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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 
 Annual Report Pursuant To Section 13 or 15(d) of
the Securities Exchange Act of 1934
 For the fiscal year ended September 30, 2006
 Commission File Number: 0-9116
 PANHANDLE ROYALTY COMPANY
  OKLAHOMA
    
    73-1055775(State or other jurisdiction of incorporation 
or 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)
 (405) 948-1560
  CLASS A COMMON STOCK (VOTING)
    
    AMERICAN STOCK EXCHANGE(Title of Class)
    
    (Name of each exchange on which registered)
   CLASS B COMMON STOCK (NON-VOTING) $1.00 par value
 o þ
 o þ
 þ o
 o
  o þ o
 o þ
  Documents Incorporated By Reference




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T A B L E O F C O N T E N T S
 PagePART IItem 1 Business
    
    1-8Item 2 Properties
    
    8-15Item 3 Legal Proceedings
    
    
    15Item 4 Submission of Matters to a Vote of
Security Holders
    
    
    15PART IIItem 5 Market for Registrants Common Equity and
Related Stockholder Matters
    
    
    16Item 6 Selected Financial Data
    
    17-18Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    18-25Item 7A Quantitative and Qualitative Disclosures about Market
Risk
    
    25-26Item 8 Financial Statements and Supplementary Data
    
    26-50Item 9 Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure
    
    
    51Item 9A Controls and Procedures
    
    
    51PART IIIItem 10-14 Incorporated by Reference to Proxy StatementPART IVItem 15 Exhibits, Financial Statement Schedules and Reports on Form 8- K
    
    
    52Signature Page
    
    
    53Exhibit 21
    
    
    54Exhibit 31.1-31.2
    
    55-56Exhibit 32.1-32.2
    
    57-58Subsidiaries of the RegistrantCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive OfficerCertification of Chief Financial Officer
  SEC Bbl Bcf Mcf Mcfd Mcfe PV-10 gross net Minerals mineral
acres




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PART I
 
 ITEM 1 BUSINESS
 GENERAL
       BUSINESS STRATEGY
  (1)




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PRINCIPAL PRODUCTS AND MARKETS
    COMPETITIVE BUSINESS CONDITIONS
  (2)




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SOURCES AND AVAILABILITY OF RAW MATERIALS
  MAJOR CUSTOMERS
  PATENTS, TRADEMARKS, LICENSES, FRANCHISES AND ROYALTY AGREEMENTS
  GOVERNMENTAL REGULATION
     (3)




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ENVIRONMENTAL MATTERS
  (4)




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EMPLOYEES
  RISK FACTORS
  Oil and natural gas prices are volatile. Volatility in oil and natural gas prices can adversely
affect results and the price of the Companys common stock. This volatility also makes valuation
of oil and natural gas producing properties difficult and can disrupt markets.
  
    
    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 alternative sources of energy; and
    
    economic, political and regulatory developments.
  A substantial or extended decline in oil and natural gas prices would have a material adverse
effect on the Company.
  (5)




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
    
    cash flow would be reduced, decreasing funds available for capital expenditures
employed to replace reserves or increase production;
    
    certain reserves may no longer be economic to produce, leading to both lower proved
reserves and cash flow; and
    
    access to sources of capital, such as equity or long-term debt markets, could be
severely limited or unavailable.
 Lower oil and natural gas prices may cause impairment charges.
   Although the Companys estimated oil and natural gas reserve data is prepared by a consulting
engineering firm, estimates may still prove to be inaccurate.
  
    
    expected reservoir characteristics based on geological, geophysical and engineering
assessments;
    
    future production rates based on historical performance and expected future
operating and investment activities;
    
    future oil and gas prices; and
    
    future development and operating costs.
  (6)




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Failure to find or acquire additional reserves will cause reserves and production to decline
materially from their current levels.
    Oil and natural gas drilling and producing operations involve various risks.
   We can not control activities on properties we do not operate.
  (7)




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Shortages of oil field equipment, services, qualified personnel and resulting cost increases could
adversely affect results of operations.
  
 ITEM 2 PROPERTIES
    (8)




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ACREAGE
 Mineral Interests
  Net
    
    Gross
    
    Net
    
    Gross
    
    Net
    
    GrossAcres
    
    Acres
    
    Acres
    
    Acres
    
    Acres
    
    AcresNet
    
    Gross
    
    Prodg
    
    Prodg
    
    Leased
    
    Leased
    
    Open
    
    OpenState
    
    Acres
    
    Acres
    
    (1)
    
    (1)
    
    (2)
    
    (2)
    
    (3)
    
    (3)Arkansas
    
    
    10,048
    
    
    
    44,556
    
    
    
    1,079
    
    
    
    2,936
    
    
    
    8,959
    
    
    
    41,581
    
    
    
    10
    
    
    
    39Colorado
    
    
    8,326
    
    
    
    39,299
    
    
    
    109
    
    
    
    219
    
    
    
    30
    
    
    
    200
    
    
    
    8,187
    
    
    
    38,880Florida
    
    
    5,606
    
    
    
    12,239
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,606
    
    
    
    12,239Kansas
    
    
    3,082
    
    
    
    11,816
    
    
    
    152
    
    
    
    1,280
    
    
    
    
    
    
    
    
    
    
    
    2,930
    
    
    
    10,536Montana
    
    
    1,007
    
    
    
    17,947
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    1,599
    
    
    
    996
    
    
    
    16,348North Dakota
    
    
    11,179
    
    
    
    64,286
    
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    600
    
    
    
    11,164
    
    
    
    63,686New Mexico
    
    
    57,396
    
    
    
    174,460
    
    
    
    1,352
    
    
    
    7,125
    
    
    
    320
    
    
    
    320
    
    
    
    55,724
    
    
    
    167,015Oklahoma
    
    
    113,078
    
    
    
    939,674
    
    
    
    32,223
    
    
    
    266,110
    
    
    
    3,336
    
    
    
    24,067
    
    
    
    77,519
    
    
    
    649,497South Dakota
    
    
    1,825
    
    
    
    9,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,825
    
    
    
    9,300Texas
    
    
    43,187
    
    
    
    361,270
    
    
    
    7,060
    
    
    
    67,436
    
    
    
    1,206
    
    
    
    6,777
    
    
    
    34,921
    
    
    
    287,057OTHER
    
    
    44
    
    
    
    279
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44
    
    
    
    279Total:
    
    
    254,778
    
    
    
    1,675,126
    
    
    
    41,975
    
    
    
    345,106
    
    
    
    13,877
    
    
    
    75,144
    
    
    
    198,926
    
    
    
    1,254,876
 
 (1)
    
    Producing represents the mineral acres in which Panhandle owns a royalty or working
interest in a producing well.(2)
    
    Leased represents the mineral acres owned by Panhandle that are leased to third parties but
not producing.(3)
    
    Open represents mineral acres owned by Panhandle that are not leased or in production. Leases
  Net AcresHeld byState
    
    Net Acres
    
    Lease Acres Expiring
    
    
    
    
    
    Production2007
    
    2008
    
    2009Kansas
    
    
    2,117
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,117Oklahoma
    
    
    16,782
    
    
    
    914
    
    
    
    1,375
    
    
    
    548
    
    
    
    13,945Texas
    
    
    470
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    470Other
    
    
    1,373
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,373TOTAL
    
    
    20,742
    
    
    
    914
    
    
    
    1,375
    
    
    
    548
    
    
    
    17,905
 (9)




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PROVED RESERVES
  Barrels of Oil
    
    Mcf of GasProved Developed ReservesSeptember 30, 2006
    
    
    566,110
    
    
    
    25,322,756September 30, 2005
    
    
    613,536
    
    
    
    24,011,062September 30, 2004
    
    
    710,513
    
    
    
    24,086,120Proved Undeveloped ReservesSeptember 30, 2006
    
    
    9,081
    
    
    
    5,547,083September 30, 2005
    
    
    20,787
    
    
    
    3,435,341September 30, 2004
    
    
    49,729
    
    
    
    4,164,633Total Proved ReservesSeptember 30, 2006
    
    
    575,191
    
    
    
    30,869,839September 30, 2005
    
    
    634,323
    
    
    
    27,446,403September 30, 2004
    
    
    760,242
    
    
    
    28,250,753
   (10)




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ESTIMATED FUTURE NET CASH FLOWS
  Estimated Future Net Cash Flows (before federal income taxes)
 9-30-06
    
    
    9-30-05
    
    
    9-30-04Proved Developed
    
    $
    94,939,418
    
    
    $
    265,189,328
    
    
    $
    129,410,259Proved Undeveloped
    
    $
    10,734,504
    
    
    $
    31,671,502
    
    
    $
    18,782,490Total Proved
    
    $
    105,673,922
    
    
    $
    296,860,830
    
    
    $
    148,192,749
 10% Discounted Present Value of Estimated Future Net Cash Flows (before federal income taxes)
 9-30-06
    
    
    9-30-05
    
    
    9-30-04Proved Developed
    
    $
    62,920,576
    
    
    $
    169,417,252
    
    
    $
    84,400,194Proved Undeveloped
    
    $
    5,716,092
    
    
    $
    20,978,021
    
    
    $
    12,812,424Total Proved
    
    $
    68,636,668
    
    
    $
    190,395,273
    
    
    $
    97,212,618
  OIL AND GAS PRODUCTION
  Year Ended
    
    Year Ended
    
    Year Ended9-30-06
    
    9-30-05
    
    9-30-04Bbls  Oil
    
    
    97,139
    
    
    
    101,581
    
    
    
    114,986Mcf  Gas
    
    
    4,299,142
    
    
    
    4,011,226
    
    
    
    3,863,277Mcfe
    
    
    4,881,976
    
    
    
    4,620,712
    
    
    
    4,553,193
  (11)




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AVERAGE SALES PRICES AND PRODUCTION COSTS
  Year Ended
    
    
    Year Ended
    
    
    Year Ended9-30-06
    
    
    9-30-05
    
    
    9-30-04Average Sales PricePer Bbl, Oil
    
    $
    63.44
    
    
    $
    51.30
    
    
    $
    35.89Per Mcf, Gas
    
    $
    6.94
    
    
    $
    6.24
    
    
    $
    5.03Per Mcfe
    
    $
    7.38
    
    
    $
    6.54
    
    
    $
    5.18Average Production (lifting costs)(Per Mcfe of Gas)(1)
    
    $
    0.49
    
    
    $
    0.52
    
    
    $
    0.48(2)
    
    $
    0.59
    
    
    $
    0.52
    
    
    $
    0.42$
    1.08
    
    
    $
    1.04
    
    
    $
    0.90
 
 (1)
    
    Includes actual well operating costs only.(2)
    
    Includes production taxes, compression, handling and marketing fees paid on
natural gas sales and other minor expenses associated with well operations.  GROSS AND NET PRODUCTIVE WELLS AND DEVELOPED ACRES
  Gross Wells
    
    
    Net WellsOil
    
    
    955
    
    
    
    18.92Gas
    
    
    3,219
    
    
    
    73.85TOTAL
    
    
    4,174
    
    
    
    92.77
   UNDEVELOPED ACREAGE
  (12)




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DRILLING ACTIVITY
  Net Productive Wells
    
    Net Dry WellsDevelopment WellsFiscal year ended
September 30, 2004
    
    
    4.362204
    
    
    
    0.322523Fiscal year ended
September 30, 2005
    
    
    5.485356
    
    
    
    0.142047Fiscal year ended
September 30, 2006
    
    
    5.477069
    
    
    
    0.139168Exploratory WellsFiscal year ended
September 30, 2004
    
    
    1.245048
    
    
    
    0.305172Fiscal year ended
September 30, 2005
    
    
    0.584992
    
    
    
    0.131758Fiscal year ended
September 30, 2006
    
    
    0.747225
    
    
    
    0.159593Purchased WellsFiscal year ended
September 30, 2004
    
    
    0.009749
    
    
    
    0Fiscal year ended
September 30, 2005
    
    
    1.660737
    
    
    
    0Fiscal year ended
September 30, 2006
    
    
    0
    
    
    
    0
 PRESENT ACTIVITIES
  Gross Wells
    
    Net WellsOil
    
    
    2
    
    
    
    0.22875Gas
    
    
    39
    
    
    
    1.19593
 (13)




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OTHER FACILITIES
  SAFE HARBOR STATEMENT
      Commodity Prices.
  (14)




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Uncertainty of Oil and Natural Gas Reserves.
    
 ITEM 3 LEGAL PROCEEDINGS
  
 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  (15)




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PART II
 
 ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
  Quarter Ended
    
    High
    
    LowDecember 31, 2004
    
    $
    12.65
    
    
    $
    8.70March 31, 2005
    
    $
    15.84
    
    
    $
    10.55June 30, 2005
    
    $
    15.25
    
    
    $
    10.53September 30, 2005
    
    $
    22.50
    
    
    $
    13.88December 31, 2005
    
    $
    21.28
    
    
    $
    14.63March 31, 2006
    
    $
    20.33
    
    
    $
    17.48June 30, 2006
    
    $
    22.41
    
    
    $
    16.98September 30, 2006
    
    $
    19.53
    
    
    $
    17.27
   Date
    
    Rate Per ShareDecember 2004
    
    $
    0.025March 2005
    
    $
    0.05June 2005
    
    $
    0.025September 2005
    
    $
    0.025December 2005
    
    $
    0.025March 2006
    
    $
    0.08June 2006
    
    $
    0.04September 2006
    
    $
    0.04
  (16)




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##### Table of Contents



ITEM 6 SELECTED FINANCIAL DATA
  Year Ended September 30,2006
    
    2005
    
    2004
    
    2003
    
    2002RevenuesOil & Gas Sales
    
    $
    36,008,527
    
    
    $
    30,242,210
    
    
    $
    23,578,615
    
    
    $
    22,098,198
    
    
    $
    13,080,754Lease Bonuses
    
    
    410,984
    
    
    
    2,214,992
    
    
    
    115,938
    
    
    
    72,765
    
    
    
    41,497Interest & Other
    
    
    1,066,169
    
    
    
    1,140,973
    
    
    
    912,056
    
    
    
    285,075
    
    
    
    469,146$
    37,485,680
    
    
    $
    33,598,175
    
    
    $
    24,606,609
    
    
    $
    22,456,038
    
    
    $
    13,591,397Costs and ExpensesLease Oper. Exp
& Prod. Taxes
    
    $
    5,262,834
    
    
    $
    4,802,595
    
    
    $
    4,098,124
    
    
    $
    4,013,572
    
    
    $
    3,001,449Exploration Costs (A)
    
    
    222,892
    
    
    
    784,741
    
    
    
    236,939
    
    
    
    469,224
    
    
    
    417,971Depr. Depl. Amortization
    
    
    10,142,367
    
    
    
    7,506,571
    
    
    
    6,115,500
    
    
    
    5,783,457
    
    
    
    5,845,779Provision for Impairment
    
    
    3,009,953
    
    
    
    232,295
    
    
    
    841,687
    
    
    
    692,220
    
    
    
    1,116,234Loss on Sale of Assets
    
    
    119,282
    
    
    
    291,452
    
    
    
    
    
    
    
    
    
    
    
    Gen. & Administrative
    
    
    3,335,899
    
    
    
    4,545,208
    
    
    
    3,033,437
    
    
    
    2,666,177
    
    
    
    2,263,908Interest Expense
    
    
    232,234
    
    
    
    359,527
    
    
    
    488,097
    
    
    
    699,266
    
    
    
    895,997$
    22,325,461
    
    
    $
    18,522,389
    
    
    $
    14,813,784
    
    
    $
    14,323,916
    
    
    $
    13,541,338Income Before Provision
(Benefit) For Income Taxes
    
    $
    15,160,219
    
    
    $
    15,075,786
    
    
    $
    9,792,825
    
    
    $
    8,132,122
    
    
    $
    50,059Cumulative effect of
accounting changes, net
of taxes of $28,500 (B)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,500
    
    
    
    Provision (Benefit)
for Income Taxes
    
    
    4,586,000
    
    
    
    4,591,000
    
    
    
    3,063,000
    
    
    
    2,217,000
    
    
    
    (293,000
    )Net Income
    
    $
    10,574,219
    
    
    $
    10,484,786
    
    
    $
    6,729,825
    
    
    $
    5,961,622
    
    
    $
    343,059Basic Earnings per share
    
    $
    1.25
    
    
    $
    1.25
    
    
    $
    0.80
    
    
    $
    0.71
    
    
    $
    0.04Diluted Earnings per share
    
    $
    1.25
    
    
    $
    1.24
    
    
    $
    0.80
    
    
    $
    0.71
    
    
    $
    0.04Dividends Declared per share
    
    $
    0.185
    
    
    $
    0.125
    
    
    $
    0.09
    
    
    $
    0.07
    
    
    $
    0.07Weighted AverageShares Outstanding (C)Basic
    
    
    8,479,406
    
    
    
    8,390,280
    
    
    
    8,357,566
    
    
    
    8,325,488
    
    
    
    8,271,488Diluted
    
    
    8,479,406
    
    
    
    8,450,238
    
    
    
    8,457,602
    
    
    
    8,414,852
    
    
    
    8,359,888Net Cash Provided by
Operating Activities
    
    $
    23,736,931
    
    
    $
    17,154,171
    
    
    $
    15,515,300
    
    
    $
    13,198,368
    
    
    $
    7,481,195Total Assets
    
    $
    70,949,242
    
    
    $
    61,241,692
    
    
    $
    54,186,362
    
    
    $
    49,402,534
    
    
    $
    44,837,060Long-Term Debt
    
    $
    1,166,649
    
    
    $
    3,166,653
    
    
    $
    8,516,657
    
    
    $
    12,666,661
    
    
    $
    14,024,000Shareholders Equity
    
    $
    49,065,697
    
    
    $
    38,635,350
    
    
    $
    28,700,515
    
    
    $
    22,527,685
    
    
    $
    16,953,294
 (17)




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##### Table of Contents



(A)
    
    The Company uses the successful efforts method of accounting for its oil and
gas activities.(B)
    
    Represents the income effect of the adoption of SFAS No. 143, Accounting for
Asset Retirement Obligationson October 1, 2003. See Note 1: Summary of Significant
Accounting Policies of Notes to the Consolidated Financial Statements herein.(C)
    
    Weighted average shares outstanding for basic and diluted earnings per share
are the same in fiscal year 2006 due to the October 2005 amendment to the Deferred
Compensation Plan for Non-Employee Directors.
 
 ITEM 7 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  General
   For the Year Ended September 30,Percent
    
    
    
    
    
    Percent2006
    
    Incr or (Decr)
    
    2005
    
    Incr or (Decr)
    
    2004Production:Oil (Bbls)
    
    
    97,139
    
    
    
    (4
    %)
    
    
    101,581
    
    
    
    (12
    %)
    
    
    114,986Gas (Mcf)
    
    
    4,299,142
    
    
    
    7
    %
    
    
    4,011,226
    
    
    
    4
    %
    
    
    3,863,277Mcfe
    
    
    4,881,976
    
    
    
    6
    %
    
    
    4,620,712
    
    
    
    1
    %
    
    
    4,553,193Average Sales Price:Oil (per Bbl)
    
    $
    63.44
    
    
    
    24
    %
    
    $
    51.30
    
    
    
    43
    %
    
    $
    35.89Gas (per Mcf)
    
    $
    6.94
    
    
    
    11
    %
    
    $
    6.24
    
    
    
    24
    %
    
    $
    5.03Mcfe
    
    $
    7.38
    
    
    
    13
    %
    
    $
    6.54
    
    
    
    26
    %
    
    $
    5.18
 2006 Compared to 2005
 Overview
  (18)




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##### Table of Contents



Revenues
    First quarter
    
    1,196,923 mcfeSecond quarter
    
    1,173,313 mcfeThird quarter
    
    1,134,814 mcfeFourth quarter
    
    1,376,926 mcfe
 Lease Operating Expenses and Production Taxes (LOE)
  Production Taxes:
  Exploration Costs
  (19)




---



##### Table of Contents



Depreciation, Depletion and Amortization (DD&A)
  Provision for Impairment
  Loss on Sale of Assets
  General and Administrative Costs (G&A)
  Interest Expense
  Provision for Income Taxes
  (20)




---



##### Table of Contents



Liquidity and Capital Resources
    Contractual Obligations
   (21)




---



##### Table of Contents



Payments Due By PeriodLess than
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    1 Year
    
    1-3 Years
    
    3-5 Years
    
    5 YearsLong-term debt
obligations
    
    $
    3,166,653
    
    
    $
    2,000,004
    
    
    $
    1,166,649
    
    
    $
    
    
    
    $
    
 Hedging
  First Contract:Production volume covered
    
    30,000 mcf/monthPeriod covered
    
    January through December of 2007Prices
    
    Floor of $6.00 and a ceiling of $9.20Second Contract:Production volume covered
    
    40,000 mcf/monthPeriod covered
    
    January through December of 2007Prices
    
    Floor of $6.00 and a ceiling of $9.20Third Contract:Production volume covered
    
    30,000 mcf/monthPeriod covered
    
    January through December of 2007Prices
    
    Floor of $6.00 and a ceiling of $10.20
 2005 Compared to 2004
 Overview
  Revenues
  (22)




---



##### Table of Contents



Lease Operating Expenses and Production Taxes (LOE)
  Exploration Costs
  Depreciation, Depletion and Amortization (DD&A)
  Provision for Impairment
  General and Administrative Costs (G&A)
  (23)




---



##### Table of Contents



Interest Expense
  Provision for Income Taxes
  CRITICAL ACCOUNTING POLICIES
   Oil and Gas Reserves
  (24)




---



##### Table of Contents



Successful Efforts Method of Accounting
  Impairment of Assets
  Oil and Gas Sales Revenue Accrual
  Income Taxes
   
 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  (25)




---



##### Table of Contents



ITEM 8 FINANCIAL STATEMENTS
  
 Managements Report on Internal Control Over Financial Reporting
    
    
    27Report of Registered Public Accounting Firm on
Internal Control Over Financial Reporting
    
    
    28Report of Independent Registered Public Accounting Firm
    
    
    29Consolidated Balance Sheets
As of September 30, 2006 and 2005
    
    
    30-31Consolidated Statements of Income for the
Years Ended September 30, 2006, 2005 and 2004
    
    
    32Consolidated Statements of Stockholders Equity for the
Years Ended September 30, 2006, 2005 and 2004
    
    
    33Consolidated Statements of Cash Flows for the
Years Ended September 30, 2006, 2005 and 2004
    
    
    34-35Notes to Consolidated Financial Statements
    
    
    36-50
 (26)




---



##### Table of Contents



Managements Annual Report on Internal Control Over Financial Reporting
  
    
    Pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the Company;
    
    Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and
    
    Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Companys assets that could have a
material effect on the financial statements.
  Internal Control  Integrated Framework
  (27)




---



##### Table of Contents



.
   
 (28)




---



##### Table of Contents



(29)




---



##### Table of Contents



September 30,2006
    
    2005AssetsCurrent Assets:Cash and cash equivalents
    
    $
    434,353
    
    
    $
    1,638,833Oil and gas sales receivables
    
    
    6,471,623
    
    
    
    6,641,447Income tax and other receivables
    
    
    1,889,636
    
    
    
    21,520Total current assets
    
    
    8,795,612
    
    
    
    8,301,800Property and equipment at cost, based on successful efforts accounting:Producing oil and gas properties
    
    
    103,129,158
    
    
    
    84,388,067Non-producing oil and gas properties
    
    
    11,273,373
    
    
    
    11,170,926Furniture and fixtures
    
    
    562,047
    
    
    
    524,721114,964,578
    
    
    
    96,083,714Less accumulated depreciation,
depletion, and amortization
    
    
    53,654,385
    
    
    
    43,787,403Net properties and equipment
    
    
    61,310,193
    
    
    
    52,296,311Investments
    
    
    596,280
    
    
    
    396,424Other
    
    
    247,157
    
    
    
    247,157Total assets
    
    $
    70,949,242
    
    
    $
    61,241,692
  See accompanying notes.
 (30)




---



##### Table of Contents



September 30,2006
    
    2005Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable
    
    $
    1,564,176
    
    
    $
    700,242Accrued liabilities:Deferred compensation
    
    
    
    
    
    
    1,335,305Interest
    
    
    15,649
    
    
    
    23,129Other
    
    
    218,069
    
    
    
    173,445Income taxes payable
    
    
    
    
    
    
    599,669Long-term debt due within one year
    
    
    2,000,004
    
    
    
    2,000,004Total current liabilities
    
    
    3,797,898
    
    
    
    4,831,794Long-term debt
    
    
    1,166,649
    
    
    
    3,166,653Deferred income taxes
    
    
    15,498,750
    
    
    
    13,321,750Asset retirement obligation and other noncurrent liabilities
    
    
    1,420,248
    
    
    
    1,286,145Stockholders equity:Class A voting common stock, $.0166 par value;
12,000,000 shares
authorized, 8,422,529
issued and outstanding
(8,410,886 in 2005)
    
    
    140,375
    
    
    
    140,182Capital in excess of par value
    
    
    1,924,587
    
    
    
    1,715,206Deferred directors compensation
    
    
    1,202,569
    
    
    
    Retained earnings
    
    
    45,798,166
    
    
    
    36,779,962Total stockholders equity
    
    
    49,065,697
    
    
    
    38,635,350Total liabilities and stockholders equity
    
    $
    70,949,242
    
    
    $
    61,241,692
 See accompanying notes.
 (31)




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##### Table of Contents



Year ended September 30,2006
    
    2005
    
    2004Revenues:Oil and gas sales
    
    $
    36,008,527
    
    
    $
    30,242,210
    
    
    $
    23,578,615Lease bonuses and rentals
    
    
    410,984
    
    
    
    2,214,992
    
    
    
    115,938Gain on sales and interest
    
    
    529,804
    
    
    
    745,800
    
    
    
    5,436Income from partnerships
    
    
    536,365
    
    
    
    395,173
    
    
    
    906,62037,485,680
    
    
    
    33,598,175
    
    
    
    24,606,609Costs and expenses:Lease operating expenses and production taxes
    
    
    5,262,834
    
    
    
    4,802,595
    
    
    
    4,098,124Exploration costs
    
    
    222,892
    
    
    
    784,741
    
    
    
    236,939Depreciation, depletion, and amortization
    
    
    10,142,367
    
    
    
    7,506,571
    
    
    
    6,115,500Provision for impairment
    
    
    3,009,953
    
    
    
    232,295
    
    
    
    841,687Loss on sale of assets
    
    
    119,282
    
    
    
    291,452
    
    
    
    General and administrative
    
    
    3,335,899
    
    
    
    4,545,208
    
    
    
    3,033,437Interest expense
    
    
    232,234
    
    
    
    359,527
    
    
    
    488,09722,325,461
    
    
    
    18,522,389
    
    
    
    14,813,784Income before provision for income taxes
    
    
    15,160,219
    
    
    
    15,075,786
    
    
    
    9,792,825Provision for income taxes
    
    
    4,586,000
    
    
    
    4,591,000
    
    
    
    3,063,000Net Income
    
    $
    10,574,219
    
    
    $
    10,484,786
    
    
    $
    6,729,825Basic earnings per common share:Net income
    
    $
    1.25
    
    
    $
    1.25
    
    
    $
    0.80Diluted earnings per common share:Net income
    
    $
    1.25
    
    
    $
    1.24
    
    
    $
    0.80
 See accompanying notes.
 (32)




---



##### Table of Contents



Capital in
    
    DeferredCommon Stock
    
    Excess of
    
    Directors
    
    RetainedShares
    
    Amount
    
    Par Value
    
    Compensation
    
    Earnings
    
    TotalBalances at September 30, 2003
    
    
    8,356,404
    
    
    $
    139,274
    
    
    $
    1,022,249
    
    
    $
    
    
    
    $
    21,366,162
    
    
    $
    22,527,685Issuance of common shares to ESOP
    
    
    20,116
    
    
    
    336
    
    
    
    172,662
    
    
    
    
    
    
    
    
    
    
    
    172,998Issuance of common shares to
directors for services
    
    
    3,046
    
    
    
    50
    
    
    
    22,109
    
    
    
    
    
    
    
    
    
    
    
    22,159Dividends declared ($.09 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (752,152
    )
    
    
    (752,152
    )Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,729,825
    
    
    
    6,729,825Balances at September 30, 2004
    
    
    8,379,566
    
    
    $
    139,660
    
    
    $
    1,217,020
    
    
    $
    
    
    
    $
    27,343,835
    
    
    $
    28,700,515Issuance of common shares to ESOP
    
    
    9,186
    
    
    
    154
    
    
    
    196,380
    
    
    
    
    
    
    
    
    
    
    
    196,534Issuance of common shares to
directors for services
    
    
    22,134
    
    
    
    368
    
    
    
    301,806
    
    
    
    
    
    
    
    
    
    
    
    302,174Dividends declared ($.125 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,048,659
    )
    
    
    (1,048,659
    )Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,484,786
    
    
    
    10,484,786Balances at September 30, 2005
    
    
    8,410,886
    
    
    $
    140,182
    
    
    $
    1,715,206
    
    
    $
    
    
    
    $
    36,779,962
    
    
    $
    38,635,350Issuance of common shares to ESOP
    
    
    11,643
    
    
    
    193
    
    
    
    209,381
    
    
    
    
    
    
    
    
    
    
    
    209,574Increase in deferred directors
compensation:Reclassification of liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,053,408
    
    
    
    
    
    
    
    1,053,408Charged to expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    149,161
    
    
    
    
    
    
    
    149,161Dividends declared ($.185 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,556,015
    )
    
    
    (1,556,015
    )Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,574,219
    
    
    
    10,574,219Balances at September 30, 2006
    
    
    8,422,529
    
    
    $
    140,375
    
    
    $
    1,924,587
    
    
    $
    1,202,569
    
    
    $
    45,798,166
    
    
    $
    49,065,697
 See accompanying notes.
 (33)




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##### Table of Contents



Year ended September 30,2006
    
    2005
    
    2004Operating ActivitiesNet income
    
    $
    10,574,219
    
    
    $
    10,484,786
    
    
    $
    6,729,825Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation, depletion, amortization,
and impairment
    
    
    13,152,320
    
    
    
    7,738,866
    
    
    
    6,957,186Deferred income taxes
    
    
    2,177,000
    
    
    
    1,072,750
    
    
    
    1,920,000Lease bonus income
    
    
    (95,892
    )
    
    
    (2,133,337
    )
    
    
    286,679Exploration costs
    
    
    222,892
    
    
    
    784,741
    
    
    
    236,939Gain on sale of assets
    
    
    (415,951
    )
    
    
    (365,288
    )
    
    
    (6,959
    )Equity in earnings of partnerships
    
    
    (536,365
    )
    
    
    (395,173
    )
    
    
    (246,573
    )Common stock issued to ESOP/Directors
Deferred Compensation Plan
    
    
    149,161
    
    
    
    498,708
    
    
    
    195,156Cash provided (used) by changes in assets
and liabilitiesOil and gas sales receivables
    
    
    169,824
    
    
    
    (1,678,455
    )
    
    
    (973,115
    )Income tax and other receivables
    
    
    (1,889,363
    )
    
    
    218,375
    
    
    
    (122,473
    )Accounts payable
    
    
    863,934
    
    
    
    (125,699
    )
    
    
    273,740Accrued directors deferred
compensation
    
    
    (281,897
    )
    
    
    470,972
    
    
    
    344,550Accrued interest payable
    
    
    (7,480
    )
    
    
    (7,807
    )
    
    
    (9,277
    )Other accrued liabilities
    
    
    254,198
    
    
    
    (8,937
    )
    
    
    60,410Income taxes payable
    
    
    (599,669
    )
    
    
    599,669
    
    
    
    (130,788
    )Total adjustments
    
    
    13,162,712
    
    
    
    6,669,385
    
    
    
    8,785,475Net cash provided by operating activities
    
    
    23,736,931
    
    
    
    17,154,171
    
    
    
    15,515,300Investing ActivitiesCapital expenditures, including dry hole costs
    
    
    (22,624,040
    )
    
    
    (14,741,637
    )
    
    
    (10,946,471
    )Proceeds from leasing of fee mineral acreage
    
    
    493,652
    
    
    
    2,304,383
    
    
    
    Distributions received from partnerships
    
    
    618,509
    
    
    
    497,839
    
    
    
    369,761Purchase of investment
    
    
    (282,000
    )
    
    
    
    
    
    
    Proceeds from sale of assets
    
    
    408,487
    
    
    
    2,180,397
    
    
    
    12,903Net cash used in investing activities
    
    $
    (21,385,392
    )
    
    $
    (9,759,018
    )
    
    $
    (10,563,807
    )
  See accompanying notes.
 (34)




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##### Table of Contents



Year ended September 30,2006
    
    2005
    
    2004Financing ActivitiesBorrowings under debt agreement
    
    $
    
    
    
    $
    11,350,000
    
    
    $
    6,825,000Payments of loan principal
    
    
    (2,000,004
    )
    
    
    (16,700,004
    )
    
    
    (10,975,004
    )Payments of dividends
    
    
    (1,556,015
    )
    
    
    (1,048,659
    )
    
    
    (752,152
    )Purchase and cancellation of common shares
    
    
    
    
    
    
    
    
    
    
    Net cash used in financing activities
    
    
    (3,556,019
    )
    
    
    (6,398,663
    )
    
    
    (4,902,156
    )Increase (decrease) in cash and cash equivalents
    
    
    (1,204,480
    )
    
    
    996,490
    
    
    
    49,337Cash and cash equivalents at beginning of year
    
    
    1,638,833
    
    
    
    642,343
    
    
    
    593,006Cash and cash equivalents at end of year
    
    $
    434,353
    
    
    $
    1,638,833
    
    
    $
    642,343Supplemental Disclosures of Cash Flow
InformationInterest paid
    
    $
    219,898
    
    
    $
    367,333
    
    
    $
    496,441Income taxes paid, net of refunds received
    
    $
    4,781,462
    
    
    $
    2,668,870
    
    
    $
    1,344,321Supplemental schedule of noncash
investing and financing activities:Reclassification of deferred compensation
liability as equity
    
    $
    1,053,408
    
    
    $
    
    
    
    $
    Additions and revisions, net, to asset
retirement obligations
    
    $
    141,158
    
    
    $
    494,508
    
    
    $
    219,675
 See accompanying notes.
 (35)




---



##### Table of Contents



1. Summary of Significant Accounting Policies
 Nature of Business
  Principles of Consolidation and Basis of Presentation
   Use of Estimates
   (36)




---



##### Table of Contents



1. Summary of Significant Accounting Policies (continued)
  Cash and Cash Equivalents
  Oil and Gas Sales and Gas Imbalances
   Concentration of Credit Risk
  Oil and Gas Producing Activities
  (37)




---



##### Table of Contents



1. Summary of Significant Accounting Policies (continued)
 Derivatives
   First Contract:Production volume covered
    
    30,000 mcf/monthPeriod covered
    
    January through December of 2007Prices
    
    Floor of $6.00 and a ceiling of $9.20Second Contract:Production volume covered
    
    40,000 mcf/monthPeriod covered
    
    January through December of 2007Prices
    
    Floor of $6.00 and a ceiling of $9.20Third Contract:Production volume covered
    
    30,000 mcf/monthPeriod covered
    
    January through December of 2007Prices
    
    Floor of $6.00 and a ceiling of $10.20
 Depreciation, Depletion, Amortization, and Impairment
   (38)




---



##### Table of Contents



1. Summary of Significant Accounting Policies (continued)
  Accounting
for the Impairment or Disposal of Long-Lived Assets
 Investments
  Asset Retirement Obligations
   PluggingLiabilityPlugging Liability as of September 30, 2005
    
    $
    1,144,299Accretion of Discount
    
    
    88,837Liability Incurred in the Period
    
    
    141,158Plugging Liability as of September 30, 2006
    
    $
    1,374,294
 (39)




---



##### Table of Contents



1. Summary of Significant Accounting Policies (continued)
 Environmental Costs
   Earning Per Share of Common Stock
  Stock-based Compensation
   (40)




---



##### Table of Contents



1. Summary of Significant Accounting Policies (continued)
 Fair Values of Financial Instruments
  Income Taxes
  New Accounting Pronouncements
     (41)




---



##### Table of Contents



2. Commitments
  3. Income Taxes
  2006
    
    2005
    
    2004Current:Federal
    
    $
    2,351,000
    
    
    $
    3,488,250
    
    
    $
    1,113,000State
    
    
    58,000
    
    
    
    30,000
    
    
    
    30,0002,409,000
    
    
    
    3,518,250
    
    
    
    1,143,000Deferred:Federal
    
    
    1,928,000
    
    
    
    1,004,750
    
    
    
    1,851,000State
    
    
    249,000
    
    
    
    68,000
    
    
    
    69,0002,177,000
    
    
    
    1,072,750
    
    
    
    1,920,000$
    4,586,000
    
    
    $
    4,591,000
    
    
    $
    3,063,000
  2006
    
    2005
    
    2004Provision for income taxes at statutory
rate
    
    $
    5,210,883
    
    
    $
    5,178,799
    
    
    $
    3,329,561Percentage depletion
    
    
    (699,384
    )
    
    
    (620,982
    )
    
    
    (334,365
    )State income taxes, net of federal benefit
    
    
    361,680
    
    
    
    63,700
    
    
    
    64,350State net operating loss carryforward
benefit
    
    
    (241,000
    )
    
    
    
    
    
    
    Other
    
    
    (46,179
    )
    
    
    (30,517
    )
    
    
    3,454$
    4,586,000
    
    
    $
    4,591,000
    
    
    $
    3,063,000
 (42)




---



##### Table of Contents



3. Income Taxes (continued)
  2006
    
    2005Deferred tax
liabilities:Financial basis in excess of tax basis, principally
intangible drilling costs capitalized for financial
purposes and expensed for tax purposes
    
    $
    16,538,959
    
    
    $
    13,933,416Deferred tax assets:State net operating loss carry forwards
    
    
    368,890
    
    
    
    220,340Deferred directors compensation and other
    
    
    671,319
    
    
    
    391,3261,040,209
    
    
    
    611,666Net deferred tax liabilities
    
    $
    15,498,750
    
    
    $
    13,321,750
 4. Long-term Debt
  2006
    
    20054.56% loan
    
    $
    3,166,653
    
    
    $
    5,166,657Current maturities of long-term debt
    
    
    2,000,004
    
    
    
    2,000,004$
    1,166,649
    
    
    $
    3,166,653
   (43)




---



##### Table of Contents



4. Long-term Debt (continued)
   BancFirst
    
    BOK2007
    
    $
    2,000,004
    
    
    $
    2,500,0002008
    
    $
    1,116,649
    
    
    $
    2009
    
    $
    
    
    
    $
    2010
    
    $
    
    
    
    $
    666,6532011
    
    $
    
    
    
    $
    
 5. Shareholders Equity
    (44)




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##### Table of Contents



6. Earnings Per Share
  Year ended September 30,2006
    
    2005
    
    2004Numerator for primary and diluted
earnings per share:Net income
    
    $
    10,574,219
    
    
    $
    10,484,786
    
    
    $
    6,729,825Denominator:For basic earnings per share-
weighted average shares (including
for 2006,
unissued vested directors shares of
68,488)
    
    
    8,479,406
    
    
    
    8,390,280
    
    
    
    8,357,566Effect of potential diluted shares:Directors deferred compensation
shares
    
    
    *
    
    
    
    59,958
    
    
    
    100,036Denominator for diluted earnings per
share-adjusted weighted average
shares and potential shares
    
    
    8,479,406
    
    
    
    8,450,238
    
    
    
    8,457,602
 
 *
    
    Not applicable  see Note 8.  7. Employee Stock Ownership Plan
  Year
    
    Shares
    
    Amount2006
    
    
    11,643
    
    
    $
    209,7002005
    
    
    9,186
    
    
    $
    196,8422004
    
    
    20,116
    
    
    $
    173,125
 (45)




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8. Deferred Compensation Plan for Directors
  9. Information on Oil and Gas Producing Activities
   (46)




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9. Information on Oil and Gas Producing Activities (continued)
 Aggregate Capitalized Costs
  2006
    
    2005Producing properties
    
    $
    103,129,158
    
    
    $
    84,388,067Non-producing properties
    
    
    11,273,373
    
    
    
    11,170,926114,402,531
    
    
    
    95,558,993Accumulated depreciation, depletion and
amortization
    
    
    (53,239,322
    )
    
    
    (43,415,988
    )Net capitalized costs
    
    $
    61,163,209
    
    
    $
    52,143,005
 Costs Incurred
  2006
    
    2005 (1)
    
    2004Property acquisition costs
    
    $
    983,159
    
    
    $
    2,032,823
    
    
    $
    612,392Exploration costs
    
    
    2,719,068
    
    
    
    907,385
    
    
    
    1,239,217Development costs
    
    
    18,900,917
    
    
    
    11,799,545
    
    
    
    9,005,341$
    22,603,144
    
    
    $
    14,739,753
    
    
    $
    10,856,950
 
  10. Supplementary Information on Oil and Gas Reserves (Unaudited)
 Disclosures About Oil and Gas Producing Activities.
  (47)




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10. Supplementary Information on Oil and Gas Reserves (Unaudited) (continued)
  Estimated Quantities of Proved Oil and Gas Reserves
  Proved ReservesOil
    
    Gas(Mbarrels)
    
    (MMcf)September 30, 2003
    
    
    836
    
    
    
    28,270Revisions of previous estimates
    
    
    (50
    )
    
    
    (2,489
    )Extensions and discoveries
    
    
    89
    
    
    
    6,333Production
    
    
    (115
    )
    
    
    (3,863
    )September 30, 2004
    
    
    760
    
    
    
    28,251Revisions of previous estimates
    
    
    (60
    )
    
    
    (3,122
    )Acquisitions
    
    
    4
    
    
    
    409Divestitures
    
    
    (60
    )
    
    
    (814
    )Extensions and discoveries
    
    
    92
    
    
    
    6,733Production
    
    
    (102
    )
    
    
    (4,011
    )September 30, 2005
    
    
    634
    
    
    
    27,446Revisions of previous estimates
    
    
    (11
    )
    
    
    (3,557
    ) (1)Extensions and discoveries
    
    
    49
    
    
    
    11,279Production
    
    
    (97
    )
    
    
    (4,299
    )September 30, 2006
    
    
    575
    
    
    
    30,869
 
 (1)
    
    The prices used to calculate reserves and future cash flows from reserves for oil and
natural gas, respectively, were as follows: September 30, 2006  $60.50, $3.49; 2005  $64.18,
$11.54. The large decrease in the natural gas price for 2006 resulted in a negative revision to
gas reserves of 4,365 mmcf, meaning other revisions were a positive 808 mmcf. (48)




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10. Supplementary Information on Oil and Gas Reserves (Unaudited) (continued)
 Proved Developed Reserves
    
    Proved Undeveloped ReservesOil
    
    Gas
    
    Oil
    
    Gas(Mbarrels)
    
    (MMcf)
    
    (Mbarrels)
    
    (MMcf)September 30, 2003
    
    
    703
    
    
    
    23,600
    
    
    
    133
    
    
    
    4,670September 30, 2004
    
    
    710
    
    
    
    24,086
    
    
    
    50
    
    
    
    4,165September 30, 2005
    
    
    613
    
    
    
    24,011
    
    
    
    21
    
    
    
    3,435September 30, 2006
    
    
    566
    
    
    
    25,323
    
    
    
    9
    
    
    
    5,547
  Standardized Measure of Discounted Future Net Cash Flows
  2006
    
    2005
    
    2004Future cash inflows
    
    $
    146,872,790
    
    
    $
    358,380,000
    
    
    $
    187,769,949Future production costs
    
    
    34,045,630
    
    
    
    55,406,990
    
    
    
    35,447,026Future development costs
    
    
    7,101,523
    
    
    
    5,458,591
    
    
    
    3,716,299Asset retirement obligation
    
    
    1,374,294
    
    
    
    1,144,299
    
    
    
    728,037Future net cash inflows before future
income tax expenses
    
    
    104,351,343
    
    
    
    296,370,120
    
    
    
    147,878,587Future income tax expense
    
    
    24,394,272
    
    
    
    84,708,027
    
    
    
    40,959,776Future net cash flows
    
    
    79,957,071
    
    
    
    211,662,093
    
    
    
    106,918,81110% annual discount
    
    
    28,765,504
    
    
    
    78,040,774
    
    
    
    37,768,822Standardized measure of discounted
future net cash flows
    
    $
    51,191,567
    
    
    $
    133,621,319
    
    
    $
    69,149,989
 (49)




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##### Table of Contents



10. Supplementary Information on Oil and Gas Reserves (Unaudited) (continued)
  2006
    
    2005
    
    2004Beginning of year
    
    $
    133,621,319
    
    
    $
    69,149,989
    
    
    $
    53,740,536Changes resulting from:Sales of oil and gas, net of production costs
    
    
    (30,745,693
    )
    
    
    (25,439,615
    )
    
    
    (19,480,491
    )Net change in sales prices and production costs
    
    
    (123,034,702
    )
    
    
    96,847,355
    
    
    
    23,317,917Net change in future development costs
    
    
    (1,053,612
    )
    
    
    (1,142,715
    )
    
    
    91,349Net change in asset retirement obligation
    
    
    (149,267
    )
    
    
    (266,949
    )
    
    
    (144,078
    )Extensions and discoveries
    
    
    23,822,148
    
    
    
    43,200,477
    
    
    
    20,153,689Revisions of quantity estimates
    
    
    (7,891,218
    )
    
    
    (19,409,623
    )
    
    
    (8,026,019
    )Divestitures of reserves-in-place
    
    
    
    
    
    
    (6,975,566
    )
    
    
    Acquisition of reserves-in-place
    
    
    
    
    
    
    2,585,268
    
    
    
    Accretion of discount
    
    
    19,006,216
    
    
    
    9,698,899
    
    
    
    7,516,647Net change in income taxes
    
    
    39,908,385
    
    
    
    (28,601,833
    )
    
    
    (6,413,806
    )Change in timing and other, net
    
    
    (2,292,009
    )
    
    
    (6,024,368
    )
    
    
    (1,605,755
    )Net change
    
    
    (82,429,752
    )
    
    
    64,471,330
    
    
    
    15,409,453End of year
    
    $
    51,191,567
    
    
    $
    133,621,319
    
    
    $
    69,149,989
 11. Quarterly Results of Operations (Unaudited)
  Fiscal 2006Quarter EndedDecember 31
    
    March 31
    
    June 30
    
    September 30Revenues
    
    $
    12,207,679
    
    
    $
    8,728,506
    
    
    $
    7,414,606
    
    
    $
    9,134,889Income before provision for
income taxes
    
    
    7,471,118
    
    
    
    3,842,760
    
    
    
    2,815,878
    
    
    
    1,030,463Net income
    
    
    4,894,118
    
    
    
    2,653,760
    
    
    
    2,078,878
    
    
    
    947,463Basic earnings per share
    
    $
    0.58
    
    
    $
    0.31
    
    
    $
    0.25
    
    
    $
    0.11Diluted earnings per share
    
    $
    0.58
    
    
    $
    0.31
    
    
    $
    0.25
    
    
    $
    0.11
 Fiscal 2005Quarter EndedDecember 31
    
    March 31
    
    June 30
    
    September 30Revenues
    
    $
    8,492,360
    
    
    $
    6,274,779
    
    
    $
    9,215,046
    
    
    $
    9,324,538Income before provision for
income taxes
    
    
    3,616,344
    
    
    
    2,210,649
    
    
    
    5,056,419
    
    
    
    4,192,374Net income
    
    
    2,448,344
    
    
    
    1,575,649
    
    
    
    3,419,419
    
    
    
    3,041,374Basic earnings per share
    
    $
    0.29
    
    
    $
    0.19
    
    
    $
    0.41
    
    
    $
    0.36Diluted earnings per share
    
    $
    0.29
    
    
    $
    0.19
    
    
    $
    0.40
    
    
    $
    0.36
 (50)




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##### Table of Contents



ITEM 9
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A CONTROLS AND PROCEDURES
 (a) Evaluation of Disclosure Controls and Procedures
  (b) Managements Report on Internal Control Over Financial Reporting
 Internal Control  Integrated Framework
  (c) Changes in Internal Control Over Financial Reporting
  (51)




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##### Table of Contents



PART III
  
 PART IV
 
 ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 Financial Statement Schedules
  Exhibits
 (3)
    
    Amended Certificate of Incorporation (incorporated by reference to Exhibit
attached to Form 10 filed January 27, 1980, and to Forms 8-K dated June 1, 1982,
December 3, 1982 and to Form 10-QSB dated March 31, 1999).By-Laws as amended (incorporated by reference to Form 8-K dated October 31,
1994)By-Laws as amended (incorporated by reference to Form 8-K dated February
24, 2006)(4)
    
    Instruments defining the rights of security holders (incorporated by reference to
Certificate of Incorporation and By-Laws listed above)(10)
    
    Amendment to Loan Agreement (incorporated by reference to Form 10-K dated
September 30, 2003)(10)
    
    Agreement indemnifying directors and officers (incorporated by reference to
Form 10-K dated September 30, 1989)(21)
    
    Subsidiaries of the Registrant(31.1)
    
    Certification of Chief Executive Officer(31.2)
    
    Certification of Chief Financial Officer(32.1)
    
    Certification of Chief Executive Officer(32.2)
    
    Certification of Chief Financial Officer
 REPORTS ON FORM 8-K
  (52)




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##### Table of Contents



SIGNATURES
  PANHANDLE ROYALTY COMPANYBy: /s/ Michael C. Coffman
    
    By: /s/ Ben D. HareMichael C. Coffman
    
    Ben D. HareCo-President;
    
    Co-President;Chief Financial Officer
    
    Chief Operating OfficerDate: December 12, 2006
  /s/ E. Chris Kauffman
    
    /s/ Bruce M. BellE. Chris Kauffman, Chairman of Board
    
    Bruce M. Bell, DirectorDate December 12, 2006
    
    Date December 12, 2006/s/ Robert A. Reece
    
    /s/ Robert E. RobottiRobert A. Reece, Director
    
    Robert E. Robotti, DirectorDate December 12, 2006
    
    Date December 12, 2006/s/ H. Grant Swartzwelder

H. Grant Swartzwelder, Director
    
    /s/ Robert O. Lorenz

Robert O. Lorenz, DirectorDate December 12, 2006
    
    Date December 12, 2006/s/ Lonnie J. LowryLonnie J. Lowry, Vice President,
Controller and Secretary
(Chief Accounting Officer)Date December 12, 2006
 (53)