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  **UNITED STATES SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549****FORM 10-K****Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934******For the fiscal year ended September 30, 2005******Commission File Number: 0-9116****PANHANDLE ROYALTY COMPANY**(Exact name of registrant as specified in its charter)   OKLAHOMA 73-1055775   (State or other jurisdiction of incorporationor organization) (I.R.S. Employer Identification No.)     Grand Centre, Suite 305, 5400 North Grand Blvd., Oklahoma City, OK  73112  (Address of principal executive offices) (Zip code)Registrant’s telephone number: (405) 948-1560Securities registered under Section 12(b) of the Act:   CLASS A COMMON STOCK (VOTING) AMERICAN STOCK EXCHANGE   (Title of Class) (Name of each exchange on which registered)   Securities registered under Section 12(g) of the Act:  (Title of Class)  CLASS B COMMON STOCK (NON-VOTING) $1.00 par valueIndicateby check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No þIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o No þIndicate by check mark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.þ Yes o NoIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. oIndicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 ofthe Act).þYes o NoIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).o Yes þ NoThe aggregate market value of the voting stock held by non-affiliates of the registrant, computedby using the closing price of registrant’s common stock, at March 31, 2005, was $100,025,465. Asof December 3, 2005, 4,205,443 shares of Class A Common stock were outstanding.**Documents Incorporated By Reference**The information required by Part III of this Report, to the extent not set forth herein, isincorporated by reference from the registrant’s definitive proxy statement relating to the annualmeeting of stockholders to be held in February 2006, which definitive proxy statement will be filedwith the Securities and Exchange Commission within 120 days after the end of the fiscal year towhich this Report relates.  
 

 
**TABLEOF CONTENTS**           **Page** **PART I**             Item 1 Business  1-8        Item 2 Properties  8-15        Item 3 Legal Proceedings  15        Item 4 Submission of Matters to a Vote of Security Holders  15        **PART II**             Item 5 Market for Registrants Common Equity and Related Stockholder Matters  16        Item 6 Selected Financial Data  17-18        Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations  18-24        Item 7A Quantitative and Qualitative Disclosures about Market Risk  24        Item 8 Financial Statements and Supplementary Data  25-48        Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  49        Item 9A Controls and Procedures  49        **PART III**             Item 10-14 Incorporated by Reference to Proxy Statement           **PART IV**             Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8- K  50        Signature Page    51        Exhibit 21    52        Exhibit 31.1-31.2    53-54        Exhibit 32.1-32.2    55-56  Subsidiaries Certification of Chief Executive Officer Certification of Chief Financial Officer Certification of Chief Executive Officer Certification of Chief Financial OfficerCertain defined terms as used in this report: “**SEC**” means the United States Securities and ExchangeCommission, “**Bbl**” means barrel, “**Mcf**” means thousand cubic feet, “**Mcfd**” means thousand cubic feetper day, “**Mcfe**” means natural gas stated on an Mcf basis and crude oil converted to a thousandcubic feet of natural gas equivalent by using the ratio of one Bbl of crude oil to six Mcf ofnatural gas, “**PV-10**” means estimated pretax present value of future net revenues discounted at 10%using SEC rules, “**gross**” wells or acres are the wells or acres in which the Company has a workinginterest, and “**net**” wells or acres are determined by multiplying gross wells or acres by theCompany’s net revenue interest in such wells or acres. References to years 2002-2006 refer to theCompany’s fiscal years ended September 30 each year. “**Minerals**” or “**mineral acres**” refers to feemineral acreage owned in perpetuity by the Company.
 

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**PART I****ITEM 1 BUSINESS**GENERAL     Panhandle Royalty Company (“Panhandle” or the “Company”) is an Oklahoma corporation organizedin 1926 as Panhandle Cooperative Royalty Company. In 1979, Panhandle Cooperative Royalty Companywas merged into Panhandle. Panhandle’s authorized and registered stock consisted of 100,000 sharesof $1.00 par value Class A Common Stock. In 1982, the Company split the stock on a 10-for-1 basisresulting in 1,000,000 shares of authorized Class A Common Stock. In May 1999, the Company’sshareholders voted to increase the authorized Class A Common Stock of the Company to 6,000,000shares and to split the shares on a three-for-one basis. In addition, voting rights for the shareswere changed from one vote per shareholder to one vote per share. In February 2004, the Company’sshareholders voted to increase the authorized Class A Common Stock of the Company to 12,000,000shares and to split the shares on a two-for-one basis.     Since its formation, the Company has been involved in the acquisition and management of feemineral acreage and the exploration for and development of oil and gas properties, principallyinvolving wells located on the Company’s mineral acreage. Panhandle’s mineral properties and otheroil and gas interests are located primarily in Oklahoma, New Mexico and Texas. Properties are alsolocated in nineteen other states. The majority of the Company’s oil and gas production is fromwells located in Oklahoma. In 1988, the Company merged with New Mexico Osage Royalty Company thusacquiring most of its New Mexico mineral acreage.     On October 1, 2001, Panhandle acquired privately held Wood Oil Company (“Wood”) of Tulsa,Oklahoma. Pursuant to an Agreement and Plan of Merger dated August 9, 2001 among Panhandle RoyaltyCompany, PHC, Inc., and Wood. Wood merged with Panhandle’s wholly owned subsidiary PHC, Inc., onOctober 1, 2001, with Wood being the surviving company. Prior to the acquisition, Wood was aprivately held company engaged in oil and gas exploration and production and fee mineral ownershipand owned interests in certain oil and gas and real estate partnerships and an office building inTulsa. Wood is operating as a wholly owned subsidiary of Panhandle. Wood and its shareholderswere unrelated parties to Panhandle.     The Company’s office is located at Grand Centre, Suite 305, 5400 North Grand Blvd., OklahomaCity, OK 73112 (405)948-1560, FAX (405)948-2038. Its website is located at www.panra.com.     The Company makes periodic SEC reports on Forms 10-Q and Forms 10-K, the Company’s annualreport to shareholders and current press releases available free of charge through its website assoon as reasonably practicable after they are filed electronically with the SEC. In addition,posted on the website are copies of the various corporate governance documents. From time to timeother important disclosures to investors are provided by posting them in the press release orupcoming events section of the website, as allowed by SEC rules.     Materials filed with the SEC may be read and copied at the SEC’s Public Reference Room at 450Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public ReferenceRoom may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internetwebsite at www.sec.gov that contains reports, proxy and information statements, and otherinformation regarding the Company that have been filed electronically with the SEC.
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BUSINESS STRATEGY     The majority of Panhandle’s revenues are derived from the production and sale of oil andnatural gas. See “Item 8 — Financial Statements”. The Company’s oil and gas holdings, includingits mineral acreage and its interests in producing wells, both working interests and royaltyinterests, are centered in Oklahoma with some activity in New Mexico, Texas and Kansas. See “Item2 — Description of Properties”. Exploration and development of the Company’s oil and gasproperties are conducted in association with operating oil and gas companies, primarily largerindependent companies. The Company does not operate any of its oil and gas properties, but hasbeen an active working interest participant for many years in wells drilled on the Company’smineral properties and in third party drilling prospects. A large percentage of the Company’srecent drilling participations have been on properties in which the Company has mineral acreageand, in many cases, already owns an interest in a producing well in the unit. This “increaseddensity” drilling has accounted for a large part of the successful oil and gas wells completedduring these years and has added significant reserves and production for the Company. The Companyacquired additional mineral interest properties, both producing and non-producing, and interests inapproximately 2000 wells in the Wood acquisition. Several of the mineral properties and wellinterests were in areas where the Company had no holdings, thus expanding the Company’s area ofinterest.PRINCIPAL PRODUCTS AND MARKETS     The Company’s principal products are crude oil and natural gas. These products are sold tovarious purchasers, including pipeline and marketing companies, which are generally located in andservice the areas where the Company’s producing wells are located. The Company does not act asoperator for any of the properties in which it owns an interest; thus it relies on the operatingexpertise of numerous companies that operate in the areas where the Company owns interests. Thisexpertise includes the drilling and completion of new wells, producing well operations and, in mostcases, the marketing or purchasing of the well’s production. Natural gas sales are principallyhandled by the well operator and are normally contracted on a monthly basis with third party gasmarketers and pipeline companies. Payment for gas sold is received either from the contractedpurchasers or the well operator. Crude oil sales are generally handled by the well operator andpayment for oil sold is received from the well operator or from the crude oil purchaser.     In general, prices of oil and gas are dependent on numerous factors beyond the control of theCompany, such as competition, international events and circumstances, supply and demand, actionstaken by the Organization of Petroleum Exporting Countries (“OPEC”), and economic, political andregulatory developments. Since demand for natural gas is generally highest during winter months,prices received for the Company’s natural gas are subject to seasonal variations. The Company hasnot, to date, engaged in price hedging on its oil or gas production.COMPETITIVE BUSINESS CONDITIONS     The oil and gas industry is highly competitive, particularly in the search for new oil and gasreserves. There are many factors affecting Panhandle’s competitive position and the market for itsproducts which are beyond its control. Some of these factors include the quantity and price offoreign oil imports, changes in prices received for its oil and gas production, business andconsumer demand for refined oil products and natural gas, and the effects of federal and stateregulation of the exploration for, production of and sales of oil and natural gas. Changes inexisting economic conditions, weather patterns and actions taken by OPEC and other oil-producingcountries have dramatic influence on the price Panhandle receives for its oil and gas production.The Company relies heavily on companies with greater resources, staff, equipment, research, andexperience for operation of wells and the development and drilling of subsurface prospects. TheCompany uses its strong financial base and its mineral acreage
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ownership, coupled with its own geologic and economic evaluation, to participate in drillingoperations with these larger companies. This method allows the Company to effectively compete indrilling operations it could not undertake on its own due to financial and personnel limits andallows it to maintain low overhead costs.SOURCES AND AVAILABILITY OF RAW MATERIALS     The existence of commercial oil and gas reserves is essential to the ultimate realization ofvalue from the Company’s mineral acreage and these mineral properties may be considered a rawmaterial to its business. The production and sale of oil and natural gas from the Company’sproperties is essential to provide the cash flow necessary to sustain the ongoing viability of theCompany. The Company continues to reinvest a portion of its cash flow in the purchase of oil andgas leasehold acreage and, to a lesser extent, additional mineral acreage, to assure the continuedavailability of acreage with which to participate in exploration, drilling, and developmentoperations and subsequently the production and sale of oil and gas. This participation inexploration and production activities and the purchasing of additional acreage is necessary tocontinue to supply the Company with the raw materials with which to generate additional cash flow.Mineral and leasehold purchases are made from varied owners, and the Company does not rely on anyparticular companies or individuals for these acquisitions.MAJOR CUSTOMERS     The Company’s oil and gas production is sold, in most cases, by the well operators to manydifferent purchasers on a well-by-well basis. During fiscal 2005, sales through ChesapeakeOperating Inc. accounted for approximately 17% of the Company’s total revenues. Generally, if onepurchaser declines to continue purchasing the Company’s oil and natural gas, several otherpurchasers can be located, especially in the current market environment for natural gas and oil.Pricing is usually reasonably consistent from purchaser to purchaser.PATENTS, TRADEMARKS, LICENSES, FRANCHISES AND ROYALTY AGREEMENTS     The Company does not own any patents, trademarks, licenses or franchises. Royalty agreementson producing oil and gas wells stemming from the Company’s ownership of mineral acreage generate aportion of the Company’s revenues. These royalties are tied to the ownership of the mineralacreage and this ownership is perpetual, unless sold by the Company. Royalties are due and payableto the Company whenever oil and/or gas is produced from wells located on the Company’s mineralacreage.GOVERNMENTAL REGULATION     Oil and gas production is subject to various taxes, such as gross production taxes and, insome cases, ad valorem taxes.     The State of Oklahoma and other states require permits for drilling operations, drilling bondsand reports concerning operations and impose other regulations relating to the exploration andproduction of oil and gas. These states also have regulations addressing conservation matters,including provisions for the unitization or pooling of oil and gas properties and the regulation ofspacing, plugging and abandonment of wells. As previously discussed, the well operators are reliedupon by Panhandle to comply with governmental regulations.     Various aspects of the Company’s oil and gas operations are regulated by agencies of thefederal government. The transportation of natural gas in interstate commerce is generallyregulated by the Federal Energy Regulatory Commission (“FERC”) pursuant to the Natural Gas Act of1938 and the Natural Gas Policy Act of 1978 (“NGPA”). The intrastate transportation and gatheringof natural gas
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(and operational and safety matters related thereto) may be subject to regulation by state andlocal governments.     FERC’s jurisdiction over interstate natural gas sales was substantially modified by the NGPAunder which FERC continued to regulate the maximum selling prices of certain categories of gas soldin “first sales” in interstate and intrastate commerce. Effective January 1, 1993, however, theNatural Gas Wellhead Decontrol Act (the “Decontrol Act”) deregulated natural gas prices for all“first sales” of natural gas. Because “first sales” include typical wellhead sales by producers,all natural gas produced from the Company’s natural gas properties is sold at market prices,subject to the terms of any private contracts which may be in effect. FERC’s jurisdiction overnatural gas transportation was not affected by the Decontrol Act.     Sales of natural gas are affected by intrastate and interstate gas transportation regulation.Beginning in 1985, FERC adopted regulatory changes that have significantly altered thetransportation and marketing of natural gas. These changes were intended by FERC to fostercompetition by transforming the role of interstate pipeline companies from wholesale marketers ofnatural gas to the primary role of gas transporters. As a result of the various omnibus rulemakingproceedings in the late 1980s and the individual pipeline restructuring proceedings of the early tomid-1990s, interstate pipelines must provide open and nondiscriminatory transportation andtransportation-related services to all producers, natural gas marketing companies, localdistribution companies, industrial end users and other customers seeking service. Through similarorders affecting intrastate pipelines that provide similar interstate services, FERC expanded theimpact of open access regulations to intrastate commerce.     More recently, FERC has pursued other policy initiatives that have affected natural gasmarketing. Most notable are (1) the large-scale divestiture of interstate pipeline-owned gasgathering facilities to affiliated or non-affiliated companies; (2) further development of rulesgoverning the relationship of the pipelines with their marketing affiliates; (3) the publication ofstandards relating to the use of electronic bulletin boards and electronic data exchange by thepipelines to make available transportation information on a timely basis and to enable transactionsto occur on a purely electronic basis; (4) further review of the role of the secondary market forreleased pipeline capacity and its relationship to open access service in the primary market; and(5) development of policy and promulgation of orders pertaining to its authorization ofmarket-based rates (rather than traditional cost-of-service based rates) for transportation ortransportation-related services upon the pipeline’s demonstration of lack of market control in therelevant service market.     As a result of these changes, sellers and buyers of natural gas have gained direct access tothe particular pipeline services they need and are able to conduct business with a larger number ofcounter parties. These changes generally have improved the access to markets for natural gas whilesubstantially increasing competition in the natural gas marketplace. What new or differentregulations FERC and other regulatory agencies may adopt or what effect subsequent regulations mayhave on production and marketing of natural gas from the Company’s properties cannot be predicted.     Sales of oil are not regulated and are made at market prices. The price received from thesale of oil is affected by the cost of transporting it to market. Much of that transportation isthrough interstate common carrier pipelines. Effective January 1, 1995, FERC implementedregulations generally grandfathering all previously approved interstate transportation rates andestablishing an indexing system for those rates by which adjustments are made annually based on therate of inflation, subject to certain conditions and limitations. These regulations may tend toincrease the cost of transporting oil by interstate pipeline, although the annual adjustments mayresult in decreased rates in a given year. These regulations have generally been approved onjudicial review. Every five years, FERC will examine the relationship between the annual change inthe applicable index and the actual cost changes experienced by the oil pipeline industry.
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ENVIRONMENTAL MATTERS     As the Company is directly involved in the extraction and use of natural resources, it issubject to various federal, state and local provisions regarding environmental and ecologicalmatters. Compliance with these laws may necessitate significant capital outlays; however, to datethe Company’s cost of compliance has been insignificant. The Company does not believe theexistence of these environmental laws will materially hinder or adversely affect the Company’sbusiness operations; however, there can be no assurances of future events. Since the Company doesnot operate any wells where it owns an interest, actual compliance with environmental laws iscontrolled by the well operators, with Panhandle being responsible for its proportionate share ofthe costs involved. Panhandle carries liability insurance and, to the extent available atreasonable cost, pollution control coverage. However, all risks are not insured due to theavailability and cost of insurance.EMPLOYEES     At September 30, 2005, Panhandle employed seventeen persons on a full-time basis and onepart-time employee. Four of the employees are executive officers and the chief executive officeris a director of the Company.RISK FACTORS     In addition to the other information included in this Form 10-K, the following risk factorsshould be considered in evaluating the Company’s business and future prospects. The risk factorsdescribed below are not necessarily exhaustive and investors are encouraged to perform their owninvestigation with respect to the Company and its business. Investors should also read the otherinformation included in this Form 10-K, including the financial statements and related notes.**Oil and natural gas prices are volatile. Volatility in oil and natural gas prices can adverselyaffect results and the price of the Company’s common stock. This volatility also makes valuationof oil and natural gas producing properties difficult and can disrupt markets.**     Oil and natural gas prices have historically been, and are likely to continue to be, volatile.The prices for oil and natural gas are subject to wide fluctuation in response to a number offactors, including: **•** relatively minor changes in the supply of and demand for oil and natural gas;  **•** market uncertainty;  **•** worldwide economic conditions;  **•** weather conditions;  **•** import prices;  **•** political conditions in major oil producing regions, especially the Middle East;  **•** actions taken by OPEC;  **•** competition from other sources of energy; and  **•** economic, political and regulatory developments.     Price volatility makes it difficult to budget and project the return on exploration anddevelopment projects involving oil and natural gas properties and to estimate with precision thevalue of producing properties that are owned or acquired. In addition, unusually volatile pricesoften disrupt the market for oil and natural gas properties, as buyers and sellers have moredifficulty agreeing on the purchase price of properties. Quarterly results of operations mayfluctuate significantly as a result of, among other things, variations in oil and natural gasprices and production performance. In recent years, oil and natural gas price volatility hasbecome increasingly severe.
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**A substantial or extended decline in oil and natural gas prices would have a material adverseeffect on the Company.**     A substantial or extended decline in oil and natural gas prices would have a material adverseeffect on the Company’s financial position, results of operations, access to capital and thequantities of oil and natural gas that may be economically produced. A significant decrease inprice levels for an extended period would have a negative effect in several ways including: **•** cash flow would be reduced, decreasing funds available for capital expendituresemployed to replace reserves or increase production;  **•** certain reserves may no longer be economic to produce, leading to both lower provedreserves and cash flow; and  **•** access to sources of capital, such as equity or long-term debt markets, could beseverely limited or unavailable.**Lower oil and natural gas prices may cause impairment charges.**     The Company has elected to utilize the successful efforts method of accounting for its oil andgas exploration and development activities. Exploration expenses, including geological andgeophysical costs, rentals and exploratory dry holes, are charged against income as incurred.Costs of successful wells and related production equipment and development dry holes arecapitalized and amortized by property using the unit-of-production method as oil and gas isproduced.     All long-lived assets, principally the Company’s oil and gas properties, are monitored forpotential impairment when circumstances indicate that the carrying value of the asset may begreater than its future net cash flows. The need to test a property for impairment may result fromsignificant declines in sales prices or unfavorable adjustments to oil and gas reserves. Anyassets held for sale are reviewed for impairment when the Company approves the plan to sell.Because of the uncertainty inherent in these factors, the Company can not predict when or if futureimpairment charges will be recorded. If an impairment charge is recognized, cash flow fromoperating activities is not impacted but net income and consequently shareholders equity arereduced.**Although the Company’s estimated oil and natural gas reserve data is prepared by a consultingengineering firm, estimates may still prove to be inaccurate.**     The Company’s reserve data represents the estimates of Campbell and Associates, a consultingpetroleum engineering firm. Reserve estimates are prepared for all of the Company’s propertiesannually by the reservoir engineer with a limited review mid-year report also prepared.Incorporated into reserve estimates are many factors and assumptions including: **•** expected reservoir characteristics based on geological, geophysical and engineeringassessments;  **•** future production rates based on historical performance and expected futureoperating and investment activities;  **•** future oil and gas prices; and  **•** future development and operating costs.     Management believes the assumptions are reasonable based on the information available at thetime of the estimates, actual results could vary considerably which could cause material variancesin the estimated quantities of proved oil and natural gas reserves in the aggregate and for aparticular geographic location or future net revenues, including production, revenues, taxes anddevelopment and operating expenditures. Any significant variation from these assumptions couldresult in the actual quantity of reserves and future net cash flows being materially different fromthe estimates. In addition,
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estimates of reserves may be subject to downward or upward revision based upon productionhistory, results of future exploration and development, prevailing oil and natural gas prices,operating and development costs and other factors. Because a complete review of reserveprojections is only done at the end of the year, any material change in a reserve estimate isincluded in subsequent reserve reports.**Failure to find or acquire additional reserves, thus reserves and production will declinematerially from their current levels.**     The rate of production from oil and natural gas properties generally declines as reserves aredepleted. Except to the extent that the Company acquires additional properties containing provedreserves, conducts successful exploration and development drilling, successfully applies newtechnologies or identifies additional behind-pipe zones or secondary recovery reserves, theCompany’s proved reserves will decline materially as reserves are produced. Future oil and naturalgas production is, therefore, highly dependent upon the level of success in acquiring or findingadditional reserves. All the above activities must be done in conjunction with operators of thesewells, as the Company does not operate any of its wells.     Drilling for oil and natural gas may involve unprofitable efforts, not only from dry wells butalso from wells that are productive but do not produce sufficient net reserves to return a profitafter deducting drilling, operating and other costs. In addition, wells that are profitable maynot achieve a targeted rate of return. We rely on the operators’ seismic data and other advancedtechnologies in identifying prospects and in conducting exploration activities. The seismic dataand other technologies used do not allow them to know conclusively prior to drilling a well whetheroil or natural gas is present or may be produced economically.     The ultimate cost of drilling, completing and operating a well is controlled by theseoperators and cost factors can adversely affect the economics of a project. Further drillingoperations may be curtailed, delayed or canceled as a result of numerous factors, includingunexpected drilling conditions, title problems, pressure or irregularities in formations, equipmentfailures or accidents, adverse weather conditions, environmental and other governmentalrequirements and the cost of, or shortages or delays in the availability of, drilling rigs,equipment and services.**Oil and natural gas drilling and producing operations involve various risks.**     The Company is subject to all the risks normally incident to the operation and development ofoil and natural gas properties and the drilling of oil and natural gas wells, includingencountering well blowouts, cratering and explosions, pipe failures, fires, formations withabnormal pressures, uncontrollable flows of oil, natural gas, brine or well fluids, release ofcontaminants into the environment and other environmental hazards and risks.     The Company maintains insurance against many potential losses or liabilities arising from welloperations in accordance with customary industry practices and in amounts believed to be prudent.However, this insurance does not protect us against all operational risks. For example, theCompany does not maintain business interruption insurance. Additionally, pollution andenvironmental risks generally are not fully insurable. These risks could give rise to significantcosts not covered by insurance that could have a material adverse effect upon financial reports.**We can not control activities on properties we do not operate.**     The Company does not operate any of the properties in which it has an interest and has verylimited ability to exercise influence over operations for these properties or their associatedcosts. Dependence on the operator and other working interest owners for these projects and thelimited ability
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to influence operations and associated costs could materially adversely affect the realization oftargeted returns on capital in drilling or acquisition activities and targeted production growthrates. The success and timing of drilling, development and exploitation activities on propertiesoperated by others depend on a number of factors that are beyond the Company’s control, includingthe operator’s expertise and financial resources, approval of other participants for drilling wellsand utilization of technology.**Shortages of oil field equipment, services and qualified personnel could adversely affect resultsof operations.**     The demand for qualified and experienced field personnel to drill wells and conduct fieldoperations, geologists, geophysicists, engineers and other professionals in the oil and natural gasindustry can fluctuate significantly, often in correlation with oil and natural gas prices, causingperiodic shortages. There have also been shortages of drilling rigs and other equipment, as demandfor rigs and equipment has increased along with the number of wells being drilled. These factorsalso cause significant increases in costs for equipment, services and personnel. Higher oil andnatural gas prices generally stimulate increased demand and result in increased prices for drillingrigs, crews and associated supplies, equipment and services. These shortages or price increasescould adversely affect the profit margin, cash flow and operating results or restrict the abilityto drill wells and conduct ordinary operations.**ITEM 2 PROPERTIES**     As of September 30, 2005, Panhandle’s principal properties consisted of perpetual ownership of258,884 net mineral acres, held principally in tracts in Oklahoma, New Mexico and Texas and 19other states. The Company also held leases on 20,023 net acres of minerals primarily in Oklahoma.At September 30, 2005, Panhandle held small royalty and/or working interests in 4,163 producing oilor gas wells, and 73 wells in the process of being drilled or completed.     Panhandle does not have current abstracts or title opinions on all mineral properties ownedand, therefore, cannot warrant that it has unencumbered title to all of its properties. In recentyears, few challenges have been made against the Company’s fee title to its properties.     Panhandle pays ad valorem taxes on its minerals owned in certain states.
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ACREAGE     Mineral Interests     The following table of mineral interests owned reflects, as of September 30, 2005, in eachrespective state, the number of net and gross acres, net and gross producing acres, net and grossacres leased, and net and gross acres open (unleased).                       Net Gross Net Gross Net Gross  Net Gross Acres Acres Acres Acres Acres Acres  Acres Acres Prod’g Prod’g Leased Leased Open OpenState     (1) (1) (2) (2) (3) (3) Arkansas 10,050 44,596 1,074 2,856 8,976 41,740    Colorado 8,326 39,299 109 219 31 200 8,186 38,880Florida 6,421 13,849         6,421 13,849Illinois 1,068 4,979 40 261     1,028 4,718Kansas 3,082 11,816 152 1,280     2,930 10,536Montana 1,007 17,947         1,007 17,947Nebraska 1,319 13,249         1,319 13,249North Dakota 11,179 64,286         11,179 64,286New Mexico 57,396 174,460 1,367 7,195     56,029 167,265Oklahoma 113,119 939,927 30,553 252,889 4,176 29,497 78,390 657,541South Dakota 1,825 9,300         1,825 9,300Texas 43,186 361,270 11,063 105,079 856 4,600 31,267 251,591OTHER 906 6,112         906 6,112  **Total:** **258,884** **1,701,090** **44,358** **369,779** **14,039** **76,037** **200,487** **1,255,274**   (1) “Producing” represents the mineral acres in which Panhandle owns a royalty or workinginterest in a producing well. (2) “Leased” represents the mineral acres owned by Panhandle that are leased to third parties butnot producing. (3) “Open” represents mineral acres owned by Panhandle that are not leased or in production.     Leases     The following table reflects net mineral acres leased from others, lease expiration dates, andnet leased acres held by production.                                       Net Acres                  Held byState Net Acres Lease Acres Expiring Production      2006 2007 2008    Kansas  2,117               2,117 Oklahoma  16,218   623   932   931   13,732 Texas  316               316 Other  1,372               1,372  TOTAL  20,023   623   932   931   17,537  
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PROVED RESERVES     The following table summarizes estimates of the proved reserves of oil and gas held byPanhandle. All reserves are located within the United States. Because the Company’s non-producingmineral and leasehold interests consist of various small interests in numerous tracts locatedprimarily in Oklahoma, New Mexico and Texas and because the Company is a non-operator and must relyon third parties to propose and drill and operate producing wells, it is not feasible or possibleto provide estimates of all proved undeveloped reserves and associated future net revenues. TheCompany is currently providing proved undeveloped reserve estimates for wells that it has asubstantial reason to believe will be drilled in the very near term. In many cases, this means theCompany has received some type of notice from the operator that a well will be drilled. Allreserve quantity estimates were prepared by Campbell & Associates, Inc., Norman, Oklahoma, aconsulting petroleum engineering firm. The Company’s reserve estimates are not filed with anyother federal agency.           Barrels of Oil Mcf of GasProved Developed Reserves    September 30, 2005  613,536   24,011,062 September 30, 2004  710,513   24,086,120 September 30, 2003  703,400   23,599,473          Proved Undeveloped Reserves        September 30, 2005  20,787   3,435,341 September 30, 2004  49,729   4,164,633 September 30, 2003  132,575   4,670,400          Total Proved Reserves        September 30, 2005  634,323   27,446,403 September 30, 2004  760,242   28,250,753 September 30, 2003  835,975   28,269,873      These reserves exclude approximately 1.2 to 1.5 MMcf of CO2 gas reserves for the yearspresented.     Because the determination of reserves is a function of testing, evaluating, developing oil andgas reservoirs and establishing a production decline history, along with product pricefluctuations, estimates will change as future information concerning individual reservoirs isdeveloped and as market conditions change. Estimated reserve quantities and future net revenuesare affected by changes in product prices, and these prices have varied substantially in recentyears and are expected to vary substantially from current pricing in the future. Proved developedreserves are those expected to be recovered through existing well bores under existing economic andoperating conditions. Proved undeveloped reserves are reserves that may be recovered fromundrilled acreage or units, but are limited to those sites directly offsetting establishedproduction units, have sufficient geological data to indicate a reasonable expectation ofcommercial success and the Company has reason to believe will be drilled in the very near term.ESTIMATED FUTURE NET CASH FLOWS     Set forth below are estimated future net cash flows with respect to Panhandle’s provedreserves (based on the estimated units set forth in the immediately preceding table) for the fiscalyear indicated, and the present value of such estimated future net cash flows, computed by applyinga 10% discount factor as required by the rules and regulations of the SEC. Estimated future netcash flows have been
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computed by applying current year-end prices to future production of provedreserves less estimated future expenditures (based on costs as of year end) to be incurred with respect to the developmentand production of such reserves. Such pricing is based on SEC guidelines. No federal income taxesare included in estimated costs. However, the amounts are net of operating costs and productiontaxes levied by respective states. Prices used for determining future cash flows from oil andnatural gas for the periods ended September 30, 2005, 2004, 2003 were as follows: 2005 — $64.18,$11.54; 2004 — $44.68, $5.42; 2003 — $27.39, $4.43. These future net cash flows should not beconstrued as the fair market value of the Company’s reserves. A market value determination wouldneed to include many additional factors, including anticipated oil and gas price increases ordecreases.   Estimated Future Net Cash Flows (before federal income taxes)               9-30-05  9-30-04  9-30-03 Proved Developed $265,189,328  $129,410,259  $97,847,582 Proved Undeveloped $31,671,502  $18,782,490  $17,893,760           Total Proved $296,860,830  $148,192,749  $115,741,342    10% Discounted Present Value of Estimated Future Net Cash Flows (before federal income taxes)               9-30-05  9-30-04  9-30-03 Proved Developed $169,417,252  $84,400,194  $63,591,623 Proved Undeveloped $20,978,021  $12,812,424  $11,905,681           Total Proved $190,395,273  $97,212,618  $75,497,304      The future net cash flows are net of immaterial amounts of future cash flow to be receivedfrom CO2 reserves.OIL AND GAS PRODUCTION     The following table sets forth the Company’s net production of oil and gas for the fiscalperiods indicated.               Year Ended  Year Ended  Year Ended   9-30-05  9-30-04  9-30-03 Bbls — Oil  101,581   114,986   112,746 Mcf — Gas  4,011,226   3,863,277   3,926,124 Mcfe  4,620,712   4,553,193   4,602,600      Gas production includes 183,743, 176,605 and 152,384 Mcf of CO2 sold at average prices of$.51, $.41 and $.32 per Mcf for the years ended September 30, 2005, 2004 and 2003, respectively.
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AVERAGE SALES PRICES AND PRODUCTION COSTS     The following table sets forth unit price and cost data for the fiscal periods indicated.               Year Ended  Year Ended  Year Ended   9-30-05  9-30-04  9-30-03 Average Sales Price         Per Bbl, Oil $51.30  $35.89  $29.30 Per Mcf, Gas $6.24  $5.03  $4.79 Per Mcfe $6.54  $5.18  $4.80              Average Production (lifting costs)            (Per Mcfe of Gas)            (1) $0.52  $0.48  $0.46 (2) $0.52  $0.42  $0.41             $1.04  $0.90  $0.87  (1) Includes actual well operating costs only. (2) Includes production taxes, compression, handling and marketing fees paid onnatural gas sales and other minor expenses associated with well operations.     Approximately 27% of the Company’s oil and gas revenue is generated from small royaltyinterests in a few thousand wells. These royalty interests bear no share of the operating costs onthose producing wells.GROSS AND NET PRODUCTIVE WELLS AND DEVELOPED ACRES     The following table sets forth Panhandle’s gross and net productive oil and gas wells as ofSeptember 30, 2005. Panhandle owns fractional royalty interests or fractional working interests inthese wells. The Company does not operate any wells.           Gross Wells  Net Wells Oil  1,131   21.21 Gas  3,032   71.61        TOTAL  4,163   92.82      Information on multiple completions is not available from Panhandle’s records, but the numberof such is insignificant.     As of September 30, 2005, Panhandle owned 369,779 gross developed mineral acres and 44,358 netdeveloped mineral acres. Panhandle has also leased from others 177,324 gross developed acres,which contain 17,537 net developed acres.UNDEVELOPED ACREAGE     As of September 30, 2005, Panhandle owned 1,331,311 gross and 214,526 net undeveloped mineralacres, and leases on 34,012 gross and 2,486 net acres.
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DRILLING ACTIVITY     The following net productive development and exploratory wells and net dry development andexploratory wells in which the Company had a fractional royalty or working interest were drilledand completed during the fiscal years indicated. Also shown are the net wells purchased duringthese periods.       Net Productive Wells Net Dry WellsDevelopment Wells    Fiscal year ending