2001 as follows: 2003 - 43%, 36%, 10%, 2002 - 46%, 32%,
and 2001 - 39%, 32%, 15%. 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.

In addition, the Company maintains its cash accounts in several commercial
banks. Accounts in the banks are guaranteed by the Federal Deposit Insurance
Corporation (FDIC) up to $100,000. At December 31, 2003 and 2002, cash in
excess of FDIC coverage was $4,067,801 and $2,634,951, respectively.

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) Investments

During 2002, the Company purchased a profit-only interest in a privately,
closely held company at a cost of $100,000. At December 31, 2002 the fair
value was determined to be $100,000, and as such there was no unrealized
gain or loss, and therefore no other comprehensive income or loss to
recognize at December 31, 2002.

During 2003, the closely held company dissolved, and the Company received a
liquidating distribution. No gain or loss was realized as the distribution
was considered a return on capital, and therefore no other comprehensive
income or loss is recognized at December 31, 2003.

The Company held other investments at year-end totaling less that $500.

(3) Notes Payable and Long-term Debt

The Company had notes payable and long-term debt to banks as follows at
December 31:
2003 2002

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. --- 235,075

A note with a bank secured by oil and gas properties.
The original value of the note was $735,074. Interest
accrues at .5% above the prime rate, with monthly
payments of $30,628. The note matures February
12, 2005. 428,794 ---

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 matured in December 2002. --- 2,000,000

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 on February 12, 2005. 2,750,000 ---

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 in certificates of deposit. The
line of credit matures on April 25, 2003. This line
of credit was renewed with interest and interest
payable quarterly at 6.35% secured by $700,000 in
certificates of deposit. The line of credit matures
on April 26, 2004. 500,000 700,000

Note payable with a bank secured by a vehicle.
The original value of the note was $28,415.
Interest accrues at 4.6%. The note matures
on November 16, 2007. 27,879 ---

Other notes payable, due on demand or in
monthly installments, maturing on various
dates through September, 2003, secured by
equipment. --- 4,589
--------- ---------
Total debt 3,706,673 2,939,664
Less current installments (874,094) (939,664)
--------- ---------
Long-term bank debt, excluding current installments $ 2,832,579 2,000,000
========= =========

Future maturities of long-term debt are as follows:

2004 $ 874,094
2005 2,818,167
2006 7,279
2007 7,133
---------
Total $3,706,673
=========

The note payable with a $428,794 balance as of December 31, 2003 has a
restrictive covenant, among others, that requires the Company to maintain
a cash flow to debt service ratio of not less than 1.25 to 1.00. The
Company was not in violation of the aforementioned, or other, restrictive
covenants for any quarter during the year-ended December 31, 2003.

(4) Related Party Transactions

The Company and an entity owned by the Chairman of the Company have an agree-
ment whereby the latter provides the Company general corporate management
services. The affiliated company received $222,000, $210,000, and $201,000 as
compensation for performance of those services during the years ended
December 31, 2003, 2002 and 2001, respectively. Effective January 1, 2004
the agreement was continued with terms of $18,500 per month through December
31, 2004.

The Company leases office space from a company owned by the Chairman of the
Company under a non-cancelable operating lease expiring June 30, 2004.
Rent expense incurred under this lease was $22,800, $22,200 and $22,800
for the years ended December 31, 2003, 2002, and 2001, respectively.
Future minimum lease payments for 2004 are $11,400.

Robert Watson, Inc. and William Watson, Inc.,both own small interests
in a number of the properties that the Company has interests in. Each company
also owns interest in 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 31,2003, 2002 and 2001, a Director of the
Company received $60,000 $72,320 and $51,500, respectively for engineering
consultant work.

During the year ended December 31, 2002 an officer of the Company purchased
a vehicle from the Company for $28,458, resulting in no gain or loss to the
Company.

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

During the year ended December 31, 2002, the Company purchased an investment
in a private, closely-held corporation that is valued at fair value for
financial statement purposes. The purchase of services from this related party
totaled $193,155 for the year ended 2002 and $85,105 for the year ended
December 31, 2003. As of December 31, 2003, the private, closely-held
corporation was dissolved, and the Company received a return of capital of
$100,000.

(5) 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:

2003 2002 2001

Current tax expense at statutory rate $ 179,550 --- ---
Deferred tax (benefit) 83,725 (74,130) (122,914)
_________ ________ ________
$ 263,275 (74,130) (122,914)
========= ======== ========

The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities at December 31, 2003 and 2002 is presented below:

2003 2002
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 (269,967) (186,242)
--------- ---------
Total deferred tax liability $ (269,967) (186,242)
========= =========

The Company has accumulated losses for Federal income tax purposes of
approximately $-0-, $230,000, and $-0- as of December 31, 2003, 2002
and 2001, respectively, which may be carried forward and used to reduce
taxable income in future years. The accumulated losses were utilized in 2003.

(6) 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, 2003 and 2002.

The Board of Directors
Texas Vanguard Oil Company:

INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL INFORMATION

Our report on our audit of the basic financial statements of Texas Vanguard
Oil Company for 2003 appears on page 12. The audit was made for the purpose
of forming an opinion on those statements taken as a whole. The supplemental
material presented in the following section of this report is presented for
purposes of additional analysis and is not a required part of the basic
financial statements. We have applied certain limited procedures, which
consisted principally of inquiries of management regarding the methods of
measurement and presentation of the required supplementary information.
However, we did not audit the information and express no opinion on it.

Sprouse & Anderson, L.L.P.
March 10, 2004

TEXAS VANGUARD OIL COMPANY

SUPPLEMENTAL OIL AND GAS INFORMATION

Years ended December 31, 2003, 2002 and 2001
(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.

2003 2002 2001
Oil Gas Oil Gas Oil Gas
BBLS MCF BBLS MCF BBLS MCF

Proved developed
and undeveloped
reserves:
Beginning of year 922,877 6,341,396 951,414 7,180,417 1,065,744 7,988,672
Revisions of
previous estimate 88,500 252,675 21,500 (465,726) (101,367) (688,502)
Extensions
and Discoveries --- --- --- --- --- ---
Purchase of
minerals in place 40,692 340,559 22,921 87,820 66,740 442,588
Sale of minerals --- --- --- --- --- ---
Production (63,058) (395,234) (73,006) (461,115) (79,705) (562,341)
--------- --------- -------- --------- -------- ---------
End of year 989,011 6,539,396 922,877 6,341,396 951,412 7,180,417
========= ========= ======== ========= ========= =========
Proved developed
reserves:
Beginning of year 922,877 6,341,396 951,412 7,180,417 1,065,744 7,988,672
End of year 989,011 6,539,396 922,877 6,341,396 951,412 7,180,417

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,
2003 2002 2001

Future cash inflows $ 53,100,051 41,173,230 37,347,266
Future production
and development costs (23,774,850) (20,628,693) (19,294,773)
Future income tax expenses (8,390,979) ( 5,724,646) (4,840,426)
------------ ------------ ------------
Future net cash flows 20,934,222 14,819,891 13,312,067

10% annual discount for
estimated timing of cash flows (12,721,019) (6,975,044) (4,955,521)
------------ ------------ ------------
Standardized measure of
discounted future net cash flows $ 8,213,203 7,844,847 8,256,546
============ ============ ============

TEXAS VANGUARD OIL COMPANY

SUPPLEMENTAL OIL AND GAS INFORMATION, CONTINUED
(Unaudited)

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

2003 2002 2001

Changes:
Sale of oil and gas produced, net of
production costs $ (1,257,140) (352,159) (962,232)
Net changes in prices and production
costs (470,853) (459,699) (1,038,973)
Purchase of minerals in place 127,939 60,345 176,064
Extensions and discoveries --- --- ---
Sales --- --- ---
Revisions of previous quantity estimates 428,395 (131,114) (778,521)
Accretion of discount 784,485 825,655 1,415,864
Other 755,530 (354,727) (4,714,300)
---------- ---------- ---------
Net changes 368,356 (411,699) (5,902,098)

Beginning balance - standardized measure
of discounted future net cash flows 7,844,847 8,256,546 14,158,644
---------- ---------- ----------
Ending balance - standardized measure
of discounted future net cash flows $ 8,213,203 7,844,847 8,256,546
========== ========== ==========

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,
2003 2002 2001

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

Proven oil and gas properties 3,880,756 3,506,181 3,474,611

Accumulated depletion and amortization (1,688,606) (1,504,724) (1,350,377)
---------- ---------- ----------
Net capitalized costs $ 2,358,780 2,168,087 2,290,864
========== ========== ==========

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

Years ended December 31,
2003 2002 2001

Acquisition of properties - unproven $ --- --- ---
Acquisition of properties - proven 524,562 306,570 707,144
Exploration costs --- --- ---
Development costs --- --- ---

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, 2003 and 2002 and
the related Statements of Earnings, Stockholders' Equity, and Cash Flows for
each of the years in the three-year period ended December 31, 2003, 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 26, 2003.

10.5 Note payable to First American Bank dated February 12, 2003.

10.6 Note payable to First American Bank dated February 12, 2003.

99.1 Certificate of Chief Executive Officer and Chief Financial Officer

99.2 Certification of Periodic Financial Reports

(b). Reports on Form 8-K

None filed during the quarter ended December 31, 2003.

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: William G. Watson
William G. Watson, President
March 26, 2004

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.

William G. Watson Rober L. Patterson
William G. Watson, President, Robert L. Patterson, Director
Director, Chief Executive March 26, 2004
Officer and Principal Financial
and Accounting Officer
March 26, 2004

Linda R. Watson Teresa N. Nuckols
Linda R. Watson, Director Teresa N. Nuckols, Secretary
and Chairman of the Board March 26, 2004
March 26, 2004

OFFICERS AND DIRECTORS CORPORATE INFORMATION

Linda R. Watson CORPORATE OFFICE
Chairman of the Board 9811 Anderson Mill Road, Suite 202
and Director Austin, Texas 78750

William G. Watson
President, Chief Executive INDEPENDENT ACCOUNTANTS
Officer and Director Sprouse & Anderson, L.L.P.
Austin, Texas
Teresa Nuckols
Secretary

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

CORPORATE GOVERNANCE
The Company has adopted a Code of Ethics
for its executive officers, directors and
employees which is available upon request
free of charge from:
Investor Relations
9811 Anderson Mill Road, Suite 202
Austin, Texas 78750

2003 ANNUAL SHAREHOLDERS MEETING
June 10, 2004, 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: 6.35%
Principal Amount: $700,000.00
Funding Date: April 26, 2003
Maturity Date: April 26, 2004

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 6.35% 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 26, 2004. In addition, Borrower will pay regular quarterly payments of
accrued unpaid interest beginning July 26, 2003, 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: William G. Watson, 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.

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: William G. Watson, President
Texas Vanguard Oil Company

EXHIBIT 10.5

TERM PROMISSORY NOTE:

First American Bank, SSB ("Lender")
500 West Illinois, Suite 10
Midland, Texas 79701
Midland County

Texas Vanguard Oil Company ("Borrower")
PO Box 202650
Austin, Texas 78720
TERMS:
Interest Rate: Variable
Principal Amount: $735,074.00
Funding Date: February 12, 2003
Maturity Date: February 12, 2005
Loan Number: 700028806
PROMISE TO PAY:

For value received, Texas Vanguard Oil Company, a Texas Corporation
("Borrower"), whose address is PO Box 202650, Austin, TX 78720-2650
promises to pay to the order of First American Bank, SSB ("Lender"
or "Payee") the sum of SEVEN HUNDRED THIRTY-FIVE THOUSAND SEVENTY-FOUR
DOLLARS ($735,074.00), together with interest on the unpaid principal balance
thereof from date hereof until maturity at the rate hereinafter provided,
both principal and interest payable as hereinafter provided in lawful money
of the United States of America at Lender's offices at 500 West Illinois,
Suite 10, Midland, TX 79701 or at such place as from time to time may be
designated by the holder of this Note.

This Note, that certain Revolving Line of Credit Note dated as of the date of
this Note having an original commitment amount of $3,000,000.00 executed by
Borrower and payable to Lender ("Line of Credit Note") and that certain Letter
of Credit Note or Agreement dated on or about the date of this Note have a face
amount of $250,000.00 executed by Borrower and payable to Lender ("Letter of
Credit Note") in support of a Letter of Credit in favor of the Texas Railroad
Commission are described in and are subject to the terms and provisions of that
certain Loan Agreement ("Loan Agreement") dated as of the date of this Note by
and between Borrower and Lender. The Loan Agreement, among other things,
contains provisions regarding the amount that Lender is required to advance
under the terms of the Line of Credit Note ("the Borrowing Base"), provisions
for acceleration of the maturity hereof upon the happening or omission of
certain stated events upon the terms and conditions therein specified and the
payment of an origination fee at closing of $15,000.00.

"Stated Rate" means, on any day, a rate per annum equal to the Prime Rate from
time to time in effect plus one-half of one percent (.5%), provided, that (a)
if on any day the Stated Rate shall exceed the Highest Lawful Rate for that day
then the Stated Rate shall be fixed at the Highest Lawful 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 Highest Lawful Rate and/or (b) the
Stated Rate shall not be less than four and three-quarters percent (4.75%).

As used herein the following terms shall have the meanings set forth below:

"Prime Rate" means the fluctuating per annum rate of interest which is
published in the Wall Street Journal as the Prime Rate, or if, but only if,
such Prime Rate or index is no longer available or if such Prime Rate is no
longer ascertainable, Lender (or its successors) will substitute an index
determined by Lender to be comparable, in its sole discretion, which rate shall
become the "Prime Rate". In the event The Wall Street Journal publishes more
than one interest rate as the Prime Rate, the Prime Rate used herein shall be
the highest of said published rates, unless Lender (or its successors) notifies
Borrower in writing of Lender's (or its successor's) intent to use one of the
lower published rates as the prime rate. The interest rate on this Note will
change each time and as of the date that the Prime Rate or applicable index
rate changes. The Prime Rate may not be the lowest rate of interest charged
by Lender to its customers.

"Highest Lawful Rate" means the maximum nonusurious rate of interest that
Lender is permitted under applicable law to contract for, take, charge or
receive with respect to the indebtedness evidenced by this Note.

The above sum and accrued interest shall be due and payable in twenty-three
(23) monthly principal installments of Thirty Thousand Six Hundred Twenty-Eight
dollars ($30,628.00) each, plus interest accrued on the unpaid principal
balance to the date of each installment, beginning March 12, 2003, and
continuing on the 12th date of each month thereafter until and including
January 12, 2005, and then in one installment of the entire unpaid principal
balance plus accrued unpaid interest on February 12, 2005.

All past due principal and/or interest or installments thereof shall bear
interest from maturity at the Highest Lawful Rate.

This Note, the Line of Credit Note and Letter of Credit Note described above
are secured by a Deed of Trust, Mortgage, Security Agreement, Assignment of
Production and Financing Statement dated as of the date of this Note from
Borrower (hereinafter sometimes referred to as "Grantor," whether one or
more) to Robert Nordhaus, Trustee for the benefit of the Lender covering any
and all of Grantor's interest, where now owned or hereafter acquired, in and
to various leasehold and associated net revenue and overriding royalty
interests in oil and gas wells and leases along with personal property
associated therewith and proceeds derived therefrom located in Bastrop, Crane,
DeWitt, Fayette, Kent, Lee and Martin Counties, Texas (hereinafter referred
to as "Security Documents"). Failure to describe all or part of the security
shall not be considered as a waiver of such security.

Upon the failure to pay any installment of the principal or interest on this
Note as above promised or upon the occurrence of a default or event of default
specified in the Line of Credit Note, Letter of Credit Note, the Loan Agreement
and/or the Security Documents described above, the holder of this Note or any
part thereof shall have the option of declaring the principal balance hereof
and the interest accrued herein to be immediately due and payable.

Borrower shall have the right to prepay, without penalty, at any time and from
time to time prior to maturity, all or any part of the unpaid principal
balance of this Note and/or all or any part of the interest accrued to the
date of such prepayment, provided that any such principal thus paid is
accompanied by accrued interest on such principal.

It is the intent of the Payee of the Note and the undersigned in the execution
of this Note and all other instruments now or hereafter securing this Note
to contract in strict compliance with applicable usury law. In furtherance
thereof, the said Lender and the undersigned stipulate and agree that none of
the terms and provisions contained in this Note, or in any other instrument
executed in connection herewith, shall ever be construed to create a contract
to pay for the use, forbearance or detention of money, at a rate in excess of
the Highest Lawful Rate; that neither the undersigned nor any guarantors,
endorsers or other parties now or hereafter becoming liable for payment of
this Note shall ever be obligated or required to pay interest on this Note
at a rate in excess of the Highest Lawful Rate; and that the provisions of this
paragraph shall control over all other provisions of this Note and any other
instruments now or hereafter executed in connection herewith which may be
in apparent conflict herewith. The holder of this Note expressly disavows
any intention to charge or collect excessive unearned interest or finance
charges in the event the maturity of this Note is accelerated. If the maturity
of this Note shall be accelerated for any reason of if the principal of this
Note is paid prior to the end of the term of this Note, and as a result
thereof the interest received for the actual period of existence of the loan
evidenced by this Note exceeds the Highest Lawful Rate, the holder of this
Note shall, at its option, either refund to the undersigned the amount of such
excess or credit the amount of such excess against the principal balance of
this Note then outstanding and thereby shall render inapplicable any and all
penalties of any kind provided by applicable law as a result of such excess
interest. In the event that the said Lender or any other holder of this Note
shall contract for, charge or receive any amount or amounts and/or any other
thing of value which are determined to constitute interest which would equal
to interest in excess of the Highest Lawful Rate shall, upon such determination
at the option of the Holder of this Note, be either immediately returned to
the undersigned or credited against the principal balance of this Note then
outstanding, in which event any and all penalties of any kind under applicable
law as a result of such excess shall be inapplicable. By execution of this
Note the undersigned acknowledges that it believes the loan evidenced by this
Note to be non-usurious and agrees that if, at any time the undersigned should
have reason to believe that such loan is in fact usurious, it will give the
holder of this Note notice of such condition and the undersigned agrees that
said holder shall have ninety (90) days in which to make appropriate refund
or other adjustment in order to correct such condition if in fact such exists.
The term "applicable law" as used in this Note shall mean the laws of the
State of Texas or the laws of the United States, whichever laws allow the
greater rate of interest, as such laws now exist or may be changed or amended
or come into effect in the future.

Should the indebtedness represented by this Note or any part thereof be
collected at law or in equity or through bankruptcy, probate or other court
proceeding or if this Note is placed in the hands of attorneys for collection
after default, the undersigned and all endorsers, guarantors and sureties of
this Note jointly and severally agree to pay to the holder of this Note in
addition to the principal and interest due and payable herein all the costs
and expenses of said holder in enforcing this Note including, without
limitation, reasonable attorneys' fees and legal expenses.

This Note is given for money advanced by Lender in payment of sums owing upon
certain indebtedness ("Original Note") executed by Borrower and payable to
Community National Bank, the successor-in-interest to Washington Mutual Bank,
FA, the successor-in-interest to Bank United,the successor-in-trust to Midland
American Bank, which Original Note is described in and secured by various Deeds
of Trust and amendments thereto executed by Grantor for the benefit of
Community National Bank covering oil and gas properties located in Bastrop,
DeWitt, Fayette, Kent, Lee and Martin Counties, Texas described in the Deed
of Trust. Borrower expressly acknowledges that it has requested and does
hereby request lender to advance monies to pay off the Original Note and if
requested by Lender to cause the holder of the Original Note to execute and
assign the Original Note to Lender.

The undersigned and all endorsers, guarantors and sureties of this Note and
all other persons liable or to become liable on this Note severally waive
presentment for payment, demand, notice of demand and of dishonor and
nonpayment of this Note, notice of acceleration, notice of intention to
accelerate the maturity of this Note, protest and notice of protest, diligence
in collecting, and the bringing of suit against any other party, and agree to
all renewals, extensions, modifications, partial payments, releases or
substitutions of security, in whole or in party, with or without notice, before
or after maturity.

This Note and the Rights and Duties of the parties hereunder shall be governed
for all purposes by the law of the state of Texas and the law of the United
States applicable to transactions within such state.

This loan is payable in full on February 12, 2005 or upon acceleration for any
reason permitted under this note. At maturity you must repay the entire
principal balance of the loan and unpaid interest then due. The Lender 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 Lender 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 Lender.

NOTICE: This term note, the line of credit note, the Letter of Credit, the
Security Documents and accompanying UCC-1 Financing Statements and Loan
Agreement and/or any and all other documents executed at or near the time of
execution of this document 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 not 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 date set out above, although executed on this 13th day of February
2003.

By: TEXAS VANGUARD OIL COMPANY
WILLIAM G. WATSON
PRESIDENT

EXHIBIT 10.6

PROMISSORY NOTE (REVOLVING LINE OF CREDIT):

First American Bank, SSB ("Lender")
500 West Illinois, Suite 10
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: February 12, 2003
Maturity Date: February 12, 2005
Loan Number: 700028799
PROMISE TO PAY:

For value received, Texas Vanguard Oil Company, a Texas Corporation
("Borrower"), whose address is PO Box 202650, Austin, TX 78720-2650
promises to pay to the order of First American Bank, SSB ("Lender"
or "Payee") the sum of THREE-MILLION DOLLARS ($3,000,000.00), or so much
thereof as may be advanced by Lender prior to maturity, together with interest
on the unpaid principal balance thereof from date hereof until maturity at
the rate hereinafter provided, both principal and interest payable as
hereinafter provided in lawful money of the United States of America at
Lender's offices at 500 West Illinois, Suite 10, Midland, TX 79701 or at
such place as from time to time may be designated by the holder of this Note.

This Note, that certain Term Promissory Note dated as of the date of
this Note in the original principal amount of $735,074.00 executed by
Borrower and payable to Lender ("Term Note") and that certain Letter
of Credit Note or Agreement dated on or about the date of this Note have a face
amount of $250,000.00 executed by Borrower and payable to Lender ("Letter of
Credit Note") in support of a Letter of Credit in favor of the Texas Railroad
Commission are described in and are subject to the terms and provisions of that
certain Loan Agreement ("Loan Agreement") dated as of the date of this Note by
and between Borrower and Lender. The Loan Agreement, among other things,
contains provisions regarding the amount that Lender is required to advance
under the terms of the Line of Credit Note ("the Borrowing Base"), provisions
for acceleration of the maturity hereof upon the happening or omission of
certain stated events upon the terms and conditions therein specified and the
payment of an origination fee at closing of $15,000.00.

"Stated Rate" means, on any day, a rate per annum equal to the Prime Rate from
time to time in effect plus one-half of one percent (.5%), provided, that (a)
if on any day the Stated Rate shall exceed the Highest Lawful Rate for that day
then the Stated Rate shall be fixed at the Highest Lawful 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 Highest Lawful Rate and/or (b) the
Stated Rate shall not be less than four and three-quarters percent (4.75%).

As used herein the following terms shall have the meanings set forth below:

"Prime Rate" means the fluctuating per annum rate of interest which is
published in the Wall Street Journal as the Prime Rate, or if, but only if,
such Prime Rate or index is no longer available or if such Prime Rate is no
longer ascertainable, Lender (or its successors) will substitute an index
determined by Lender to be comparable, in its sole discretion, which rate shall
become the "Prime Rate". In the event The Wall Street Journal publishes more
than one interest rate as the Prime Rate, the Prime Rate used herein shall be
the highest of said published rates, unless Lender (or its successors) notifies
Borrower in writing of Lender's (or its successor's) intent to use one of the
lower published rates as the prime rate. The interest rate on this Note will
change each time and as of the date that the Prime Rate or applicable index
rate changes. The Prime Rate may not be the lowest rate of interest charged
by Lender to its customers.

"Highest Lawful Rate" means the maximum nonusurious rate of interest that
Lender is permitted under applicable law to contract for, take, charge or
receive with respect to the indebtedness evidenced by 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 March
12, 2003, and continuing on the 12th day of each month thereafter until
and including January 12, 2005.

(b) On February 12, 2005, 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 Promissory Note having a face
amount of $3,000,000.00 but an initial commitment amount described in
the Loan Agreement. The unpaid principal balance of this Note at any
time shall be the total of all amounts loaned or advanced by the holder
hereof less the amount of all payments or prepayments of principal made
hereon by or for Maker. Maker may use all or any part of the credit
provided for herein at any time before February 12, 2005, subject to the
Borrowing Base limitation set out in the Loan Agreement. 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 the lessor of (a) $3,000,000.00 or (b) the
Borrowing Base as set out in the Loan Agreement.

Upon the failure to pay any installment of the principal or interest on this
Note as above promised or upon the occurrence of a default or event of default
specified in the Term Note, Letter of Credit Note, the Loan Agreement and/or
the Security Documents described below, the holder of this Note or any part
thereof shall have the option of declaring the principal balance hereof and
the interest accrued hereon to be immediately due and payable.

All past due principal and/or interest or installments thereof shall bear
interest from maturity at the Highest Lawful Rate.

This Note, the Term Note and Letter of Credit Note described above
are secured by a Deed of Trust, Mortgage, Security Agreement, Assignment of
Production and Financing Statement dated as of the date of this Note from
Borrower (hereinafter sometimes referred to as "Grantor," whether one or
more) to Robert Nordhaus, Trustee for the benefit of the Lender covering any
and all of Grantor's interest, where now owned or hereafter acquired, in and
to various leasehold and associated net revenue and overriding royalty
interests in oil and gas wells and leases along with personal property
associated therewith and proceeds derived therefrom located in Bastrop, Crane,
DeWitt, Fayette, Kent, Lee and Martin Counties, Texas (hereinafter referred
to as "Security Documents"). Failure to describe all or part of the security
shall not be considered as a waiver of such security.

Upon the failure to pay any installment of the principal or interest on this
Note as above promised or upon the occurrence of a default or event of default
specified in the Term Note, the Loan Agreement and/or the Security Documents
described above, the holder of this Note or any part thereof shall have the
option of declaring the principal balance hereof and the interest accrued
hereon to be immediately due and payable.

Borrower shall have the right to prepay, without penalty, at any time and from
time to time prior to maturity, all or any part of the unpaid principal
balance of this Note and/or all or any part of the interest accrued to the
date of such prepayment, provided that any such principal thus paid is
accompanied by accrued interest on such principal.

It is the intent of the Payee of the Note and the undersigned in the execution
of this Note and all other instruments now or hereafter securing this Note
to contract in strict compliance with applicable usury law. In furtherance
thereof, the said Lender and the undersigned stipulate and agree that none of
the terms and provisions contained in this Note, or in any other instrument
executed in connection herewith, shall ever be construed to create a contract
to pay for the use, forbearance or detention of money, at a rate in excess of
the Highest Lawful Rate; that neither the undersigned nor any guarantors,
endorsers or other parties now or hereafter becoming liable for payment of
this Note shall ever be obligated or required to pay interest on this Note
at a rate in excess of the Highest Lawful Rate; and that the provisions of this
paragraph shall control over all other provisions of this Note and any other
instruments now or hereafter executed in connection herewith which may be
in apparent conflict herewith. The holder of this Note expressly disavows
any intention to charge or collect excessive unearned interest or finance
charges in the event the maturity of this Note is accelerated. If the maturity
of this Note shall be accelerated for any reason or if the principal of this
Note is paid prior to the end of the term of this Note, and as a result
thereof the interest received for the actual period of existence of the loan
evidenced by this Note exceeds the Highest Lawful Rate, the holder of this
Note shall, at its option, either refund to the undersigned the amount of such
excess or credit the amount of such excess against the principal balance of
this Note then outstanding and thereby shall render inapplicable any and all
penalties of any kind provided by applicable law as a result of such excess
interest. In the event that the said Lender or any other holder of this Note
shall contract for, charge or receive any amount or amounts and/or any other
thing of value which are determined to constitute interest which would equal
to interest in excess of the Highest Lawful Rate shall, upon such determination
at the option of the Holder of this Note, be either immediately returned to
the undersigned or credited against the principal balance of this Note then
outstanding, in which event any and all penalties of any kind under applicable
law as a result of such excess shall be inapplicable. By execution of this
Note the undersigned acknowledges that it believes the loan evidenced by this
Note to be non-usurious and agrees that if, at any time the undersigned should
have reason to believe that such loan is in fact usurious, it will give the
holder of this Note notice of such condition and the undersigned agrees that
said holder shall have ninety (90) days in which to make appropriate refund
or other adjustment in order to correct such condition if in fact such exists.
The term "applicable law" as used in this Note shall mean the laws of the
State of Texas or the laws of the United States, whichever laws allow the
greater rate of interest, as such laws now exist or may be changed or amended
or come into effect in the future.

Should the indebtedness represented by this Note or any part thereof be
collected at law or in equity or through bankruptcy, probate or other court
proceeding or if this Note is placed in the hands of attorneys for collection
after default, the undersigned and all endorsers, guarantors and sureties of
this Note jointly and severally agree to pay to the holder of this Note in
addition to the principal and interest due and payable hereon all the costs
and expenses of said holder in enforcing this Note including, without
limitation, reasonable attorneys' fees and legal expenses.

This Note is given for money advanced by Lender in payment of sums owing upon
certain indebtedness ("Original Note") executed by Borrower and payable to
Community National Bank, the successor-in-interest to Washington Mutual Bank,
FA, the successor-in-interest to Bank United,the successor-in-trust to Midland
American Bank, which Original Note is described in and secured by various Deeds
of Trust and amendments thereto executed by Grantor for the benefit of
Community National Bank covering oil and gas properties located in Bastrop,
DeWitt, Fayette, Kent, Lee and Martin Counties, Texas described in the Deed
of Trust. Borrower expressly acknowledges that it has requested and does
hereby request lender to advance monies to pay off the Original Note and if
requested by Lender to cause the holder of the Original Note to execute and
assign the Original Note to Lender.

The undersigned and all endorsers, guarantors and sureties of this Note and
all other persons liable or to become liable on this Note severally waive
presentment for payment, demand, notice of demand and of dishonor and
nonpayment of this Note, notice of acceleration, notice of intention to
accelerate the maturity of this Note, protest and notice of protest, diligence
in collecting, and the bringing of suit against any other party, and agree to
all renewals, extensions, modifications, partial payments, releases or
substitutions of security, in whole or in party, with or without notice, before
or after maturity.

This Note and the Rights and Duties of the parties hereunder shall be governed
for all purposes by the law of the state of Texas and the law of the United
States applicable to transactions within such state.

This loan is payable in full on February 12, 2005 or upon acceleration for any
reason permitted under this note. At maturity you must repay the entire
principal balance of the loan and unpaid interest then due. The Lender 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 Lender 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 Lender.

NOTICE: This line of credit note, the term note, the Letter of Credit, the
Security Documents and accompanying UCC-1 Financing Statements and Loan
Agreement and/or any and all other documents executed at or near the time of
execution of this document 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 date set out above, although executed on this 13th day of February
2003.

By: TEXAS VANGUARD OIL COMPANY
WILLIAM G. WATSON
PRESIDENT

EXHIBIT 99.1:
CERTIFICATE OF CHIEF FINANCIAL OFFICER AND CHIEF FINANCIAL OFFICER

I, William Watson, certify that:

1. I have reviewed this annual report on Form 10-K of Texas Vanguard Oil
Company (TVOC).

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report.

3. Based on my knowledge, the financial statements and other financial
information included in this annual report fairly present, in all
material respects, the financial condition, results of operations and cash
flows of TVOC as of, and for, the periods presented in this annual report.

4. Texas Vanguard Oil Company's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in the Exchange Act Rules 13a-14 and 15d-14) for
TVOC and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to TVOC, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of TVOC disclosure controls and procedures
as of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date.

c) presented in this annual report our conclusions about the effective-
ness of the disclosure controls and procedures based on our evaluation as
of the Evaluation Date.

5. TVOC's other certifying officers and I have disclosed, based on our
most recent evaluation, to our auditors and the audit committee of TVOC's
board of directors:

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect TVOC's ability to record, process,
summarize and report financial data and have identified for TVOC's auditors
any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in TVOC's internal controls.

6. TVOC's other certifying officers and I have indicated in this annual
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

March 26, 2004

By /s/ William G. Watson
- ------------------------
William G. Watson, President
(Principal Financial and Accounting Officer)

EXHIBIT 99.2: CERTIFICATION OF PERIODIC FINANCIAL REPORTS

The undersigned hereby certifies that this Annual Report on Form 10-K
for the fiscal year ended December 31, 2003, fully complies with the
requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act
of 1934 and that the information contained in this report fairly presents,
in all material respects, the financial conditions and results of operations
of Texas Vanguard Oil Company.

Date: March 26, 2004 By/s/ William G. Watson
--------------------------
William G. Watson, President
(Principal Financial and Accounting Officer)