Table of Contents

 

 

 

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-Q**

 

**x****      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarterly period ended: June 30, 2010**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Commission file number 0-02517**

 

**TOREADOR RESOURCES CORPORATION**

(Exact name of registrant as specified inits charter)

 

| **Delaware**                                    | ** ** | **75-0991164**                           |
|-------------------------------------------------|------------|------------------------------------------|
| (State or other jurisdiction

of incorporation) |       | (I.R.S. Employer

Identification Number) |

 

**c/o Toreador Holding SAS**

**9 rue Scribe**

**75009 Paris, France**

(Address of principal executive office)

 

Registrant’s telephone number, including areacode:**+33 1 47 03 34 24**

 

Indicateby check mark whether the Registrant (i) has filed all reports required tobe filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the Registrant was required to filesuch reports), and (ii) has been subject to such filing requirements forthe past 90 days.  Yes x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes o  No o

 

Indicateby check mark whether the Registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company. Seedefinition of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (check one):

 

| Large accelerated filer o                     |   | Accelerated filer x         |
|-----------------------------------------------|--------|-----------------------------|
|                                          |   |                        |
| Non-accelerated filer o                       |   | Smaller Reporting company o |
| (Do not check if a smaller reporting company) |   |                        |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o  No x

 

Asof June 30, 2010, there were 25,761,158 shares of common stock, par value$.15625 per share, outstanding.

 

 

 

----

Table of Contents

 

**TOREADOR RESOURCES CORPORATION**

 

**TOREADOR RESOURCES CORPORATION**

 

**TABLE OF CONTENTS**

 
| ** **                             | ** **                                                                                                     | **Page** |
|----------------------------------------|----------------------------------------------------------------------------------------------------------------|----------|
| **PART I.FINANCIAL  INFORMATION** |                                                                                                           |
|                                   |                                                                                                           |     |
| Item 1.                                | Financial  Statements (unaudited)                                                                              |     |
|                                   |                                                                                                           |     |
|                                   | Condensed Consolidated Balance Sheets — June 30,  2010 and December 31, 2009                    | 1        |
|                                   |                                                                                                           |     |
|                                   | Condensed Consolidated Statements of Operations — for  the three months ended June 30, 2010 and 2009 | 2        |
|                                   |                                                                                                           |     |
|                                   | Condensed Consolidated Statements of Operations — for  the six months ended June 30, 2010 and 2009   | 3        |
|                                   |                                                                                                           |     |
|                                   | Condensed Consolidated Statement of Changes in  Stockholder’s Equity — June 30, 2010            | 4        |
|                                   |                                                                                                           |     |
|                                   | Condensed Consolidated Statements of Cash Flows — for  the six months ended June 30, 2010 and 2009   | 5        |
|                                   |                                                                                                           |     |
|                                   | Notes to Condensed Consolidated Financial Statements                                                           | 6        |
|                                   |                                                                                                           |     |
| Item 2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                    | 23       |
|                                   |                                                                                                           |     |
| Item 3.                                | Quantitative  and Qualitative Disclosures About Market Risk                                                    | 41       |
|                                   |                                                                                                           |     |
| Item 4.                                | Controls and Procedures                                                                                        | 42       |
|                                   |                                                                                                           |     |
| **PART II.OTHER INFORMATION**     |                                                                                                           |
|                                   |                                                                                                           |     |
| Item 1.                                | Legal Proceedings                                                                                              | 43       |
|                                   |                                                                                                           |     |
| Item 1A.                               | Risk Factors                                                                                                   | 43       |
|                                   |                                                                                                           |     |
| Item 2.                                | Unregistered  Sales of Equity Securities and Use of Proceeds                                                   | 43       |
|                                   |                                                                                                           |     |
| Item 6.                                | Exhibits                                                                                                       | 43       |
| ** **                             | ** **                                                                                                     |     |
| ** **                             | **SIGNATURES**                                                                                                 | 44       |

 

i

----

Table ofContents

 

**PART I. FINANCIALINFORMATION**

 

**ITEM 1.     *FINANCIALSTATEMENTS (UNAUDITED)***

 

**TOREADOR RESOURCES CORPORATION**

 

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                               | ** ** | **June 30,********2010**                                                          | ** ** | **December 31,********2009** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                               | ** ** | **(Unaudited)**                                                                        | ** ** | ** **                        | ** ** |
| ** **                                                                                               | ** ** | **(In thousands, except share and per share data)** | ** ** |
| **ASSETS**                                                                                               |       |                                                                                   |       |                              |       |
| Current assets:                                                                                          |       |                                                                                   |       |                              |       |
| Cash and cash equivalents (Note 2)                                                                       |       | $                                                                                      | 56,049     |                              | $          | 8,712 |   |
| Accounts receivable (Note 2)                                                                             |       | 2,603                                                                                  |       | 3,126                             |       |
| Income tax receivable (Note 8)                                                                           |       | —                                                                                 |       | 245                               |       |
| Other                                                                                                    |       | 3,028                                                                                  |       | 3,593                             |       |
| Total current assets                                                                                     |       | 61,680                                                                                 |       | 15,676                            |       |
|                                                                                                     |       |                                                                                   |       |                              |       |
| Oil and natural gas properties, net                                                                      |       |                                                                                   |       |                              |       |
| Oil and natural gas properties, gross                                                                    |       | 99,505                                                                                 |       | 116,435                           |       |
| Accumulated depletion, depreciation and  amortization                                                    |       | (36,630                                                                                | )          | (41,814                           | )          |
| Oil and natural gas properties, net                                                                      |       | 62,875                                                                                 |       | 74,621                            |       |
|                                                                                                     |       |                                                                                   |       |                              |       |
| Investments                                                                                              |       | 200                                                                                    |       | 200                               |       |
| Goodwill (Note 15)                                                                                       |       | 3,384                                                                                  |       | 3,973                             |       |
| Other assets                                                                                             |       | 3,033                                                                                  |       | 2,685                             |       |
|                                                                                                     |       |                                                                                   |       |                              |       |
| Total assets                                                                                             |       | $                                                                                      | 131,172    |                              | $          | 97,155 |   |
|                                                                                                     |       |                                                                                   |       |                              |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                           |       |                                                                                   |       |                              |       |
| Current liabilities:                                                                                     |       |                                                                                   |       |                              |       |
| Accounts payable and accrued liabilities                                                                 |       | $                                                                                      | 10,592     |                              | $          | 12,491 |   |
| Deferred lease payable — current portion                                                            |       | 110                                                                                    |       | 107                               |       |
| Derivatives (Note 13)                                                                                    |       | 72                                                                                     |       | 886                               |       |
| Current portion of long-term debt (Note 5)                                                               |       | 32,385                                                                                 |       | 32,385                            |       |
| Income taxes payable (Note 8)                                                                            |       | 5,543                                                                                  |       | —                            |       |
| Total current liabilities                                                                                |       | 48,702                                                                                 |       | 45,869                            |       |
|                                                                                                     |       |                                                                                   |       |                              |       |
| Long-term accrued liabilities                                                                            |       | 329                                                                                    |       | 385                               |       |
| Deferred lease payable, net of current portion                                                           |       | 386                                                                                    |       | 442                               |       |
| Asset retirement obligations (Note 6)                                                                    |       | 5,915                                                                                  |       | 6,733                             |       |
| Deferred income tax liabilities                                                                          |       | 13,927                                                                                 |       | 15,358                            |       |
| Long-term debt (Notes 5 and 14)                                                                          |       | 34,973                                                                                 |       | 22,231                            |       |
| Total liabilities                                                                                        |       | 104,232                                                                                |       | 91,018                            |       |
| Stockholders’ equity:                                                                               |       |                                                                                   |       |                              |       |
| Common stock, $0.15625 par value, 30,000,000  shares authorized; 25,761,158 and 22,106,955 shares issued |       | 4,025                                                                                  |       | 3,454                             |       |
| Additional paid-in capital                                                                               |       | 198,601                                                                                |       | 170,895                           |       |
| Accumulated deficit                                                                                      |       | (177,600                                                                               | )          | (176,578                          | )          |
| Accumulated other comprehensive income                                                                   |       | 4,448                                                                                  |       | 10,900                            |       |
| Treasury stock at cost, 721,027 shares for 2009  and 2010                                                |       | (2,534                                                                                 | )          | (2,534                            | )          |
| Total stockholders’ equity                                                                          |       | 26,940                                                                                 |       | 6,137                             |       |
|                                                                                                     |       |                                                                                   |       |                              |       |
| Total liabilities and stockholders’ equity                                                          |       | $                                                                                      | 131,172    |                              | $          | 97,155 |   |

 

The accompanying notes arean integral part of these financial statements.

 

1

----

Table ofContents

 

**TOREADOR RESOURCES CORPORATION**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                                 | ** ** | **Three Months Ended********June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                 | ** ** | **2010**                                    | ** ** | **2009** | ** ** |
| ** **                                                                 | ** ** | **(Unaudited)**                             | ** ** |
| ** **                                                                 | ** ** | **(In thousands, except per share data)**   | ** ** |
| Revenues and other income:                                                 |       |                                        |       |   |   |
| Sales and other operating revenue                                          |       | $                                           | 5,946      |   | $ | 4,504 |   |
| Other income (Note 16)                                                     |       | 15,000                                      |       | 121 |   |
| Total revenues and other income                                            |       | 20,946                                      |       | 4,625 |   |
| Operating costs and expenses:                                              |       |                                        |       |   |   |
| Lease operating expense                                                    |       | 3,138                                       |       | 1,776 |   |
| Exploration expense                                                        |       | 1,055                                       |       | 146 |   |
| Depreciation, depletion and amortization                                   |       | 673                                         |       | 1,469 |   |
| Accretion on discounted assets and liabilities  (Notes 5 and 6)            |       | 31                                          |       | 123 |   |
| General and administrative                                                 |       | 2,837                                       |       | 5,703 |   |
| Gain on oil and gas derivative contracts (Note 13)                         |       | (783                                        | )          | — |   |
| Total operating costs and expenses                                         |       | 6,951                                       |       | 9,217 |   |
| Operating income (loss)                                                    |       | 13,995                                      |       | (4,592 | ) |
| Other (expense) income:                                                    |       |                                        |       |   |   |
| Foreign currency exchange gain (loss)                                      |       | (83                                         | )          | (653 | ) |
| Gain on early extinguishment of debt (Note 5)                              |       | —                                      |       | 3,370 |   |
| Interest expense, net of interest capitalized  (Note 5)                    |       | (1,011                                      | )          | (546 | ) |
| Total other income (expense)                                               |       | (1,094                                      | )          | 2,171 |   |
| Income (loss) before taxes from continuing  operations                     |       | 12,901                                      |       | (2,421 | ) |
| Income tax (benefit) provision (Note 8)                                    |       | 6,351                                       |       | (691 | ) |
| Income (loss) from continuing operations, net of  income taxes             |       | 6,550                                       |       | (1,730 | ) |
| Income (loss) from discontinued operations, net of  income taxes (Note 12) |       | (247                                        | )          | 4,612 |   |
| Net income available to common shares                                      |       | $                                           | 6,303      |   | $ | 2,882 |   |
|                                                                       |       |                                        |       |   |   |
| Basic income (loss) available to common shares per  share:                 |       |                                        |       |   |   |
| From continuing operations, net of income taxes                            |       | $                                           | 0.27       |   | $ | (0.09 | ) |
| From discontinued operations, net of income taxes                          |       | (0.01                                       | )          | 0.23 |   |
|                                                                       |       | $                                           | 0.26       |   | $ | 0.14 |   |
|                                                                       |       |                                        |       |   |   |
| Diluted income (loss) available to common shares per  share:               |       |                                        |       |   |   |
| From continuing operations, net of income taxes                            |       | $                                           | 0.27       |   | $ | (0.09 | ) |
| From discontinued operations, net of income taxes                          |       | (0.01                                       | )          | 0.23 |   |
|                                                                       |       | $                                           | 0.26       |   | $ | 0.14 |   |
|                                                                       |       |                                        |       |   |   |
| Weighted average shares outstanding:                                       |       |                                        |       |   |   |
| Basic                                                                      |       | 24,640                                      |       | 20,416 |   |
| Diluted                                                                    |       | 24,658                                      |       | 20,416 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

2

----

Table ofContents

 

**TOREADOR RESOURCES CORPORATION**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                        | ** ** | **Six Months Ended********June 30,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                        | ** ** | **2010**                                  | ** ** | **2009** | ** ** |
| ** **                                                        | ** ** | **(Unaudited)**                           |
| ** **                                                        | ** ** | **(In thousands, except per share data)** |
| Revenues and other income                                         |       |                                      |       |   |   |
| Sales and other operating revenue                                 |       | $                                         | 11,456     |   | $ | 7,892 |   |
| Other income (Note 16)                                            |       | 15,000                                    |       | 121 |   |
| Total revenues and other income                                   |       | 26,456                                    |       | 8,013 |   |
| Operating costs and expenses:                                     |       |                                      |       |   |   |
| Lease operating expense                                           |       | 4,378                                     |       | 3,564 |   |
| Exploration expense                                               |       | 1,075                                     |       | 610 |   |
| Depreciation, depletion and amortization                          |       | 1,677                                     |       | 3,010 |   |
| Accretion on discounted assets and liabilities  (Notes 5 and 6)   |       | 87                                        |       | 238 |   |
| General and administrative                                        |       | 7,842                                     |       | 10,707 |   |
| Gain on oil and gas derivative contracts (Note 13)                |       | (814                                      | )          | — |   |
| Total operating costs and expenses                                |       | 14,245                                    |       | 18,129 |   |
| Operating income (loss)                                           |       | 12,211                                    |       | (10,116 | ) |
| Other (expense) income:                                           |       |                                      |       |   |   |
| Foreign currency exchange gain (loss)                             |       | (77                                       | )          | (557 | ) |
| (Loss) gain on the early extinguishment of debt  (Note 5)         |       | (4,256                                    | )          | 3,370 |   |
| Interest expense, net of interest capitalized  (Note 5)           |       | (1,720                                    | )          | (1,391 | ) |
| Total other (expense) income                                      |       | (6,053                                    | )          | 1,422 |   |
| Income (loss) before taxes from continuing  operations            |       | 6,158                                     |       | (8,694 | ) |
| Income tax (benefit) provision (Note 8)                           |       | 6,351                                     |       | (769 | ) |
| Income (loss) from continuing operations, net of  income taxes    |       | (193                                      | )          | (7,925 | ) |
| Loss from discontinued operations, net of income  taxes (Note 12) |       | (822                                      | )          | (69 | ) |
| Net loss available to common shares                               |       | $                                         | (1,015     | ) | $ | (7,994 | ) |
|                                                              |       |                                      |       |   |   |
| Basic income (loss) available to common shares per  share:        |       |                                      |       |   |   |
| From continuing operations, net of income taxes                   |       | $                                         | (0.01      | ) | $ | (0.39 | ) |
| From discontinued operations, net of income taxes                 |       | (0.03                                     | )          | (0.00 | ) |
|                                                              |       | $                                         | (0.04      | ) | $ | (0.39 | ) |
|                                                              |       |                                      |       |   |   |
| Diluted income (loss) available to common shares  per share:      |       |                                      |       |   |   |
| From continuing operations, net of income taxes                   |       | $                                         | (0.01      | ) | $ | (0.39 | ) |
| From discontinued operations, net of income taxes                 |       | (0.03                                     | )          | (0.00 | ) |
|                                                              |       | $                                         | (0.04      | ) | $ | (0.39 | ) |
|                                                              |       |                                      |       |   |   |
| Weighted average shares outstanding:                              |       |                                      |       |   |   |
| Basic                                                             |       | 23,958                                    |       | 20,271 |   |
| Diluted                                                           |       | 23,958                                    |       | 20,271 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

3

----

Table ofContents

 

**TOREADORRESOURCES CORPORATION**

 

**CONDENSED CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

(UNAUDITED)

 
| ** **                                   | ** ** | **Common********Stock********(Shares)** | ** ** | **Common********Stock********($)** | ** ** | **Additional********Paid-in********Capital** | ** ** | **Accumulated  deficit** | ** ** | **Accumulated********Other********Comprehensive********Income (loss)** | ** ** | **Treasury********Stock********(Shares)** | ** ** | **Treasury********Stock********($)** | ** ** | **Total********Stockholders’********Equity** | ** ** |
|----------------------------------------------|------------|-----------------------------------------|------------|------------------------------------|------------|----------------------------------------------|------------|--------------------------|------------|------------------------------------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------|------------|---------------------------------------------------|------------|
| Balance  at December 31, 2009           |       | 22,107                                  |       | $                                  | 3,454      |                                         | $          | 170,895                  |       | $                                                                      | (176,578   | )                                         | $          | 10,900                               |       | (721                                              | )          | $ | (2,534 | ) | $ | 6,137 |   |
| Exercise  of stock options                   |       | 5                                       |       | —                             |       | 15                                           |       | —                   |       | —                                                                 |       |                                      |       | —                               |       | 15                                                |       |
| Return  of stock options exercised           |       | —                                  |       | 1                                  |       | —                                       |       | —                   |       | —                                                                 |       |                                      |       | —                               |       | 1                                                 |       |
| Issuance  of restricted stock                |       | 199                                     |       | 31                                 |       | (31                                          | )          | —                   |       | —                                                                 |       |                                      |       | —                               |       | —                                            |       |
| Issuance  of common stock                    |       | 3,450                                   |       | 539                                |       | 28,786                                       |       | —                   |       | —                                                                 |       |                                      |       | —                               |       | 29,325                                            |       |
| Amortization  of deferred stock compensation |       | —                                  |       | —                             |       | 1,553                                        |       | —                   |       | —                                                                 |       |                                      |       | —                               |       | 1,553                                             |       |
| Net  loss                                    |       | —                                  |       | —                             |       | —                                       |       | (1,015                   | )          | —                                                                 |       |                                      |       | —                               |       | (1,015                                            | )          |
| Foreign  currency translation adjustment     |       | —                                  |       | —                             |       | —                                       |       | —                   |       | (6,452                                                                 | )          |                                      |       | —                               |       | (6,452                                            | )          |
| Tax  effect of restricted stock              |       | —                                  |       | —                             |       | (87                                          | )          | —                   |       | —                                                                 |       |                                      |       | —                               |       | (87                                               | )          |
| Payment  of equity issuance costs            |       | —                                  |       | —                             |       | (2,489                                       | )          | —                   |       | —                                                                 |       |                                      |       | —                               |       | (2,489                                            | )          |
| Other                                        |       | —                                  |       | —                             |       | (41                                          | )          | (7                       | )          | —                                                                 |       | —                                    |       | —                               |       | (48                                               | )          |
|                                         |       |                                    |       |                               |       |                                         |       |                     |       |                                                                   |       |                                      |       |                                 |       |                                              |       |
| Balance  at June 30, 2010               |       | 25,761                                  |       | $                                  | 4,025      |                                         | $          | 198,601                  |       | $                                                                      | (177,600   | )                                         | $          | 4,448                                |       | (721                                              | )          | $ | (2,534 | ) | $ | 26,940 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

4

----

Tableof Contents

 

**TOREADOR RESOURCES CORPORATION**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                          | ** ** | **Six Months Ended********June30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                          | ** ** | **2010**                            | ** ** | **2009** | ** ** |
| ** **                                                                                          | ** ** | **(Unaudited)**                     | ** ** |
| ** **                                                                                          | ** ** | **(In thousands)**                  | ** ** |
| Cash flows from operating activities:                                                               |       |                                |       |   |   |
| Net loss                                                                                            |       | $                                   | (1,015     | ) | $ | (7,994 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |       |                                |       |   |   |
| Depreciation, depletion and amortization                                                            |       | 1,677                               |       | 3,010 |   |
| Accretion on discounted assets and liabilities                                                      |       | 87                                  |       | 238 |   |
| Amortization of deferred debt issuance costs                                                        |       | 98                                  |       | 975 |   |
| Stock based compensation                                                                            |       | 2,204                               |       | 2,831 |   |
| Deferred income taxes liabilities                                                                   |       | (1,431                              | )          | (437 | ) |
| Impairment of oil and natural gas properties                                                        |       | —                              |       | 5,300 |   |
| Gain on sale of properties and equipment                                                            |       | —                              |       | (121 | ) |
| Gain on sale of properties and other assets in Romania                                              |       | —                              |       | (5,846 | ) |
| Loss (gain) on early extinguishment of debt —  convertible notes                               |       | 4,256                               |       | (3,370 | ) |
| Loss on early extinguishment of debt — revolving  credit facility                              |       | —                              |       | 4,881 |   |
| Unrealized gain on commodity derivatives                                                            |       | (814                                | )          | — |   |
| Decrease (increase) in accounts receivable                                                          |       | 523                                 |       | (121 | ) |
| Decrease in income taxes receivable                                                                 |       | 245                                 |       |   |   |
| Decrease (increase) in other current assets                                                         |       | 565                                 |       | (2,883 | ) |
| Decrease (increase) in other assets                                                                 |       | 348                                 |       | (86 | ) |
| (Decrease) increase in accounts payable and  accrued liabilities                                    |       | (1,899                              | )          | 1,289 |   |
| Decrease in deferred lease payable                                                                  |       | (53                                 | )          | — |   |
| Increase (decrease) in income taxes payable                                                         |       | 5,543                               |       | (4,087 | ) |
| Decrease in long-term accrued liabilities                                                           |       | (56                                 | )          | — |   |
| Net cash provided by (used in) operating  activities                                                |       | 10,278                              |       | (6,421 | ) |
| Cash flows from investing activities:                                                               |       |                                |       |   |   |
| Proceeds from sale of property and equipment                                                        |       | —                              |       | 121 |   |
| Additions to property and equipment                                                                 |       | (252                                | )          | (990 | ) |
| Restricted cash                                                                                     |       |                                |       | 1,928 |   |
| Proceeds from sale of oil and gas properties                                                        |       | —                              |       | 50,000 |   |
| Net cash (used in) provided by investing  activities                                                |       | (252                                | )          | 51,059 |   |
| Cash flows from financing activities:                                                               |       |                                |       |   |   |
| Repayment of convertible notes (Note 5)                                                             |       | (22,231                             | )          | (12,661 | ) |
| Repayment of revolving credit facility (Note 5)                                                     |       | —                              |       | (36,372 | ) |
| Issuance of convertible notes                                                                       |       | 31,631                              |       |   |   |
| Deferred debt issuance costs                                                                        |       | (1,936                              | )          |   |   |
| Proceeds from issuance of common stock, net of  equity issuance costs of $2,489 (Note 9)            |       | 26,836                              |       |   |   |
| Proceeds from exercise of stock options                                                             |       | 15                                  |       |   |   |
| Other                                                                                               |       | —                              |       | (82 | ) |
| Net cash provided by (used in) financing  activities                                                |       | 34,315                              |       | (49,115 | ) |
| Net increase (decrease) in cash and cash  equivalents                                               |       | 44,341                              |       | (4,477 | ) |
| Effects of foreign currency translation on cash  and cash equivalents                               |       | 2,996                               |       | 1,206 |   |
| Cash and cash equivalents, beginning of period                                                      |       | 8,712                               |       | 19,457 |   |
| Cash and cash equivalents, end of period                                                            |       | $                                   | 56,049     |   | $ | 16,186 |   |
| Supplemental disclosures:                                                                           |       |                                |       |   |   |
| Cash paid during the period for interest, net of  interest capitalized                              |       | $                                   | 1,180      |   | $ | 1,787 |   |
| Cash paid during the period for income taxes                                                        |       | $                                   | 7          |   | $ | 4,032 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

5

----

Table of Contents

 

**TOREADOR RESOURCES CORPORATION**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(UNAUDITED)

 

**NOTE 1 - BASIS OF PRESENTATION**

 

The consolidated financialstatements of Toreador Resources Corporation and subsidiaries (“Toreador,” “we,”“us,” “our,” or the “Company”) included herein have been prepared by theCompany without audit, pursuant to the rules and regulations of theSecurities and Exchange Commission (the “SEC”). They reflect all adjustmentswhich are, in the opinion of management, necessary for a fair presentation ofthe financial position and results of operations for the interim periods, on abasis consistent with the annual audited financial statements. All suchadjustments are of a normal recurring nature, unless noted herein. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States have been condensed or omitted pursuant to such rules andregulations. However, the Company believes that the disclosures containedherein are adequate to make the information presented not misleading. Theseinterim financial statements should be read in conjunction with theconsolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2009,which was filed with the SEC on March 16, 2010. The results of operationsfor interim periods are not necessarily indicative of the results to beexpected for the full year.

 

We are a Delawarecorporation that was incorporated in 1951. Our common stock is traded on theNASDAQ Global Market under the trading symbol TRGL. Our offices in the UnitedStates are located at 13760 Noel Road, Suite 1100, Dallas, TX, 75240-1383(telephone number: (214) 559-3933). Our principal executive offices are locatedat c/o Toreador Holding SAS, 9 rue Scribe, 75009 Paris, France (telephonenumber: +33 1 47 03 34 24). Our website address is www.toreador.net.

 

Unless otherwise noted,amounts reported in tables are in thousands, except per unit data.

 

***Revenue Recognition***

 

OurFrench crude oil production accounts for substantially all of our sales. Wesell our French crude oil to Total (“TOTAL”), and recognize the relatedrevenues when the production is delivered to TOTAL’s refinery, typically viatruck. At the time of delivery to the plant, title to the crude oil transfersto TOTAL. The terms of the contract with TOTAL state that the price receivedfor oil sold will be the arithmetic mean of all average daily quotations ofDated Brent published in Platt’s Oil Market Wire for the month of productionless a specified differential per barrel. The pricing of oil sales is done on thefirst day of the month following the month of production. In accordance withthe terms of the contract, payment is made within six working days of the dateof issue of the invoice. The contract with TOTAL is automatically extended fora period of one year unless either party cancels it in writing no later thansix months prior to the beginning of the next year.

 

Werecognize revenue for our remaining production when the quantities aredelivered to or collected by the respective purchaser. Title to the producedquantities transfers to the purchaser at the time the purchaser collects orreceives the quantities. Prices for such production are defined in salescontracts and are readily determinable based on certain publicly availableindices. The purchasers of such production have historically made payment forcrude oil and natural gas purchases within thirty and sixty days of the end ofeach production month, respectively. We periodically review the differencebetween the dates of production and the dates we collect payment for suchproduction to ensure that receivables from those purchasers are collectible.Taxes associated with production are classified as lease operating expense.

 

Gainon sales of proved and unproved properties are only recognized when there is nouncertainty about the recovery of costs applicable to interests retained or wherethere is no substantial obligation for future performance by the Company.Losses on properties sold are recognized when incurred. Any gain or loss isreflected in “Other Income”.

 

6

----

Table of Contents

 

***New Accounting Pronouncements***

 

In January 2010, theFASB issued guidance that clarifies and requires new disclosures about fairvalue measurements. The clarifications and requirement to disclose the amountsand reasons for significant transfers between Level 1 and Level 2, as well assignificant transfers in and out of Level 3 of the fair value hierarchy, wereadopted by the Company in the first quarter of 2010. The new guidance alsorequires that purchases, sales, issuances, and settlements be presented grossin the Level 3 reconciliation and that requirement is effective for fiscalyears beginning after December 15, 2010 and for interim periods withinthose years, with early adoption permitted. Adoption of the guidance which onlyamends the disclosures requirements did not have significant impact on ourfinancial statements.

 

In February 2010, the FASBissued 2010-09, *Amendments to Certain Recognition andDisclosure Requirements (“ASU 2010-09”).*ASU 2010-09**amends ASC 855,*Subsequent Events,*byremoving the requirement for an SEC filer to disclose the date through whichsubsequent events have been evaluated. Management’s responsibility to evaluatesubsequent events through the date of issuance remains unchanged. The Companyadopted amendments to the Codification resulting from ASU 2010-09 on February 24,2010. As ASU 2010-09 relates specifically to disclosures, the adoption of thisstandard had no impact on our condensed consolidated financial condition,results of operations or cash flows.

 

On July 21, 2010, theFASB issued ASU 2010-20, *Disclosure about theCredit Quality of Financing Receivables and the Allowance for Credit Losses*(“ASU 2010-20”). ASU 2010-20 amend existing disclosure guidance to requireentities to provide extensive new disclosures in their financial statementsabout their financing receivables, including credit risk exposures and theallowance for credit losses. ASU 2010-20 is effective for fiscal and interimperiods beginning after December 15, 2010. The Company will review therequirements under the standards to determine what impacts, if any, theadoption of the standard would have on our condensed consolidated financialstatements.

 

**NOTE 2 - CONCENTRATION OF CREDITRISK AND ACCOUNTS RECEIVABLE**

 

Financial instruments thatpotentially subject us to a concentration of credit risk consist principally ofcash and cash equivalents, accounts receivable, and our hedging and derivativefinancial instruments. We place our cash with high-credit quality financialinstitutions. We****currently sell oil to onecustomer, TOTAL. Substantially all of our accounts receivable are due from thepurchaser of oil production. We place our hedging and derivative financialinstruments with financial institutions and other firms that we believe havehigh credit ratings.

 

We periodically review thecollectability of accounts receivable and record an allowance for doubtfulaccounts on those amounts which are, in our judgment, unlikely to be collected.We have not had any significant credit losses in the past and we believe ouraccounts receivable are fully collectable with the exception of the currentallowance.

 

Accounts receivableconsisted of the following:

 
| ** **                             | ** ** | **June 30,********2010** | ** ** | **December 31,********2009** | ** ** |
|----------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
| Oil and natural gas sales  receivables |       | $                             | 2,144      |                              | $          | 2,054 |   |
| Recoverable VAT                        |       | 138                           |       | 778                               |       |
| Other accounts receivable              |       | 321                           |       | 294                               |       |
|                                   |       | $                             | 2,603      |                              | $          | 3,126 |   |

 

7

----

Table ofContents

 

**NOTE 3 — EARNINGS (LOSS) PER COMMONSHARE**

 

The following tablereconciles the numerators and denominators of the basic and diluted earnings(loss) per common share computation:

 
| ** **                                                                | ** ** | **Three  Months Ended********June 30,** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| Basic earnings (loss) per  share:                                         |       |                                         |       |   |   |
| Numerator:                                                                |       |                                         |       |   |   |
| Income (loss) from  continuing operations, net of income tax              |       | $                                            | 6,550      |   | $ | (1,730 | ) |
| Income (loss) from  discontinued operations, net of income tax            |       | (247                                         | )          | 4,612 |   |
| Net income (loss)  available to common shareholders                       |       | $                                            | 6,303      |   | $ | 2,882 |   |
|                                                                      |       |                                         |       |   |   |
| Denominator:                                                              |       |                                         |       |   |   |
| Weighted average common  shares outstanding                               |       | 24,640                                       |       | 20,416 |   |
|                                                                      |       |                                         |       |   |   |
| Basic earnings (loss)  available to common shareholders per share from:   |       |                                         |       |   |   |
| Continuing operations                                                     |       | $                                            | 0.27       |   | $ | (0.09 | ) |
| Discontinued operations                                                   |       | (0.01                                        | )          | 0.23 |   |
|                                                                      |       | 0.26                                         |       | $ | 0.14 |   |
|                                                                      |       |                                         |       |   |   |
| Diluted earnings (loss)  per share:                                       |       |                                         |       |   |   |
| Numerator:                                                                |       |                                         |       |   |   |
| Loss from continuing  operations, net of income tax                       |       | $                                            | 6,550      |   | $ | (1,730 | ) |
| Income (loss) from  discontinued operations, net of income tax            |       | (247                                         | )          | 4,612 |   |
| Net income (loss)  available to common shareholders                       |       | $                                            | 6,303      |   | $ | 2,882 |   |
|                                                                      |       |                                         |       |   |   |
| Denominator:                                                              |       |                                         |       |   |   |
| Weighted average common  shares outstanding                               |       | 24,658                                       |       | 20,416 |   |
| Conversion of notes  payable                                              |       | —                                       | (1)        | — | (1) |
| Diluted shares outstanding                                                |       | 24,658                                       |       | 20,416 |   |
|                                                                      |       |                                         |       |   |   |
| Diluted earnings (loss)  available to common shareholders per share from: |       |                                         |       |   |   |
| Continuing operations                                                     |       | $                                            | 0.27       |   | $ | (0.09 | ) |
| Discontinued operations                                                   |       | (0.01                                        | )          | 0.23 |   |
|                                                                      |       | 0.26                                         |       | $ | 0.14 |   |

 

----

| (1) | Conversion of the Company’s 5.00% Convertible Senior Notes due 2025  would be anti-dilutive and the Company’s 8.00%/7.00% Convertible Senior Notes  due 2025 are not eligible for conversion in 2010 (subject to certain terms  and conditions under the Indenture dated as of February 1, 2010)  therefore, there are no dilutive shares. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

8

----

Table of Contents

 
| ** **                                                              | ** ** | **Six Months  Ended********June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                              | ** ** | **2010**                                   | ** ** | **2009** | ** ** |
| Basic loss per share:                                                   |       |                                       |       |   |   |
| Numerator:                                                              |       |                                       |       |   |   |
| Loss from continuing  operations, net of income tax                     |       | $                                          | (193       | ) | $ | (7,925 | ) |
| Loss from discontinued  operations, net of income tax                   |       | (822                                       | )          | (69 | ) |
| Net loss available to  common shareholders                              |       | $                                          | (1,015     | ) | $ | (7,994 | ) |
|                                                                    |       |                                       |       |   |   |
| Denominator:                                                            |       |                                       |       |   |   |
| Weighted average common  shares outstanding                             |       | 23,958                                     |       | 20,271 |   |
|                                                                    |       |                                       |       |   |   |
| Basic Income (loss)  available to common shareholders per share from:   |       |                                       |       |   |   |
| Continuing operations                                                   |       | $                                          | (0.01      | ) | $ | (0.39 | ) |
| Discontinued operations                                                 |       | (0.03                                      | )          | (0.00 | ) |
|                                                                    |       | $                                          | (0.04      | ) | $ | (0.39 | ) |
|                                                                    |       |                                       |       |   |   |
| Diluted loss per share:                                                 |       |                                       |       |   |   |
| Numerator:                                                              |       |                                       |       |   |   |
| Income (loss) from  continuing operations, net of income tax            |       | $                                          | (193       | ) | $ | (7,925 | ) |
| Loss from discontinued  operations, net of income tax                   |       | (822                                       | )          | (69 | ) |
| Net loss available to  common shareholders                              |       | $                                          | (1,015     | ) | $ | (7,994 | ) |
|                                                                    |       |                                       |       |   |   |
| Denominator:                                                            |       |                                       |       |   |   |
| Weighted average common  shares outstanding                             |       | 23,958                                     |       | 20,271 |   |
| Conversion of notes  payable                                            |       | —                                     | (1)        | — | (1) |
| Diluted shares outstanding                                              |       | 23,958                                     |       | 20,271 |   |
|                                                                    |       |                                       |       |   |   |
| Diluted Income (loss)  available to common shareholders per share from: |       |                                       |       |   |   |
| Continuing operations                                                   |       | $                                          | (0.01      | ) | $ | (0.39 | ) |
| Discontinued operations                                                 |       | (0.03                                      | )          | (0.00 | ) |
|                                                                    |       | $                                          | (0.04      | ) | $ | (0.39 | ) |

 

----

| (1) | Conversion of the 5.00% Convertible Senior Notes would be  anti-dilutive and the 8/7.00% New Convertible Senior Notes are not eligible  for conversion in 2010 (subject to certain terms and conditions under the  Indenture dated as of February 1, 2010) therefore, there are no dilutive  shares. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**NOTE 4 — COMPREHENSIVE INCOME (LOSS)**

 

The following table presentsthe components of comprehensive income (loss), net of related tax:

 
| ** **                               | ** ** | **Three  Months Ended********June 30,** | ** ** | **Six Months  Ended********June 30,** | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **2010**                                     | ** ** | **2009**                                   | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net income (loss)                        |       | $                                            | 6,303      |                                       | $          | 2,882 |   | $ | (1,015 | ) | $ | (7,994 | ) |
| Foreign currency translation  adjustment |       | (1,753                                       | )          | 3,808                                      |       | (6,452 | ) | (2,255 | ) |
| Comprehensive income  (loss)             |       | $                                            | 4,550      |                                       | $          | 6,690 |   | $ | (7,467 | ) | $ | (10,249 | ) |

 

9

----

Table of Contents

 

**NOTE 5 — LONG-TERM DEBT**

 

Long-term debt consisted ofthe following:

 
| ** **               | ** ** | **June 30,********2010** | ** ** | **December 31,********2009** | ** ** |
|--------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
| Convertible senior notes |       | $                             | 67,358     |                              | $          | 54,616 |   |
|                     |       |                          |       |                              |       |
| Less: current portion    |       | (32,385                       | )          | (32,385                           | )          |
|                     |       |                          |       |                              |       |
| Total long-term debt     |       | $                             | 34,973     |                              | $          | 22,231 |   |

 

**Secured Revolving Facility with the InternationalFinance Corporation**

 

On December 28, 2006,we entered into a loan and guarantee agreement with International FinanceCorporation. The loan and guarantee agreement provided for a $25 million facilitywhich was a secured revolving facility with a maximum facility amount of $25million which maximum facility amount would have increased to $40 million whenthe projected total borrowing base amount exceeds $50 million. The $25 millionfacility was funded on March 2, 2007. The loan and guarantee agreementalso provided for an unsecured $10 million facility which was funded on December 28,2006.  Both the $25 million facility andthe $10 million facility were to fund our operations in Turkey and Romania.

 

On March 3, 2009, werepaid and retired the facilities with the International Finance Corporation.The total amount of the payment was $36.4 million, which comprised $30 millionprincipal, $5.9 million additional compensation due under the credit facilityas a result of our repayment (such additional compensation calculated under theterms of the credit facility as a percentage of the Company’s earnings beforeinterest, tax, depreciation, amortization and exploration expense) and $500,000for accrued interest and fees.  As aresult of the early extinguishment, we recorded a loss of $4.9 million for theperiod ended March 31, 2009, which was recorded in discontinuedoperations.

 

**5.00% CONVERTIBLE SENIOR NOTES DUEOCTOBER 1, 2025**

 

On September 27, 2005,we issued $75 million of Convertible Senior Notes due October 1, 2025 (the“5.00% Convertible Senior Notes”) to qualified institutional buyers pursuant toRule 144A of the Securities Act of 1933, as amended (the “Securities Act”).The Company also granted the initial purchasers the option to purchase anadditional $11.25 million aggregate principal amount of 5.00% ConvertibleSenior Notes to cover over-allotments. The over-allotment option was exercisedon September 30, 2005. The total principal amount of 5.00% ConvertibleSenior Notes issued was $86.25 million and total net proceeds wereapproximately $82.2 million. We incurred approximately $4.1 million of costsassociated with the issuance of the 5.00% Convertible Senior Notes; these costshave been recorded in other assets on the balance sheet and are being amortizedto interest expense using the straight-line interest rate method (whichapproximates effective interest method) over the term of the 5.00% ConvertibleSenior Notes.

 

The net proceeds were used forgeneral corporate purposes, including funding a portion of the Company’s 2005and 2006 exploration and development activities.

 

The 5.00% Convertible SeniorNotes bear interest at a rate of 5.00% per annum and can be converted intocommon stock at an initial conversion rate of 23.3596 shares of common stockper $1,000 principal amount of 5.00% Convertible Senior Notes (equivalent to aconversion price of approximately $42.81 per share), subject to adjustment inan event of, among other things, a fundamental change (as defined in theindenture). We may redeem the 5.00% Convertible Senior Notes, in whole or inpart, on or after October 6, 2008, and prior to October 1, 2010, forcash at a redemption price equal to 100% of the principal amount of 5.00% ConvertibleSenior Notes to be redeemed, plus any accrued and unpaid interest, if theclosing price of our common stock exceeds 130% of the conversion price over aspecified period. On or after October 1, 2010, we may redeem the 5.00%Convertible Senior Notes, in whole or in part, at a redemption price equal to100% of the principal amount of 5.00% Convertible Senior Notes to be redeemed,plus any accrued and unpaid interest, irrespective of the price of its commonstock. Holders may convert their 5.00% Convertible Senior Notes at any timeprior to the close of business on the business day

 

10

----

Table of Contents

 

immediately preceding their stated maturity, andholders may, upon the occurrence of certain fundamental changes, or on October 1,2010, October 1, 2015, and October 1, 2020, require us to repurchaseall or a portion of their 5.00% Convertible Senior Notes for cash in an amountequal to 100% of the principal amount of such 5.00% Convertible Senior Notes,plus any accrued and unpaid interest.

 

During 2008 the Companyrepurchased $6 million, face value, of the 5.00% Convertible Senior Notes onthe open market for $5.3 million. In 2009 the Company repurchased $25.7 millionface value of the 5.00% Convertible Senior Notes on the open market for $21.3million, resulting in a gain on the early extinguishment of debt of $3.4million after writing off deferred loan costs of approximately $1 million.  On February 1, 2010, Toreadorconsummated an exchange transaction (the “Convertible Notes Exchange”). In theConvertible Notes Exchange, in exchange for (a) $22,231,000 principalamount of our outstanding 5.00% Convertible Senior Notes and (b) $9.4 millioncash, we issued $31,631,000 aggregate principal amount of our 8.00%/7.00%Convertible Senior Notes, or the New Convertible Senior Notes, and paid accruedand unpaid interest on the Old Notes.  Asof June 30, 2010, $32.4 million principal aggregate amount of the 5.00%Convertible Senior Notes was outstanding. We intend to continue to buy back aportion of the currently outstanding Notes in the open market or in privatelynegotiated transactions, subject to market conditions, applicable legal requirementsand other factors.

 

As the debt instrumentsexchanged in the Convertible Notes Exchange have substantially different terms,the Company recognized the exchange of the 5.00% Convertible Senior Notes asextinguishment of debt. As a result, for the six months ended June 30,2010, the Company recognized a loss of $4.3 million including write off of loanoriginal fee of $822,000 for the debt extinguishment. The New ConvertibleSenior Notes are recorded at a fair value of $35,065,000 on the date ofexchange. The accretion expense on the Convertible Notes Exchange, which wasdetermined using fair market value of the New Convertible Senior Notes, will beamortized to income over their term. The accretion impact (positive) of $91,322was recorded for the period ended June 30, 2010.

 

**8.00%/7.00% CONVERTIBLE SENIORNOTES DUE OCTOBER 1, 2025**

 

On February 1, 2010,Toreador consummated the Convertible Notes Exchange. In the Convertible NotesExchange, in exchange for (a) the Old Notes and (b) $9.4 millioncash, we issued $31,631,000 aggregate principal amount of (the New ConvertibleSenior Notes) and paid accrued and unpaid interest on the Old Notes. Weincurred approximately $1.9 million of costs associated with the issuance ofthe New Convertible Senior Notes; these costs have been recorded in otherassets on the balance sheets and are being amortized to interest expense usingthe straight-line interest method (which approximates effective interestmethod) over the term of the New Convertible Senior Notes.

 

The New Convertible SeniorNotes are senior unsecured obligations of the Company, ranking equal in rightof payment with the Company’s 5.00% Convertible Senior and futureunsubordinated indebtedness. The New Convertible Senior Notes will mature on October 1,2025 and pay annual cash interest at 8.00% from February 1, 2010 until January 31,2011 and at 7.00% per annum thereafter. Interest on the New Convertible SeniorNotes will be payable on February 1 and August 1 of each year,beginning on August 1, 2010.

 

The New Convertible SeniorNotes are convertible prior to February 1, 2011 only if an event ofdefault occurs and is continuing under the terms of the indenture, upon achange of control (as defined in the indenture) and to the extent the Companyelects to redeem the New Convertible Senior Notes in a Provisional Redemption(as defined below). The New Convertible Senior Notes are convertible at anytime on or after February 1, 2011 and before the close of business on October 1,2025.

 

The New Convertible SeniorNotes are convertible into shares of our common stock at an initial conversionrate of 72.9927 shares of common stock per $1,000 principal amount of NewConvertible Senior Notes (which is equivalent to an initial conversion price of$13.70 per share), subject to adjustment upon certain events. Under the termsof the indenture governing the New Convertible Senior Notes, if on or before October 1,2010, we sold shares of our common stock in an equity offering or anequity-linked offering (other than for compensation), for cash considerationper share such that 120% of the issuance price was less than the conversionprice of the New Convertible Senior Notes then in effect, the conversion pricewas to be reduced to an amount equal to 120% of such offering price. As aresult of our February 2010 public offering, the conversion rate of theNew Convertible Senior Notes adjusted to 98.0392 shares of common stock per$1,000 principal amount of New Convertible Senior Notes (which is equivalent toa conversion price of approximately $10.20 per share).  Pursuant to the indenture, the 

 

11

----

Table of Contents

 

conversion price of the New Convertible Senior Noteswill not be further adjusted under such provision because the proceeds from thepublic offering were in excess of $20 million.

 

The New Convertible SeniorNotes may be redeemed in whole or in part at the Company’s option prior to October 1,2013, in cash at a redemption price equal to one hundred percent (100%) of theprincipal amount of the New Convertible Senior Notes redeemed, plus accrued andunpaid interest, if any, to, but excluding, the redemption date plus amake-whole payment, if the closing sale price of the Company’s common stock hasexceeded 200% of the conversion price then in effect for at least twenty (20)trading days in any consecutive thirty (30)-trading day period ending on thetrading day prior to the date of mailing of the relevant notice of redemption(a “Provisional Redemption”).  The NewConvertible Senior Notes may be redeemed in whole or in part at the Company’soption on or after October 1, 2013 for cash at a redemption price equal to100% of the principal amount of the New Convertible Senior Notes redeemed, plusany accrued and unpaid interest to, but excluding, the redemption date.  In addition, upon the occurrence of certainfundamental changes, or on each of October 1, 2013, October 1, 2015and October 1, 2020, a holder may require the Company to repurchase all ora portion of the New Convertible Senior Notes in cash for 100% of the principalamount of the New Convertible Senior Notes to be purchased, plus any accruedand unpaid interest to, but excluding, the purchase date.

 

Pursuant to the indenture,the Company and its subsidiaries may not incur debt other than PermittedIndebtedness. “Permitted Indebtedness” includes (i) the New ConvertibleSenior Notes; (ii) the 5.00% Convertible Senior Notes or any indebtednessof the Company that serves to refund or refinance the 5.00% Convertible SeniorNotes (“Refinancing Debt”), so long as the principal amount of the RefinancingDebt does not exceed the outstanding principal amount of the 5.00% ConvertibleSenior Notes; (iii) indebtedness incurred by the Company or itssubsidiaries not to exceed the sum of (i) the product of (x) $7.00and (y) the number of barrels of proved plus probable reserves and (ii) cashequivalents less the aggregate principal amount of the New Convertible SeniorNotes outstanding less the aggregate principal amount of the 5.00% ConvertibleSenior Notes less any Refinancing Debt; (iv) indebtedness that isnonrecourse to the Company or any of its subsidiaries used to finance projectsor acquisitions, joint ventures or partnerships, including acquiredindebtedness (“Nonrecourse Debt”); and (v) certain other customarycategories of permitted debt. In addition, the Company may not permit its totalconsolidated net debt as of any date to exceed the product of (x) $7.00 and(y) the number of barrels of proved plus probable reserves other than forNonrecourse Debt. The proved plus probable reserves underlying any NonrecourseDebt for which debt has been incurred as permitted debt pursuant to clause (iv) abovewill be excluded from the proved plus probable reserves calculation for thepurposes of the above debt covenants.

 

**DEBT ISSUANCE COSTS**

 

The Company has elected toamortize straight-line (which approximates the effective interest method) thecosts associated with the issuance of its convertible senior notes overthe term of the issuances (i.e., 2025 for both the 5.00% ConvertibleSenior Notes and the 8/7% Convertible Senior Notes) and not at the firstputtable dates of these callable debts. The unamortized debt issuance costsincluded in other assets amounted to $3.0 million and $2.1 million as of June 30,2010 and December 31, 2009, respectively.

 

**NOTE 6 — ASSET RETIREMENT OBLIGATIONS**

 

We account for our assetretirement obligations in accordance with ASC 410, “Asset Retirement andEnvironmental Obligations”, which requires us to record the fair value of aliability for an asset retirement obligation in the period in which it isincurred. When the liability is initially recorded, the entity capitalizes acost by increasing the carrying amount of the related long-lived asset. Overtime, the liability is accreted to its present value each period, and thecapitalized cost is depreciated over the useful life of the related asset. Uponsettlement of the liability, we either settle the obligation for its recordedamount or incur a gain or loss upon settlement.

 

The following tablesummarizes the changes in our asset retirement liability during the six monthsended June 30, 2010 and for the year ended December 31, 2009:

 

12

----

Table of Contents

 
| ** **                                            | ** ** | **Six Months  Ended June 30,  2010** | ** ** | **Year Ended  December 31,  2009** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| Asset retirement  obligation at January 1        |       | $                                         | 6,733      |                                    | $          | 6,037 |   |
| Asset retirement accretion  expense                   |       | 179                                       |       | 507                                     |       |
| Foreign currency exchange  loss (gain)                |       | (997                                      | )          | 189                                     |       |
| Property additions                                    |       | —                                    |       | —                                  |       |
| Property dispositions                                 |       | —                                    |       | —                                  |       |
| Asset retirement  obligation at the end of the period |       | $                                         | 5,915      |                                    | $          | 6,733 |   |

 

**NOTE 7 — GEOGRAPHIC OPERATING SEGMENT INFORMATION**

 

We have operations in onlyone industry segment, the oil and natural gas exploration and productionindustry. We are structured along geographic operating segments or regions, andcurrently have operations in the United States and France and had operations inHungary in 2009.

 

The following tables providethe geographic operating segment data required by ASC 280, “Segment Reporting”.

 

**Three Months Ended June 30, 2010**

 
| ** **                | ** ** | **United States** | ** ** | **France** | ** ** | **Total** | ** ** | ** ** | ** ** |
|---------------------------|------------|------------------------|------------|------------|------------|-----------|------------|------------|------------|
| Revenues and other income |       | $                      | 6          |       | $          | 20,940    |       | $          | 20,946     |   |   |   |
| Costs and expenses        |       | 1,430                  |       | 5,521      |       | 6,951     |       |       |       |
| Operating income (loss)   |       | $                      | (1,424     | )          | $          | 15,419    |       | $          | 13,995     |   |   |   |

 

**Three Months Ended June 30,2009**

 
| ** **                | ** ** | **United  States** | ** ** | **France** | ** ** | **Hungary** | ** ** | **Total** | ** ** |
|---------------------------|------------|--------------------|------------|------------|------------|-------------|------------|-----------|------------|
| Revenues and other income |       | $                  | 75         |       | $          | 4,429       |       | $         | 121        |   | $ | 4,625 |   |
| Costs and expenses        |       | 4,587              |       | 4,160      |       | 470         |       | 9,217     |       |
| Operating income (loss)   |       | $                  | (4,512     | )          | $          | 269         |       | $         | 349        |   | $ | (4,592 | ) |

 
| ** **                | ** ** | **Six Months Ended June 30, 2010** | ** ** | ** ** | ** ** |
|---------------------------|------------|-------------------------------------------------------------|------------|------------|------------|
| ** **                | ** ** | **United States**                                      | ** ** | **France** | ** ** | **Total** | ** ** | ** ** | ** ** |
| Revenues and other income |       | $                                                           | 9          |       | $          | 26,447 |   | $ | 26,456 |   |   |   |
| Costs and expenses        |       | 4,299                                                       |       | 9,946      |       | 14,245 |   |   |   |
| Operating income (loss)   |       | $                                                           | (4,290     | )          | 16,501     |   | $ | 12,211 |   |   |   |
|                           |            |                                                             |            |            |            |  |  |  |  |  |  |  |

 
| ** **                | ** ** | **Six Months Ended June 30, 2009** | ** ** |
|---------------------------|------------|-------------------------------------------------------------|------------|
| ** **                | ** ** | **United States**                                      | ** ** | **France** | ** ** | **Hungary** | ** ** | **Total** | ** ** |
| Revenues and other income |       | $                                                           | 154        |   | $ | 7,738 |   | $ | 121 |   | $ | 8,103 |   |
| Costs and expenses        |       | 9,395                                                       |       | 7,824 |   | 910 |   | 18,129 |   |
| Operating income (loss)   |       | $                                                           | (9,241     | ) | $ | (86 | ) | $ | (789 | ) | $ | (10,116 | ) |

 
| ** **             | ** ** | **Total  Assets (1)**      | ** ** |
|------------------------|------------|----------------------------|------------|
| ** **             | ** ** | **United  States**         | ** ** | **France** | ** ** | ** ** | ** ** |
| ** **             | ** ** | **Continuing  Operations** | ** ** | **Total** | ** ** |
| June 30, 2010     |       | $                          | 36,681     |   | $ | 94,491 |   | $ | 131,172 |   |
|                   |       |                       |       |   |   |   |   |
| December 31, 2009 |       | $                          | 6,552      |   | $ | 90,603 |   | $ | 97,155 |   |

 

----

(1)         Allintercompany accounts and transactions are eliminated in consolidation.

 

**NOTE 8 — INCOME TAXES**

 

At June 30, 2010, werecorded a $5.5 million income tax payable as we expect to owe income taxwithin the next 12 months. For the six months ended June 30, 2010 and 2009we paid income taxes of approximately

 

13

----

Table of Contents

 

$7,000 and $4 million respectively, related toFrench taxable income. As of June 30, 2010, our French operations recordeda $6.3 million tax provision, and the U.S. operations recorded a tax provisionof $17,349 which resulted in a consolidated tax payable of $6.4 million.

 

We have adopted ASC 740 “IncomeTaxes”, formerly FIN No. 48, “Accounting for Uncertainty in Income Taxes”,on January 1, 2007. There are no tax positions for which a material changein the unrecognized tax benefit is reasonably possible in the next 12 months.

 

The Company recognizespotential accrued interest and penalties related to unrecognized tax benefitswithin its global operations in income tax expense. During the six months endedJune 30, 2010, the Company recognized $0 in potential interest andpenalties associated with uncertain tax positions. To the extent interest andpenalties are not assessed with respect to uncertain tax positions, amountsaccrued will be reduced and reflected as a reduction of the overall income taxprovision.

 

In addition to U.S. federaltax returns, we file several state and foreign tax returns, many of whichremain open for examination for five years**.**

 

**NOTE 9 — CAPITAL**

 

For the six months ended June 30,2010, the Company issued 199,563 shares of stock to employees and directors, ofwhich 132,733 shares were immediately vested in accordance with the terms ofthe grants and 5,000 stock options were exercised under the terms of the optionagreements.  There were no forfeitures ofrestricted stock and stock options for the six months ended June 30, 2010.

 

On February 12, 2010,we completed a registered underwritten public offering of 3,450,000 shares ofcommon stock, including 450,000 shares of common stock acquired by theunderwriters from us to cover over-allotment options. The net proceeds toToreador from the offering were approximately $26.8 million, after deductingunderwriting discounts, commissions and estimated offering expenses. We intendto use the net proceeds, together with cash on hand, to satisfy paymentobligations arising from the holders’ exercise, if any, of their right on October 1,2010 to require the Company to repurchase its 5.00% Convertible Senior Notesand for general corporate purposes, which may include working capital, capitalexpenditures and acquisitions.  See “5.00%Convertible Senior Notes Due October 1, 2025” in Note 5. As of June 30,2010, $32.4 million principal aggregate amount of the 5.00% Convertible SeniorNotes was outstanding.  Pending such use,we have invested the net proceeds in mutual and money market funds and/or bankcertificates of deposit.

 

**NOTE 10 — CAPITALIZED INTEREST**

 

We capitalize interest on major projects thatrequire an extended period of time to complete. Capitalized interest for thethree months ended June 30, 2010 and 2009 was $0 and $118,000respectively. Capitalized interest for the six months ended June 30, 2010and 2009 was $0 and $237,000, respectively.

 

**NOTE 11 — COMMITMENTS ANDCONTINGENCIES**

 

In 2005, two separateincidents occurred offshore Turkey in the Black Sea, which resulted in thesinking of two caissons (the “Fallen Structures”) and the loss of three naturalgas wells. The Company has not been requested to or ordered by any governmentalor regulatory body to remove the caissons. Therefore, the Company believes thatthe likelihood of receiving such a request or order is remote and no liabilityhas been recorded. In connection with the Company’s sale of its 26.75% interestin the SASB to Petrol Ofisi in March 2009 and its sale of Toreador Turkeyto Tiway Oil (“Tiway”) in October 2009, the Company agreed to indemnifyPetrol Ofisi and Tiway, respectively, against and in respect of any claims,liabilities and losses arising from the Fallen Structures. The Company has alsoindemnified a third-party vendor for any claims made related to theseincidents.

 

On October 16, 2003, weentered into an agreement (the “Netherby Agreement”) with Phillip Hunnisett andRoy Barker (“Hunnisett and Barker”), pursuant to which Hunnisett and Barkeragreed to post the collateral required by the Turkish government for MadisonOil Turkey Inc. (a Liberian company later reincorporated in the Cayman

 

14

----

Table of Contents

 

Islands as Toreador Turkey Limited) to retain its36.75% interest in relation to eight offshore exploration SASB licenses inexchange for a 1.5% gross overriding royalty interest (the “Overriding Royalty”)on the net value to Madison Oil Turkey of all future production, if any,deriving from Madison’s interest in such SASB licenses. Since March 2009,we have corresponded with Hunnisett and Barker regarding a dispute over thecompensation payable by us to Hunnisett and Barker under the Netherby Agreementas a result of Toreador Turkey’s sale of a 26.75% interest in the SASB licensesto Petrol Ofisi in March 2009 (the “Netherby Payment Amount”). Hunnisettand Barker have contended that the Netherby Payment Amount could be up to $10.4million; however, we do not believe that Hunnisett and Barker are entitled tosuch amount. There has been subsequent correspondence regarding a dispute as towhether an agreement between the parties had been reached regarding theNetherby Payment Amount; Hunnisett and Barker’s contention is that such agreedNetherby Payment Amount was $7.2 million. We do not believe that any suchagreement was reached, and we do not believe that Hunnisett and Barker areentitled to such amount. We intend to vigorously defend ourselves against anyclaim for payment of an amount in excess of the amount to which we believe thatHunnisett and Barker are entitled. We have since completed the sale of ToreadorTurkey Ltd., including with it Toreador Turkey’s remaining 10% interest in theSASB license, to Tiway.  In connectionwith the sales referred to above, we agreed to indemnify Petrol Ofisi and Tiwayagainst and in respect of any and all claims, liabilities, and losses arisingfrom the Overriding Royalty. As of June 30, 2010, we had accruedapproximately $880,000 as a contingent liability for these claims, with theexpense included in discontinued operations.

 

On June 17, 2009, TheScowcroft Group, Inc. (“Scowcroft”) filed a complaint in the U.S. DistrictCourt for the District of Columbia against us. The complaint alleged that webreached a contract (the “Scowcroft Contract”) between Scowcroft and usrelating to the sale of our interests in the SASB and that Scowcroft wasentitled to a success fee thereunder as a result of the sale of our interestsin the SASB to Petrol Ofisi in March 2009. The complaint also allegedunjust enrichment/quantum meruit and fraud. Scowcroft sought damages in theamount of $2 million plus interest, costs and expenses. On April 30, 2010,Toreador and Scowcroft executed a settlement agreement (the “SettlementAgreement”), pursuant to which Toreador agreed to pay Scowcroft $495,000 and,subject to receipt of such payment, Scowcroft agreed to take actions to dismissthe suit and the parties agreed to a mutual release with respect to claimsrelating to the Scowcroft Contract.  On April 30,2010, Toreador made the settlement payment and the parties filed a stipulationof dismissal of the action. As of June 30, 2010, $657,000 has beenexpensed in discontinued operations consequently, consisting of thesettlement amount and associated legal costs.

 

On January 25, 2010, wereceived a claim notice from Tiway under the Share Purchase Agreement, dated September 30,2009, among us, Tiway Oil BV and Tiway relating to the sale of Toreador TurkeyLtd. in respect of a third-party claim asserted by Petrol Ofisi againstToreador Turkey Ltd. in the amount of TRY 7.6 million ($5.1 million), for whichTiway alleges we are liable for an estimated TRY 2.1 million ($1.4 million). Noformal legal evaluation can be made at this time as to the extent of theCompany’s liability, if any.  A hearingon this matter was held on July 20, 2010, and the Court has appointedthree experts.  The next hearing isscheduled for on November 2, 2010.

 

From time to time, we arenamed as a defendant in other legal proceedings arising in the normal course ofbusiness. In our opinion, the final judgment or settlement, if any, which maybe awarded with any suit or claim would not have a material adverse effect onour financial position.

 

**NOTE 12 — DISCONTINUED OPERATIONS**

 

In the fourth quarter of2008 and during the first quarter of 2009, Toreador farmed out or sold all ofits working interests in Romania to three different companies and closed itsoffice; thus, we no longer have any operational involvement in Romania. This resultedin a gain of $5.8 million, which was recorded in the first quarter of 2009.

 

On March 3, 2009 wecompleted the sale of a 26.75% interest in the South Akcakoca Sub-Basin (SASB)project associated licenses located in the Black Sea offshore Turkey, to PetrolOfisi for $55 million. In accordance with the revised assignment announced on February 3,2009, $50 million of the proceeds was paid by Petrol Ofisi on

 

15

----

Table of Contents

 

March 3, 2009, and the remaining $5 million waspaid on September 1, 2009. There was no gain or loss resulting from thissale.

 

On September 30, 2009,the Company entered into a Share Purchase Agreement (the “Share PurchaseAgreement”) with Tiway Oil BV, a company organized under the laws of theNetherlands (“Tiway”), and Tiway Oil AS, a company organized under the laws ofNorway, pursuant to which the Company agreed to sell 100% of the outstandingshares of Toreador Turkey Ltd. to Tiway for total consideration consisting of: (1) acash payment of $10.5 million to be paid at closing, (2) explorationsuccess payments dependent upon certain future commercial discoveries asprovided in the Share Purchase Agreement, up to a maximum aggregateconsideration of $40 million, and (3) future quarterly 10% pre-tax netprofit interest payments if a field goes into production that was discovered byan exploration well drilled within four years of closing on certain of the licensesthen still held by Tiway. The sale of Toreador Turkey Ltd. was completed on October 7,2009 and resulted in a gain of $1.8 million.

 

On September 30, 2009,the Company entered into a Quota Purchase Agreement (the “Quota PurchaseAgreement”) with RAG (Rohöl Aufsuchungs Aktiengesellschaft), a corporationorganized under the laws of Austria (“RAG”), pursuant to which the Companyagreed to sell 100% of its equity interests in Toreador Hungary Limited to RAGfor total consideration consisting of (1) a cash payment of $5.4 million(€ 3.7 million) paid at closing, (2) $435,000 (€ 300,000), which was heldback subject to a post-closing adjustment and was paid to us on November 5,2009 and (3) a contingent payment of $2.9 million (€2 million) to be paidupon post-transaction completion of agreements relating to certain assets ofToreador Hungary. The sale of Toreador Hungary was completed on September 30,2009 and resulted in a loss of $4.1 million.

 

The results of operations ofassets in Romania, Turkey and Hungary have been presented as discontinuedoperations in the accompanying consolidated statement of operations.  Results for these assets reported asdiscontinued operations were as follows:

 
| ** **                                                             | ** ** | **Three  Months********Ended********June 30,** | ** ** | **Six Months********Ended********June 30,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                             | ** ** | **2010**                                            | ** ** | **2009**                                         | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenue and other income                                               |       |                                                |       |                                             |       |   |   |   |   |
| Sales and other operating  revenue                                     |       | $                                                   | —     |                                             | $          | 1,551 |   | $ | — |   | $ | 2,913 |   |
| Operating costs and  expenses:                                         |       |                                                |       |                                             |       |   |   |   |   |
| Lease operating expense                                                |       | —                                              |       | 237                                              |       | — |   | 503 |   |
| Exploration expense                                                    |       | —                                              |       | 32                                               |       | — |   | 230 |   |
| Depreciation, depletion  and amortization                              |       | —                                              |       | —                                           |       | — |   | — |   |
| Accretion on discounted  assets and liabilities                        |       | —                                              |       | —                                           |       | — |   | — |   |
| Impairment of oil and  natural gas properties                          |       | —                                              |       | —                                           |       | — |   | 5,300 |   |
| General and administrative  expense                                    |       | 161                                                 | (1)        | 732                                              |       | 657 | (1) | 1,524 |   |
| Gain on sale of properties  and other assets in Romania                |       | —                                              |       | —                                           |       | — |   | (5,846 | ) |
| Total operating costs and  expenses                                    |       | 161                                                 |       | 1,001                                            |       | 657 |   | 1,711 |   |
| Operating income (loss)                                                |       | (161                                                | )          | 550                                              |       | (657 | ) | 1,202 |   |
| Other income (expense)                                                 |       |                                                |       |                                             |       |   |   |   |   |
| Foreign currency exchange  gain                                        |       | —                                              |       | 3,752                                            |       | — |   | 3,319 |   |
| Loss on early  extinguishment of debt — revolving credit facility |       | —                                              |       | —                                           |       | — |   | (4,881 | ) |
| Other expense                                                          |       | 86                                                  |       | —                                           |       | 165 |   | — |   |
| Interest expense, net of  interest capitalized                         |       | —                                              |       | 310                                              |       | — |   | 291 |   |
| Income (loss) before  income taxes                                     |       | (247                                                | )          | 4,612                                            |       | (822 | ) | (69 | ) |
| Income tax benefit                                                     |       | —                                              |       | —                                           |       | — |   | — |   |
| Net income (loss) from  discontinued operations                        |       | $                                                   | (247       | )                                                | $          | 4,612 |   | $ | (822 | ) | $ | (69 | ) |

 

----

(1) Residual exit costs.

 

**NOTE 13 — DERIVATIVES**

 

We periodically utilizederivative instruments such as futures and swaps for purposes of hedging ourexposure to fluctuations in the sales price of crude oil. In December 2009,we entered into futures and swap contracts for approximately 15,208 Bbls permonth for the months of January 2010 through December 2010.  This

 

16

----

Table of Contents

 

resulted in a net unrealized derivative fair valuegain of $783,000 at June 30, 2010. Presented in the table below is asummary of the contracts entered into for 2010:

 
| **Type** | ** ** | **Period**                                         | ** ** | **Barrels** | ** ** | **Floor** | ** **  | **Ceiling** | ** ** | **Unrealized  gain for the  three months ended  June ****30,****2010** | ** ** |
|----------|------------|----------------------------------------------------|------------|-------------|------------|-----------|-------------|-------------|------------|-----------------------------------------------------------------------------|------------|
|     |       |                                               |       |        |       |      |        |        |       |                                                                        |       |
| Collar   |       | January 1, 2010 – December 31, 2010 |       | 182,500     |       | $         |  68.00 |        | $          |  81.00                                                                 |       | $ | 783 |   |
|          |            |                                                    |            |             |            |           |             |             |            |                                                                             |            |  |  |  |

 

**NOTE 14 — FAIR VALUE MEASUREMENTS**

 

The carrying amounts offinancial instruments including cash and cash equivalents, short-terminvestments, accounts receivable, accounts payable and accrued liabilitiesapproximate fair value at June 30, 2010 and December 31, 2009, due tothe short-term nature or maturity of the instruments.

 

Long-term debt approximatedfair value based on the quoted market prices for the same or similar issues oron the current rates offered to the Company for debt of the same maturities.

 

On June 30, 2010, the5.00% Convertible Senior Notes, which had a book value of $35.0 million, weretrading at $95.2, which would equal a fair market value of approximately $31million

 

On December 31, 2009,the 5.00% Convertible Senior Notes, which had a book value of $54.6 million,were trading at or near par value, which would equal a fair market value ofapproximately $54.6 million.

 

On June 30, 2010, theNew Convertible Senior Notes, which had a book value of $31.6 million, weretrading at $100.265, which would equal a fair market value of approximately$31.7 million.

 

ASC 820 “Fair valuemeasurements and disclosures”, formerly SFAS No. 157, establishes a fairvalue hierarchy which prioritizes the inputs to valuation techniques used tomeasure fair value into three levels. The fair value hierarchy gives thehighest priority to quoted market prices (unadjusted) in active markets foridentical assets or liabilities (Level 1) and the lowest priority tounobservable inputs (Level 3). Level 2 inputs are inputs, other than quotedprices included within Level 1, which are observable for the asset orliability, either directly or indirectly.

 

Certain assets andliabilities are reported at fair value on a nonrecurring basis in ourconsolidated balance sheets.  Thefollowing methods and assumptions were used to estimate the fair values:

 

***Asset Impairments*** - The Company reviews aproved oil and gas property for impairment when events and circumstancesindicate a possible decline in the recoverability of the carrying value of suchproperty. We estimate the undiscounted future cash flows expected in connectionwith the property and compare such undiscounted future cash flows to thecarrying amount of the property to determine if the carrying amount isrecoverable. If the carrying amount of the property exceeds its estimatedundiscounted future cash flows, the carrying amount of the property is reducedto its estimated fair value. Fair value may be estimated using comparablemarket data, a discounted cash flow method, or a combination of the two. In thediscounted cash flow method, estimated future cash flows are based onmanagement’s expectations for the future and include estimates of future oiland gas production, commodity prices based on commodity futures price strips asof the date of the estimate, operating and development costs, and a creditrisk-adjusted discount rate.

 

The impairment charge inTurkey of $5.3 million which is recorded in discontinued operations for theperiod ended June 30, 2009, is a result of a decline in the fair marketvalue of the Company’s interest in South Akcakoca Sub-Basin asset. The fairmarket value declined at June 30, 2009 due to a 25.00% reduction in theposted sales price of natural gas produced in Turkey announced on May 1,2009.

 

***Goodwill*** - We account for goodwill in accordance with FASBAccounting Standards Codification No. 350 ***“****Intangibles-Goodwilland Other*”  (“ASC 350”). UnderASC 350, goodwill and indefinite-lived intangible assets are not amortized butare reviewed annually (or more frequently if impairment indicators arise) forimpairment.

 

17

----

Table of Contents

 

***Asset Retirement Obligations*** — The initial measurementof asset retirement obligations at fair value is calculated using cash flowstechniques and based on internal estimates of future retirement costsassociated with oil and gas properties. Significant Level 3 inputs used in thecalculation of asset retirement obligations include plugging costs and reservelives. A reconciliation of the Company’s asset retirement obligation ispresented in Note 6.

 

Effective January 1,2008, we adopted the authoritative guidance that applies to all financialassets and liabilities required to be measured and reported on a fair valuebasis. Beginning January 1, 2009, we also applied the guidance tonon-financial assets and liabilities. Fair value is the price that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date (exit price).The guidance requires disclosure that establishes a framework for measuringfair value expands disclosure about fair value measurements and requires thatfair value measurements be classified and disclosed in one of the followingcategories:

 
| Level 1: | Unadjusted quoted prices in active markets that are accessible at the  measurement date for identical, unrestricted assets or liabilities. We  consider active markets as those in which transactions for the assets or  liabilities occur with sufficient frequency and volume to provide pricing  information on an ongoing basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| Level 2: | Quoted prices in markets that are not active, or inputs that are  observable, either directly or indirectly, for substantially the full term of  the asset or liability. This category includes those derivative instruments  that we value using observable market data. Substantially all of these inputs  are observable in the marketplace throughout the full term of the derivative  instrument, can be derived from observable data or supported by observable  levels at which transactions are executed in the market place. Instruments in  this category include non-exchange traded derivatives such as  over-the-counter commodity price swaps, certain investments and interest rate  swaps.                                                                                                                                                                                                                                                                                                                                                |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| Level 3: | Measured based on prices or valuation models that require inputs that  are both significant to the fair value measurement and less observable from  objective sources (i.e., supported by little or no market activity). Our  valuation models for derivative contracts are primarily industry-standard  models (i.e., Black-Scholes) that consider various inputs including:  (a) quoted forward prices for commodities, (b) time value,  (c) volatility factors, (d) counterparty credit risk and  (e) current market and contractual prices for the underlying  instruments, as well as other relevant economic measures. Level 3 instruments  primarily include derivative instruments, such as basis swaps, commodity  price collars and floors and accrued liabilities. Although we utilize third **-**party broker quotes to assess the reasonableness of our  prices and valuation techniques, we do not have sufficient corroborating  market evidence to support classifying these assets and liabilities as Level  2. |

 

Measurement information forassets that are measured at fair value on a non-recurring basis was as follows:

 
| ** **                               | ** ** | ** **                  | ** ** | **Fair Value  Measurements Using**                 | ** ** | ** **                                            | ** ** |
|------------------------------------------|------------|-----------------------------|------------|----------------------------------------------------|------------|-------------------------------------------------------|------------|
| **Description**                          | ** ** | **Fair Value  Measurement** | ** ** | **Quoted  Prices  in  Active  Markets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Total  Impairment  Loss** | ** ** |
| ** **                               | ** ** | **(in thousands)**          | ** ** |
| **Six  Months Ended June 30, 2010** |       |                        |       |                                               |       |                                                  |       |   |   |   |   |
|                                     |       |                        |       |                                               |       |                                                  |       |   |   |   |   |
| 8.00/7.00% Convertible  Senior Notes     |       | $                           | 35,065     |                                               | —     |                                                  | —     |   | $ | 35,065 |   | $ | — |   |
|                                     |       |                        |       |                                               |       |                                                  |       |   |   |   |   |
| **Six Months  Ended June 30, 2009** |       |                        |       |                                               |       |                                                  |       |   |   |   |   |
|                                     |       |                        |       |                                               |       |                                                  |       |   |   |   |   |
| Impaired oil and natural  gas properties |       | $                           | 14,986     |                                               | —     |                                                  | —     |   | $ | 14,986 |   | $ | (5,300 | ) |

 

18

----

Table ofContents

 

Thefollowing table summarizes the valuation of our investments and financialinstrument assets (liabilities) measured on a recurring basis at fair value bypricing levels:

 
| ** **                     | ** ** | **Fair Value  Measurement Using** | ** ** | ** **    | ** ** |
|--------------------------------|------------|-----------------------------------|------------|---------------|------------|
| ** **                     | ** ** | **(Level 1)**                     | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** | **Total** | ** ** |
|                           |       |                              |       |          |       |   |   |   |   |
| As of June 30, 2010:      |       |                              |       |          |       |   |   |   |   |
| Oil derivative contracts       |       | $                                 | —     |          | $          | — |   | $ | 72 |   | $ | 72 |   |
|                           |       |                              |       |          |       |   |   |   |   |
| Total                          |       | $                                 | —     |          | $          | — |   | $ | 72 |   | $ | 72 |   |
|                           |       |                              |       |          |       |   |   |   |   |
| As of December 31,  2009: |       |                              |       |          |       |   |   |   |   |
| Oil derivative contracts       |       | $                                 | —     |          | $          | — |   | $ | 886 |   | $ | 886 |   |
|                           |       | $                                 | —     |          | $          | — |   | $ | 886 |   | $ | 886 |   |

 

The table below summarizesthe change in carrying values associated with Level 3 financial instruments:

 
| ** **                      | ** ** | **Six months  ended  June 30, 2010********Oil Derivative  Contracts** | ** ** | **Year ended  December 31, 2009********Oil Derivative  Contracts** | ** ** |
|---------------------------------|------------|----------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| Balance at beginning of  period |       | $                                                                          | 886        |                                                                    | $          | — |   |
| Unrealized (gain) loss          |       | (814                                                                       | )          | 886                                                                     |       |
|                            |       |                                                                       |       |                                                                    |       |
| Balance at end of period        |       | $                                                                          | 72         |                                                                    | $          | 886 |   |

 

**NOTE 15 — IMPAIRMENT OF ASSETS**

 

We evaluate producingproperty costs for impairment and reduce such costs to fair value if the sum ofexpected undiscounted future cash flows is less than net book value pursuant toFASB ASC 360 “Property, plant and Equipment”, formerly Statement of FinancialAccounting Standard No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets” (“Statement 144”). We assess impairment of non-producingleasehold costs and undeveloped mineral and royalty interests periodically on afield-by-field basis. We charge any impairment in value to expense in theperiod incurred. For the three months ended June 30, 2010, there was noimpairment charge for our continuing operations and discontinued operations.

 

The impairment charge inTurkey of $5.3 million, as of June 30, 2009, was a result of a decline inthe fair market value of the Company’s interest in South Akcakoca Sub-Basinasset. The fair market value declined at June 30, 2009 due to a 25.00%reduction in the posted sales price of natural gas produced in Turkey announcedon May 1, 2009.

 

**NOTE 16 — AGREEMENT WITH HESS**

 

On May 10, 2010,Toreador Energy France S.C.S. (“TEF”), a company organized under the laws ofFrance and an indirect subsidiary of Toreador Resources Corporation, a Delawarecorporation (the “Company”), entered into an Investment Agreement (the “InvestmentAgreement”) with Hess Oil France S.A.S. (“Hess”), a company organized under thelaws of France and a wholly owned subsidiary of Hess Corporation, a Delawarecorporation, pursuant to which (x) Hess becomes a 50% holder of TEF’sworking interests in its awarded and pending exploration permits in the Paris Basin,France (the “Permits”) subject to fulfillment of Work Program (as described in (y) (2) hereafter)and (y) (1) Hess must make a $15 million upfront payment to TEF, (2) Hesswill have the right to invest up to $120 million in fulfillment of a two-phasework program (the “Work Program”) and (3) TEF would

 

19

----

Table of Contents

 

be entitled to receive up to a maximum of $130million of success fees based on reserves and upon the achievement of an oilproduction threshold, each as described more fully below.

 

The Ministère de l’Ecologie,de l’Energie, du Développement Durable et de la Mer (Ministry of Ecology,Energy, Sustainable Development and the Sea) in France granted first-stageapproval on June 25, 2010. An application for the grant to Hess of titleon the permits is expected to be filed shortly with the government.

 

Pursuantto the Investment Agreement, subject to such government approval, TEF hastransferred 50% of its working interest in each Permit to Hess (collectively,the “Transfer Working Interests”) and, on June 10, 2010, Hess paid TEF $15million plus VAT, i.e., an aggregate amount of $17.9 million, on June 10,2010.

 

Under the terms of theInvestment Agreement, Phase 1 of the Work Program is expected to consist of anevaluation of the acreage underlying the Permits and the drilling of six wells.The parties have agreed to use reasonable endeavors to spud the first well by December 1,2010, the second well by the March 31, 2011 and the third well by June 30,2011.  If Hess does not spend $50 millionin fulfillment of the Work Program within 30 months of receipt of governmentapproval (“Phase 1”), Hess must promptly transfer back to TEF the TransferWorking Interests.

 

Under the terms of theInvestment Agreement, if Hess spends $50 million in Phase 1, Hess will have theoption to proceed to Phase 2 of the Work Program. If Hess elects not to proceedto Phase 2 of the Work Program, Hess must promptly transfer back to TEF apercentage of the Transfer Working Interests determined with reference to theamount of money spent by Hess in fulfillment of the Work Program during Phase1.

 

Under the terms of theInvestment Agreement, if Hess elects to proceed, Phase 2 of the Work Program isexpected to consist of appraisal and development activities, depending on theresults of the work in Phase 1. If Hess does not spend $70 million (less moneyspent by Hess in fulfillment of the Work Program in excess of $50 million inPhase 1) in fulfillment of the Work Program within 36 months (“Phase 2”), Hessmust promptly transfer back to TEF a percentage of the Transfer WorkingInterests determined with reference to the amount of money spent by Hess infulfillment of the Work Program during Phase 1. Following Phase 2, TEF and Hesswill bear the costs of subsequent exploration, appraisal and developmentactivities in accordance with individual participation agreements governing thejoint operations on each Permit.

 

Under the terms of theInvestment Agreement, Hess agrees to pay TEF: (x) a success fee based onproved developed oil reserves (as defined by Rule 4-10(a) ofRegulation S-X), up to a maximum of $80 million and (y) a success fee ifoil production exceeds an agreed threshold, up to a maximum of $50 million,each of which is subject to reduction under certain circumstances.

 

Under the terms of theInvestment Agreement, TEF and Hess have designated an area of mutual interestwithin the Paris Basin (the “AMI”). If either party acquires or applies for aworking interest in an exploration permit or exploitation concession within theAMI, such party would be required to offer to the other party 50% of suchinterest on the same terms and conditions.

 

As a result of theInvestment Agreement, the Company has recorded the upfront payment of $15million in other income for the three months period ended June 30, 2010, sincethis revenue is not subject to any further obligation or performance by theCompany nor is it depending on any approval.

 

**NOTE 17 — PENSION, POST-RETIREMENT, ANDPOST-EMPLOYMENT OBLIGATIONS**

 

Provisions for employeeretirement obligations amounted to $245,000 and $0 for the six months ended June 30,2010 and June 30, 2009, respectively. Pension benefits, which only consistin retirement indemnities, have been defined only for the Company’s Frenchsubsidiaries.

 

**NOTE 18 — STOCK COMPENSATION PLANS**

 

We have granted stockoptions to key employees and outside directors of Toreador as described below.

 

20

----

Table ofContents

 

InMay 1990, we adopted the 1990 Stock Option Plan (“1990 Plan”). The 1990Plan, as amended and restated, provides for grants of up to 1,000,000 stockoptions to employees and directors at exercise prices greater than or equal tomarket on the date of the grant.

 

InDecember 2001, we adopted the 2002 Stock Option Plan (“2002 Plan”). The2002 Plan provides for grants of up to 500,000 stock options to employees and outsidedirectors at exercise prices greater than or equal to market on the date of thegrant.

 

InSeptember 1994, we adopted the 1994 Non-employee Director Stock OptionPlan (“1994 Plan”). The 1994 Plan, as amended and restated, provides for grantsof up to 500,000 stock options to non-employee directors of Toreador atexercise prices greater than or equal to market on the date of the grant.

 

TheBoard of Directors grants options under our plans periodically. Generally,option grants are exercisable in equal increments over a three-year period, andhave a maximum term of 10 years.

 

Asummary of stock option transactions is as follows:

 
| ** **                           | ** ** | **2010**   | ** ** | **2009**                                                 | ** ** |
|--------------------------------------|------------|------------|------------|----------------------------------------------------------|------------|
| ** **                           | ** ** | **SHARES** | ** ** | **WEIGHTED********AVERAGE********EXERCISE********PRICE** | ** ** | **SHARES** | ** ** | **WEIGHTED********AVERAGE********EXERCISE********PRICE** | ** ** |
| Outstanding at January 1        |       | 67,370     |       | $                                                        | 7.78       |   | 248,370 |   | $ | 6.77 |   |
| Granted                              |       | —     |       | —                                                   |       | — |   | — |   |
| Exercised                            |       | (5,000     | )          | $                                                        | 3.10       |   | (31,000 | ) | $ | 3.67 |   |
| Forfeited                            |       | —     |       |                                                     |       | (150,000 | ) | $ | 6.96 |   |
| Outstanding at the end of the period |       | 62,370     |       | $                                                        | 8.15       |   | 67,370 |   | $ | 7.78 |   |
| Exercisable at the end of the period |       | 62,370     |       | $                                                        | 8.15       |   | 67,370 |   | $ | 7.78 |   |

 

Theintrinsic value of the options exercised at June 30, 2010 was zero.  For the six months ended June 30, 2010and for the year ended December 31, 2009 we received cash from stockoption exercises of $15,500 and $113,875, respectively.  As of June 30, 2010, all outstandingoptions were 100% vested.  As of June 30,2010 and December 31, 2009, the total compensation cost related tonon-vested stock options not yet recognized was zero.

 

Thefollowing table summarizes information about the fixed price stock optionsoutstanding at June 30, 2010:

 
| ** **              | ** ** | **Number Outstanding** | ** ** | **Number Exercisable**               | ** ** | ** ** | ** ** |
|-------------------------|------------|-----------------------------|------------|-------------------------------------------|------------|------------|------------|
| **Exercise Price** | ** ** | **Shares**                  | ** ** | **Intrinsic  Value  (in thousands)** | ** ** | **Shares** | ** ** | **Intrinsic  Value  (in thousands)** | ** ** | **Weighted Average Remaining  Contractual Life in Years** | ** ** |
|                    |       |                        |       |                                      |       |       |       |   |   |   |   |
| 3.12                    |       | 620                         |       | $                                         | 1          |       | 620        |   | $ | 1 |   | 0.22 |   |
| 3.12                    |       | 3,800                       |       | 9                                         |       | 3,800      |       | 9 |   | 0.22 |   |
| 5.50                    |       | 200                         |       | 0                                         |       | 200        |       | 0 |   | 3,82 |   |
| 5.50                    |       | 40,250                      |       | 0                                         |       | 40,250     |       | 0 |   | 3.82 |   |
| 13.75                   |       | 7,500                       |       | (62                                       | )          | 7,500      |       | (62 | ) | 4,38 |   |
| 16.90                   |       | 10,000                      |       | (114                                      | )          | 10,000     |       | (114 | ) | 4.89 |   |
|                    |       | 62,370                      |       | $                                         | (165       | )          | 62,370     |   | $ | (165 | ) | 2.89 |   |

 

InMay 2005, the Company’sstockholders approved the Toreador Resources Corporation 2005 Long-TermIncentive Plan (the “Plan”). Atthe Company’s 2010 Annual Meeting of Stockholders, the stockholders of theCompany approved an amendment to the Plan which increased the authorized numberof shares of Company

 

21

----

Table of Contents

 

commonstock available under the Plan from 1,750,000 shares to 3,250,000 shares. Thus, thePlan, as amended, authorizes the issuance of up to 3,250,000 shares of theCompany’s common stock to key employees, key consultants and outside directorsof the Company.  At June 30, 2010the Board of Directors has authorized a total of 199,561 shares of restrictedstock to be granted to employees and non-employee directors. The compensationcost is measured by the difference between the quoted market price of the stockat the date of grant and the price, if any, to be paid by an employee and isrecognized as an expense over the period the recipient performs relatedservices. The restricted stock grants vest immediately or over up to a four-yearperiod (depending on the grant), and the weighted average price of the stock onthe date of the grants was $9.67 for the six months ended June 30, 2010.Stock compensation expense of $1.1 million is included in the Statement ofOperations for the three months ended June 30, 2010 and stock compensationexpense of $2.2 million is included in the Statement of Operations for the sixmonths ended June 30, 2010, which represents the cost recognized from the dateof the grants through June 30, 2010. During the first half 2010, 242,034 shares vested having a fair value ofapproximately $1.98 million on the date of vesting. As of June 30, 2010,the total compensation cost related to non-vested restricted stock grants notyet recognized is approximately $3 million. This amount will be recognized ascompensation expense over the next 36 months.

 

OnJune 30, 2010, there were 19,906,610 remaining shares available for grantunder the plans collectively.

 

Thefollowing table summarizes the changes in outstanding restricted stock grantsalong with their related grant-date fair values for the year ended June 30,2010:

 
| ** **                           | ** ** | **Shares** | ** ** | **Weighted Average  Grant-Date********Fair Value** | ** ** |
|--------------------------------------|------------|------------|------------|--------------------------------------------------------------|------------|
| Non-vested at  December 31,2009 |       | 378,130    |       | $                                                            | 10.25      |   |
| Shares granted                       |       | 199,561    |       | $                                                            | 9.67       |   |
| Shares vested                        |       | (242,034   | )          | $                                                            | 9.51       |   |
| Shares forfeited                     |       | —     |       | —                                                       |       |
| Non-vested at  June 30, 2010    |       | 335, 657   |       | $                                                            | 10.92      |   |

 

**NOTE 19 — SUBSEQUENT EVENTS**

 

The Company evaluated its June 30, 2010 financial statements forsubsequent events through the date the financial statements were available tobe issued.

 

To cover Lundin International (“Lundin”)  against any claim by a third party arisingfrom drilling works executed by Toreador Energy France SCS (“TEF”)  as operator on the Mairy permit before thetransfer of title on such permit will have been formally accepted by the Frenchgovernment, TEF executed on August 6, 2010 an indemnification andguarantee agreement for a maximum aggregate amount of  €50 million first demand guarantee in favor ofLundin. Any claim under the guarantee shall be accompanied by a writtenstatement of Lundin mentioning liability or claim for damages made by a thirdparty against Lundin due to works done by TEF on the Mairy permit from February 15,2010 up to transfer of title, with supportive documents therefor.

 

The title to the Mairy permit was awarded to Lundin, TEF and EnCore(E&P) Ltd jointly in August 2007. Earlier this year Lundincommunicated its desire to withdraw from the permit on which no drilling workshad been performed and consequently assigned its working interest of 40% inequal parts to TEF and EnCore (E&P) Ltd. TEF subsequently assigned half of its now 50% working interest to HessOil France SAS by virtue of the Investment Agreement.

 

Under French mining law, all titleholders are held jointly and severallyresponsible for all damages, claims, etc. relating to works on the permit.Works on the permit, if any, will not start before the second half of 2011.

 

22

----

Table ofContents

 

**ITEM 2 — *MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND******RESULTS OF OPERATIONS***

 

The following discussion is intended to assist you in understanding ourbusiness and results of operations together with our present financialcondition. This section should be read in conjunction with our ConsolidatedFinancial Statements and the accompanying notes included elsewhere in thisQuarterly Report on Form 10-Q, as well as our Annual Report on Form 10-Kfor the year ended December 31, 2009, which was filed with the SEC on March 16,2010.  Certain prior-year amounts havebeen reclassified and adjusted to present the operations of Turkey, Hungary andRomania as discontinued operations.

 

**DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS**

 

Certain matters discussed under “Management’s Discussion and Analysisof Financial Condition and Results of Operations” and elsewhere in this reportmay constitute “forward-looking” statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995, Section 27A of the SecuritiesAct and Section 21E of the Securities Exchange Act of 1934, as amended(the “Exchange Act”) and, as such, may involve known and unknown risks,uncertainties and other factors that may cause the actual results, performanceor achievements to be materially different from future results, performance orachievements expressed or implied by such forward-looking statements. When usedin this report, the words “anticipates,” “estimates,” “plans,” “believes,” “continues,”“expects,” “projections,” “forecasts,” “intends,” “may,” “might,” “will,” “would,”“could,” “should,” and similar expressions are intended to be among thestatements that identify forward-looking statements. The factors that mayaffect our expectations regarding our operations include, among others, thefollowing:

 

·                       our ability toraise necessary capital in the future;

·                       our ability tomaintain or renew our existing exploration permits or exploitation concessionsor obtain new ones;

·                       the effect ofour indebtedness on our financial health and business strategy;

·                       our ability toexecute our business strategy and be profitable;

·                       our ability toreplace oil reserves;

·                       a change in theSEC position on our calculation of proved reserves;

·                       the loss of thecurrent purchaser of our oil production;

·                       results of ourhedging activities;

·                       the loss ofsenior management or key employees;

·                       political,legal and economic risks associated with having international operations;

·                       disruptions inproduction and exploration activities in the Paris Basin;

·                       currencyfluctuations;

·                       failure tomaintain adequate internal controls;

·                       indemnitiesgranted by us in connection with dispositions of our assets;

·                       unfavorableresults of legal proceedings;

·                       assessing andintegrating acquisition prospects;

·                       declines inprices for crude oil;

·                       our ability tocompete in a highly competitive oil and gas industry;

·                       our ability toobtain equipment and personnel;

·                       extensiveregulation, including environmental regulation, to which we are subject;

·                       terroristactivities;

·                       our success indevelopment, exploitation and exploration activities;

·                       reservesestimates turning out to be inaccurate; and

·                       differencesbetween the present value and market value of our reserves.

 

In addition to these factors, important factors that could cause actualresults to differ materially from our expectations (“Cautionary Statements”)are disclosed under “Risk Factors” in our Annual Report on Form 10-K forthe year ended December 31, 2009, filed with the SEC on March 16,2010, which are incorporated by reference herein.

 

All written and oral forward-looking statements attributable to us areexpressly qualified in their entirety by the Cautionary Statements.  We undertake no obligation to update orrevise publicly any forward-looking statements, whether as a result of newinformation, future events, or otherwise.

 

23

----

Table of Contents

 

**EXECUTIVE OVERVIEW**

 

We are an independent energy company engaged in the exploration andproduction of crude oil with interests in developed and undeveloped oilproperties in the Paris Basin, France. We are currently focused on thedevelopment of our conventional fields and the exploitation of the prospectiveshale oil play within our Paris Basin acreage position.

 

We currently operate solely in the Paris Basin, which coversapproximately 170,000 km2 of northeastern France, centered 50 to 100 kmeast and south of Paris. At June 30, 2010, we held interests inapproximately 683,000 gross exploration acres. According to Gaffney, Cline &Associates Ltd, an independent petroleum and geological engineering firm, orGaffney Cline, as of December 31, 2009, our proved reserves were 5.8MBbls, our proved plus probable reserves were 9.1 MBbls and our proved plusprobable plus possible reserves were 14.3 MBbls. Our production for 2009averaged approximately 900 bbl/d from two conventional oilfield areas in theParis Basin **—** the Neocomian Complex andCharmottes fields. As of June 30, 2010, production from these oil fieldsrepresented substantially all of our sales and operating revenue. We intend tomaintain production from these mature assets using suitable enhanced oilrecovery techniques. In addition to this production base, we have identified severaladditional conventional exploration targets. We received well results on the LaGarenne, the first of these targets, in January 2010. Following a moredetailed analysis of the data, we intend to formulate a development plan forthe field by the end of the third quarter of 2010.

 

We are also currently focused on exploiting our shale oil acreage inthe Paris Basin. Our current priority is to execute with our strategic partner,Hess Oil France S.A.S., a proof of concept program by drilling, by completingand testing pilot wells, subject to approval of drilling by the Frenchgovernment

 

**Operations Update**

 

*La Garenne Well*

 

We began drilling on the La Garenne well on November 12, 2009. Thewell confirmed a five-meter reservoir within a 50-meter oil column in thetarget Dogger formation. Based on our continued evaluation of the well results,we believe the well confirms a porous and hydrocarbon-bearing reservoir with alocalized low-permeability area at the crest of the structure.   We completed production testing of the wellin January 2010, and the results were inconclusive. The well flowed onlylimited quantities from one of its two horizons in the Dogger. We intend toformulate a development plan for La Garenne following a more detailed analysis.We expect that the vertical well drilled will be used as a water disposal or aninjection well in the development of this field.

 

***Strategic Partner Process***

 

In November 2009, our Board of Directors retained RBC CapitalMarkets to assist the Board’s Strategic Committee in the review of variousstrategic alternatives. The approach we principally focused on was to identifya potential partner to assist us, through a farm-out agreement or other means,in exploiting our shale oil acreage in the Paris Basin. As a result, on May 10,2010, Toreador Energy France S.C.S. (“TEF”), a company organized under the lawsof France and an indirect subsidiary of the Company, entered into an InvestmentAgreement (the “Investment Agreement”) with Hess Oil France S.A.S. (“Hess”), acompany organized under the laws of France and a wholly owned subsidiary ofHess Corporation, a Delaware corporation, pursuant to which (x) Hess maybecome a 50% holder of TEF’s working interests in its awarded and pendingexploration permits in the Paris Basin, France (the “Permits”) and (y) (1) Hessmust make a $15 million upfront payment to TEF, (2) Hess will have theright to invest up to $120 million in fulfillment of a two-phase work program(the “Work Program”) and (3) TEF would be entitled to receive up to amaximum of $130 million of success fees based on reserves and upon theachievement of an oil production threshold.

 

The *Ministère de l’Ecologie, de l’Energie, duDéveloppement Durable et de la Mer* (Ministry of Ecology, Energy,Sustainable Development and the Sea) in France granted first-stage approval on June 25,2010. An application for the grant to Hess of title on the permits is expectedto be filed shortly with the government.

 

24

----

Table of Contents

 

Pursuant to the Investment Agreement, subject to such governmentapproval, TEF has transferred 50% of its working interest in each Permit toHess (collectively, the “Transfer Working Interests”). *Pursuant tothe Investment Agreement,*Hess made the $15 million upfront payment(plus applicable VAT of $2.9 million) to TEF on June 10, 2010.

 

This payment has been recognized as revenue in “other income” sincethis revenue is not subject to any further obligation or performance by theCompany nor is it depending on any approval.

 

**Share****Repurchase****Program**

 

On May 27, 2010, the Board of Directors authorized a sharerepurchase program for the repurchase of up to $5 million of shares of Toreadorcommon stock in the open market or in private transactions at the discretion ofmanagement over the next 12 months.  TheCompany has no obligation to repurchase shares under the program, and theprogram may be suspended at any time.  Asof June 30, 2010, no shares of Toreador common stock have been repurchasedpursuant to the share repurchase program.

 

**Strategy**

 

Theprimary components of our strategy are:

 

·       *Focus onFrance.*  All of our oil assets arecurrently located in France, having disposed of our interests in Turkey,Romania and Hungary in 2009. We believe we can leverage our substantial acreageposition and our experience and industry relationships in France to grow theCompany.

 

·       *Capture,develop and accelerate conventional prospects.*   We have identified a number of conventionaloil prospects, which we intend to evaluate for potential development, beginningwith La Garenne.

 

·       *Target theprospective unconventional oil resource play.*  Weare currently working with Hess on our proof of concept program and potentialdevelopment of our Paris Basin shale oil acreage position.

 

·       *Continueto focus on operational costs.*  Since the beginning of 2009, we have improvedoperational efficiencies, and we intend to reduce general and administrativecosts and continue to focus on maintaining efficient operations.

 

·       *Seek andmaintain optimal capital structure.*  We expect the proceeds from the February 2010share offering to enable us to reduce our debt, and we intend to maintain aconservative capital structure over time.

 

**Financial Summary**

 

Forthe six months ended June 30, 2010:

 

·                  Revenues fromcontinuing operations were $26.5 million.

 

·                  Operating costsfrom continuing operations were $14.2 million.

 

·                  Loss fromdiscontinued operations, net of income taxes, was $822,000.

 

·                  Net lossavailable to common shares was $1.0 million.

 

·                  Production was161 MBOE.

 

AtJune 30, 2010, we had:

 

·                  Cash  and cash equivalents of $56 million.

 

·                  A current ratio(current assets/current liabilities) of 1.27 to 1.

 

25

----

Table of Contents

 

·                  A debt toequity ratio of 3.87 to 1.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Thissection should be read in conjunction with Note 5 to Notes to ConsolidatedFinancial Statements included in this filing.

 

***Liquidity***

 

TheCompany’s liquidity depends on cash flow from operations and existing cashresources.  As of June 30, 2010, wehad cash and cash equivalents of $56 million, a current ratio of approximately1.27 to 1 and a debt to equity ratio of 3.87 to 1. For the three months ended June 30,2010, we had an operating income of $14.0 million.  We had sales and operating revenue of $5.9million and $15.0 million of other income representing the upfront payment fromHess under the Investment Agreement.  Wehad no capital expenditures. The Company does not currently have a creditfacility and intends to rely on its cash balance to meet its immediate cashrequirements.

 

Ourcash flow from operations is highly dependent upon the prices received from ouroil production, which are dependent on numerous factors beyond ourcontrol.  Accordingly, significantchanges to oil prices are likely to have a material impact on our financialcondition, results of operation, cash flows and revenue.  Oil prices have been very volatile over thefirst half of 2010, and we expect, will continue to be, volatile for theremainder of the fiscal year 2010.  Inorder to reduce our exposure to crude oil price fluctuations, we have enteredinto a collar contract for approximately 15,208 Bbls per month for the monthsof January 2010 through December 2010 for which the floor price is$68.00 per bbl, and the ceiling price is $81.00 per bbl.

 

OnFebruary 1, 2010, we consummated an exchange transaction (the “ConvertibleNotes Exchange”). In the Convertible Notes Exchange, in exchange for (a) $22,231,000principal amount of our outstanding 5.00% Convertible Senior Notes (the “OldNotes”) and (b) $9.4 million cash, we issued $31,631,000 aggregateprincipal amount of our 8.00%/7.00% Convertible Senior Notes (the “NewConvertible Senior Notes”) and paid accrued and unpaid interest on the OldNotes.   See “ 5.00% Convertible SeniorNotes Due October 1, 2025” and “ 8.00%/7.00% Senior Convertible Notes Due October 1,2025” for further details.

 

OnFebruary 12, 2010, we completed a registered underwritten public offeringof 3,450,000 shares of common stock, including 450,000 shares of common stockacquired by the underwriters from us to cover over-allotment options. The netproceeds to Toreador from the offering were approximately $26.8 million, afterdeducting underwriting discounts, commissions and estimated offering expenses.We intend to use the net proceeds, together with cash on hand, to satisfypayment obligations arising from the holders**’**exercise, if any, of their right on October 1, 2010 to require the Companyto repurchase up to $32.4 million of the 5.00% Convertible Senior Notes and forgeneral corporate purposes, which may include working capital, capitalexpenditures and acquisitions. Pending such use, we have invested the netproceeds in mutual and money market funds, bank certificates of deposit and/orgovernment securities.

 

Wecurrently have no mandatory capital expenditures in 2010; however, we arecurrently evaluating a development plan for the La Garenne field. In addition,under French law, each of our exploration permits and exploitation concessionsrequire that we commit to expenditures of a certain amount over the period ofthe applicable permit or concession. Though we consider these amountsdiscretionary, such expenditures would be required to renew such permits.

 

Webelieve we will have sufficient cash flow from operations and cash on hand tomeet all of our 2010 obligations, including to repurchase the $32.4 millionoutstanding 5.00% Convertible Senior Notes on October 1, 2010 if theholders exercise their right to require the Company to do so. See “5.00% ConvertibleSenior Notes Due October 1, 2025”.

 

TheCompany has elected to amortize straight-line (which approximates the effectiveinterest method) the costs associated with the issuance of its convertiblesenior notes over the term of the issuance (i.e., 2025 for both the 5.00%Convertible Senior Notes and the 8.00%/7.00% Convertible Senior Notes) and notat the first puttable dates of these callable debts.

 

Dependingon the results of the repurchase option offered to the 5.00% Convertible SeniorNotes by holders, on October 1, 2010, we will reconsider this accounting policyelection.

 

26

----

Table of Contents

 

**5.00% CONVERTIBLE SENIOR NOTES DUE OCTOBER 1, 2025**

 

On September 27, 2005, we issued $75 million of Convertible SeniorNotes due October 1, 2025 (the “5.00% Convertible Senior Notes”) toqualified institutional buyers pursuant to Rule 144A of the Securities Actof 1933, as amended (the “Securities Act”). The Company also granted theinitial purchasers the option to purchase an additional $11.25 millionaggregate principal amount of 5.00% Convertible Senior Notes to coverover-allotments. The over-allotment option was exercised on September 30,2005. The total principal amount of 5.00% Convertible Senior Notes issued was$86.25 million and total net proceeds were approximately $82.2 million. Weincurred approximately $4.1 million of costs associated with the issuance ofthe 5.00% Convertible Senior Notes; these costs have been recorded in other assetson the balance sheet and are being amortized to interest expense using thestraight-line interest rate method (which approximates effective interestmethod) over the term of the 5.00% Convertible Senior Notes.

 

The net proceeds were used for general corporate purposes, includingfunding a portion of the Company’s 2005 and 2006 exploration and developmentactivities.

 

The 5.00% Convertible Senior Notes bear interest at a rate of 5.00% perannum and can be converted into common stock at an initial conversion rate of23.3596 shares of common stock per $1,000 principal amount of 5.00% ConvertibleSenior Notes, subject to adjustment (equivalent to a conversion price ofapproximately $42.81 per share). We may redeem the 5.00% Convertible SeniorNotes, in whole or in part, on or after October 6, 2008, and prior to October 1,2010, for cash at a redemption price equal to 100% of the principal amount of5.00% Convertible Senior Notes to be redeemed, plus any accrued and unpaidinterest, if the closing price of our common stock exceeds 130% of theconversion price over a specified period. On or after October 1, 2010, wemay redeem the 5.00% Convertible Senior Notes, in whole or in part, at aredemption price equal to 100% of the principal amount of 5.00% ConvertibleSenior Notes to be redeemed, plus any accrued and unpaid interest, irrespectiveof the price of its common stock. Holders may convert their 5.00% ConvertibleSenior Notes at any time prior to the close of business on the business dayimmediately preceding their stated maturity, and holders may, upon theoccurrence of certain fundamental changes, or on October 1, 2010, October 1,2015, and October 1, 2020, require us to repurchase all or a portion oftheir 5.00% Convertible Senior Notes for cash in an amount equal to 100% of theprincipal amount of such 5.00% Convertible Senior Notes, plus any accrued andunpaid interest.  As of June 30,2010, there was $32.4 million of the 5.00% Convertible Senior Notesoutstanding.

 

During 2008 the Company repurchased $6 million, face value, of the5.00% Convertible Senior Notes on the open market for $5.3 million. In 2009 theCompany repurchased $25.7 million face value of the 5.00% Convertible SeniorNotes on the open market for $21.3 million, resulting in a gain on the earlyextinguishment of debt of $3.4 million after writing off deferred loan costs ofapproximately $1 million.  On February 1,2010, Toreador consummated an exchange transaction (the “Convertible NotesExchange”). In the Convertible Notes Exchange, in exchange for (a) $22,231,000principal amount of our outstanding 5.00% Convertible Senior Notes and (b) $9.4million cash, we issued $31,631,000 aggregate principal amount of our8.00%/7.00% Convertible Senior Notes, or the New Convertible Senior Notes, andpaid accrued and unpaid interest on the Old Notes. We intend to continue to buyback a portion of the currently outstanding Notes in the open market or inprivately negotiated transactions, subject to market conditions, applicablelegal requirements and other factors.

 

As the debt instruments exchanged in the Convertible Notes Exchangehave substantially different terms, the Company recognized the exchange of the5.00% Convertible Senior Notes as extinguishment of debt. As a result, for thesix months ended June 30, 2010, the Company recognized a loss of $4.3million including write off of loan original fee of $822,000 for the debtextinguishment. The New Convertible Senior Notes are recorded at a fair valueof $35,065,000 on the date of exchange. The accretion expense on theConvertible Notes Exchange, which was determined using fair market value of theNew Convertible Senior Notes, will be amortized to income over their term.Amortization of $91,322 was recorded for the period ended June 30, 2010.

 

**8.00%/7.00% CONVERTIBLE SENIOR NOTES DUE OCTOBER 1,2025**

 

On February 1, 2010, Toreador consummated the Convertible NotesExchange. In the Convertible Notes Exchange, in exchange for (a) the OldNotes and (b) $9.4 million cash, we issued $31,631,000 aggregate principalamount of (the New Convertible Senior Notes) and paid accrued and unpaidinterest on the Old Notes. We incurred approximately $1.9 million of costsassociated with the issuance of the New Convertible Senior Notes; these costshave been recorded in other assets on the balance sheets and are beingamortized to interest expense using the

 

27

----

Table of Contents

 

straight-line interest method (whichapproximates effective interest method) over the term of the New ConvertibleSenior Notes.

 

The New Convertible Senior Notes are senior unsecured obligations ofthe Company, ranking equal in right of payment with the Company**’**s 5.00% Convertible Senior and future unsubordinatedindebtedness. The New Convertible Senior Notes will mature on October 1,2025 and pay annual cash interest at 8.00% from February 1, 2010 until January 31,2011 and at 7.00% per annum thereafter. Interest on the New Convertible SeniorNotes will be payable on February 1 and August 1 of each year,beginning on August 1, 2010.

 

The New Convertible Senior Notes are convertible prior to February 1,2011 only if an event of default occurs and is continuing under the terms of theindenture, upon a change of control (as defined in the indenture) and to theextent the Company elects to redeem the New Convertible Senior Notes in aProvisional Redemption (as defined below). The New Convertible Senior Notes areconvertible at any time on or after February 1, 2011 and before the closeof business on October 1, 2025.

 

The New Convertible Senior Notes are convertible into shares of ourcommon stock at an initial conversion rate of 72.9927 shares of common stockper $1,000 principal amount of New Convertible Senior Notes (which isequivalent to an initial conversion price of $13.70 per share), subject toadjustment upon certain events. Under the terms of the indenture governing theNew Convertible Senior Notes, if on or before October 1, 2010, we soldshares of our common stock in an equity offering or an equity-linked offering(other than for compensation), for cash consideration per share such that 120%of the issuance price was less than the conversion price of the New ConvertibleSenior Notes then in effect, the conversion price was to be reduced to anamount equal to 120% of such offering price. As a result of our February 2010public offering, the conversion rate of the New Convertible Senior Notesadjusted to 98.0392 shares of common stock per $1,000 principal amount of NewConvertible Senior Notes (which is equivalent to a conversion price ofapproximately $10.20 per share). Pursuant to the indenture, the conversion price of the New Convertible SeniorNotes will not be further adjusted under such provision because the proceedsfrom the public offering were in excess of $20 million.

 

The New Convertible Senior Notes may be redeemed in whole or in part atthe Company’s option prior to October 1, 2013, in cash at a redemptionprice equal to one hundred percent (100%) of the principal amount of the NewConvertible Senior Notes redeemed, plus accrued and unpaid interest, if any,to, but excluding, the redemption date plus a make-whole payment, if theclosing sale price of the Company’s common stock has exceeded 200% of theconversion price then in effect for at least twenty (20) trading days in anyconsecutive thirty (30)-trading day period ending on the trading day prior tothe date of mailing of the relevant notice of redemption (a “ProvisionalRedemption”).  The New Convertible SeniorNotes may be redeemed in whole or in part at the Company’s option on or after October 1,2013 for cash at a redemption price equal to 100% of the principal amount ofthe New Convertible Senior Notes redeemed, plus any accrued and unpaid interestto, but excluding, the redemption date. In addition, upon the occurrence of certain fundamental changes, or oneach of October 1, 2013, October 1, 2015 and October 1, 2020, aholder may require the Company to repurchase all or a portion of the NewConvertible Senior Notes in cash for 100% of the principal amount of the NewConvertible Senior Notes to be purchased, plus any accrued and unpaid interestto, but excluding, the purchase date.

 

Pursuant to the indenture, the Company and its subsidiaries may notincur debt other than Permitted Indebtedness. “Permitted Indebtedness” includes(i) the New Convertible Senior Notes; (ii) the 5.00% ConvertibleSenior Notes or any indebtedness of the Company that serves to refund or refinancethe 5.00% Convertible Senior Notes (“Refinancing Debt”), so long as theprincipal amount of the Refinancing Debt does not exceed the outstandingprincipal amount of the 5.00% Convertible Senior Notes; (iii) indebtednessincurred by the Company or its subsidiaries not to exceed the sum of (i) theproduct of (x) $7.00 and (y) the number of barrels of proved plusprobable reserves and (ii) cash equivalents less the aggregate principalamount of the New Convertible Senior Notes outstanding less the aggregateprincipal amount of the 5.00% Convertible Senior Notes less any RefinancingDebt; (iv) indebtedness that is nonrecourse to the Company or any of itssubsidiaries used to finance projects or acquisitions, joint ventures orpartnerships, including acquired indebtedness (“Nonrecourse Debt”); and (v) certainother customary categories of permitted debt. In addition, the Company may notpermit its total consolidated net debt as of any date to exceed the product of (x) $7.00and (y) the number of barrels of proved plus probable reserves other thanfor Nonrecourse Debt. The proved plus probable reserves underlying anyNonrecourse Debt for which debt has been incurred as permitted debt pursuant toclause (iv) above will be excluded from the proved plus probable reservescalculation for the purposes of the above debt covenants.

 

28

----

Table of Contents

 

***Dividends***

 

Dividends on our common stock may be declared and paid out of fundslegally available when and as determined by our Board of Directors. Our policyis to hold and invest corporate funds on a conservative basis, and, thus, we donot anticipate paying cash dividends on our common stock in the foreseeablefuture.

 

***Contractual Obligations***

 

The following table sets forth our contractual obligations in thousandsat June 30, 2010 for the periods shown:

 
| ** **                    | ** ** | **Total** | ** ** | **Less Than********One Year** | ** ** | **One to********Three Years** | ** ** | **Four to********Five Years** | ** ** | **More Than********Five Years** | ** ** |
|-------------------------------|------------|-----------|------------|-----------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------|------------|
| Long-term debt                |       | $         | 67,358     |                                    | $          | 32,385                                  |       | $                                       | 34,973     |                                      | $          | — |   | $ | — |   |
| Asset retirement obligation   |       | 5,915     |       | 1,852                                   |       | 295                                     |       | 397                                     |       | 3,371                                     |       |
| Lease commitments             |       | 497       |       | 110                                     |       | 387                                     |       | —                                  |       | —                                    |       |
| Total contractual obligations |       | $         | 73,770     |                                    | $          | 34,347                                  |       | $                                       | 35,655     |                                      | $          | 397 |   | $ | 3,371 |   |

 

Contractual obligations for long-term debt above does not includeamounts for interest payments.

 

**CRITICAL ACCOUNTING POLICIES**

 

The discussion and analysis of our financial condition and results ofoperations is based upon the consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requires us tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses. Our significant accounting policies aredescribed in Note 2 to our consolidated financial statements included in ourAnnual Report on Form 10-K for the year ended December 31, 2009. Wehave identified below policies that are of particular importance to theportrayal of our financial position and results of operations and which requirethe application of significant judgment by management. We analyze our estimateson a periodic basis and base our estimates on experience and various otherassumptions that we believe to be reasonable under the circumstances. Actualresults may differ from these estimates using different assumptions orconditions. We believe the following critical accounting policies affect ourmore significant judgments and estimates used in the preparation of ourfinancial statements:

 

***Successful Efforts Method of Accounting***

 

We account for our oil and natural gas exploration and developmentactivities utilizing the successful efforts method of accounting. Under thismethod, costs of productive exploratory wells, development dry holes andproductive wells and undeveloped leases are capitalized. Oil and natural gaslease acquisition costs are also capitalized. Exploration costs, includingpersonnel costs, certain geological and geophysical expenses and delay rentalsfor oil and natural gas leases, are charged to expense as incurred. Exploratorydrilling costs are initially capitalized, but such costs are charged to expenseif and when the well is determined not to have found reserves in commercialquantities. In most cases, a gain or loss is recognized for sales of producingproperties.

 

The application of the successful efforts method of accounting requiresmanagement’s judgment to determine the proper designation of wells as eitherdevelopmental or exploratory, which will ultimately determine the properaccounting treatment of the costs incurred. The results from a drillingoperation can take considerable time to analyze, and the determination thatcommercial reserves have been discovered requires both judgment and applicationof industry experience. Wells may be completed that are assumed to beproductive and actually deliver oil and natural gas in quantities insufficientto be economic, which may result in the abandonment of the wells at a laterdate. On occasion, wells are drilled which have targeted geologic structuresthat are both developmental and exploratory in nature, and in such instances anallocation of costs is required to properly account for the results.Delineation seismic costs incurred to select development locations within aproductive oil and natural gas field are typically treated as development costsand capitalized, but often these seismic programs extend beyond the provedreserve areas and therefore management must estimate the portion of seismiccosts to expense as exploratory. The evaluation of oil and natural gasleasehold acquisition costs requires management’s judgment to estimate the fair

 

29

----

Table of Contents

 

value of exploratory costs related todrilling activity in a given area. Drilling activities in an area by othercompanies may also effectively condemn leasehold positions.

 

The successful efforts method of accounting can have a significantimpact on the operational results reported when we enter a new exploratory areain hopes of finding oil and natural gas reserves. The initial exploratory wellsmay be unsuccessful and the associated costs will be expensed as dry holecosts. Seismic costs can be substantial which will result in additionalexploration expenses when incurred.

 

***Reserves Estimate***

 

Proved reserves are estimated quantities of oil and gas, which, byanalysis of geoscience and engineering data, can be estimated with reasonablecertainty to be economically producible - from a given date forward recoverablein future years from known reservoirs, and under existing economic conditions,operating methods, and government regulations - prior to the time at which contractsproviding the right to operate expire, unless evidence indicates that renewalis reasonably certain. Proved developed reserves are reserves that can beexpected to be recovered through existing wells with existing equipment andoperating methods or in which the cost of the required equipment is relativelyminor compared to the cost of a new well and through installed extractionequipment and infrastructure operational at the time of the reserves estimateif the extraction is by means not involving a well. Proved undeveloped reservesare reserves that are expected to be recovered from new wells on undrilledacreage or from existing wells where a relatively major expenditure is requiredfor recompletion. Proved undeveloped reserves on undrilled acreage are limited (i) tothose directly offsetting development spacing areas that are reasonably certainof production when drilled, unless evidence using reliable technology existsthat establishes reasonable certainty of economic producibility at greaterdistances and (ii) to other undrilled locations if a development plan hasbeen adopted indicating that they are scheduled to be drilled within fiveyears, unless the specific circumstances justify a longer time.

 

Probable reserves are those additional reserves that are less certainto be recovered than proved reserves but which, together with proved reserves,are as likely as not to be recovered. When deterministic methods are used, it is as likely as not that actualremaining quantities recovered will exceed the sum of estimated proved plusprobable reserves. When probabilistic methods are used, there should be atleast a 50% probability that the actual quantities recovered will equal orexceed the proved plus probable reserves estimates.   Probable reserves may be assigned to areasof a reservoir adjacent to proved reserves where data control orinterpretations of available data are less certain, even if the interpretedreservoir continuity of structure or productivity does not meet the reasonablecertainty criterion. Probable reserves may be assigned to areas that arestructurally higher than the proved area if these areas are in communicationwith the proved reservoir.  Probablereserves estimates also include potential incremental quantities associatedwith a greater percentage recovery of the hydrocarbons in place than assumedfor proved reserves.

 

Possible reserves are those additional reserves that are less certainto be recovered than probable reserves. When deterministic methods are used, the total quantities ultimatelyrecovered from a project have a low probability of exceeding proved plusprobable plus possible reserves. When probabilistic methods are used, thereshould be at least a 10% probability that the total quantities ultimatelyrecovered will equal or exceed the proved plus probable plus possible reservesestimates.  Possible reserves may beassigned to areas of a reservoir adjacent to probable reserves where datacontrol and interpretations of available data are progressively less certain.Frequently, this will be in areas where geoscience and engineering data areunable to define clearly the area and vertical limits of commercial productionfrom the reservoir by a defined project. Possible reserves also include incremental quantities associated with agreater percentage recovery of the hydrocarbons in place than the recoveryquantities assumed for probable reserves.

 

30

----

 

Tableof Contents

 

We emphasize that the volume of reserves are estimates that, by theirnature are subject to revision. The estimates are made using geological andreservoir data, as well as production performance data. These estimates arereviewed annually and revised, either upward or downward, as warranted byadditional performance data. These reserve revisions result primarily fromimproved or a decline in performance from a variety of sources such as anaddition to or a reduction in recoveries below or above previously establishedlowest known hydrocarbon levels, improved or a decline in drainage from naturaldrive mechanisms, and the realization of improved or declined drainage areas.If the estimates of proved reserves were to decline, the rate at which werecord depletion expense would increase.

 

For the year ended December 31, 2009, we had an upward reserverevision of 18.11% in total proved reserves. This increase can be correlated toa better long-term performance of our main producing asset, the NeocomianComplex, and a higher oil price. The reserves at December 31, 2009 werepriced at $56.99 per Bbl, as compared to $34.29 at December 31, 2008.

 

***Impairment of Oil and Natural GasProperties***

 

We review our proved oil and natural gas properties for impairment onan annual basis or whenever events and circumstances indicate a potentialdecline in the recoverability of their carrying value. We estimate the expectedfuture cash flows from our proved oil and natural gas properties and comparethese future cash flows to the carrying value of the oil and natural gasproperties to determine if the carrying value is recoverable. If the carryingvalue exceeds the estimated undiscounted future cash flows, we will adjust thecarrying value of the oil and natural gas properties to its fair value in thecurrent period. The factors used to determine fair value include, but are notlimited to, estimates of reserves, future commodity prices, future productionestimates, anticipated capital expenditures, and a discount rate commensuratewith the risk associated with realizing the expected cash flows projected.Unproved properties are reviewed quarterly to determine if there has beenimpairment of the carrying value, with any such impairment charged to expensein the period. Given the complexities associated with oil and natural gasreserves estimate and the history of price volatility in the oil and naturalgas markets, events may arise that will require us to record an impairment ofour oil and natural gas properties and there can be no assurance that suchimpairments will not be required in the future nor that they will not bematerial.

 

On May 1, 2009, the Prime Minister of Turkey, announced a 25.00%reduction in the posted price of natural gas in Turkey which caused us toreevaluate the fair value of our SASB and for management to estimate that thefair value of the asset has been impaired by approximately $5.3 million at June 30,2009; accordingly, recorded an impairment to reflect this change in fair value.

 

We recorded no impairment in the six months ended June 30, 2010.

 

31

----

Table of Contents

 

***Future Development and Abandonment Costs***

 

Future development costs include costs to be incurred to obtain accessto proved reserves, including drilling costs and the installation of productionequipment. Future abandonment costs include costs to dismantle and relocate ordispose of our production equipment, gathering systems, wells and relatedstructures and restoration costs of land. We develop estimates of these costsfor each of our properties based upon the type of production structure, depthof water, reservoir characteristics, depth of the reservoir, market demand forequipment, currently available procedures and consultations with constructionand engineering consultants. Because these costs typically extend many yearsinto the future, estimating these future costs is difficult and requiresmanagement to make estimates and judgments that are subject to future revisionsbased upon numerous factors, including changing technology, the ultimatesettlement amount, inflation factors, credit adjusted discount rates, timing ofsettlement and changes in the political, legal, environmental and regulatoryenvironment. We review our assumptions and estimates of future abandonmentcosts on an annual basis. The accounting for future abandonment costs changedon January 1, 2003, with the adoption of FASB ASC 410 “Asset Retirementand Environmental Obligations”. ASC 410 requires that the fair value of aliability for an asset retirement obligation be recorded in the period in whichit is incurred and the corresponding cost be capitalized by increasing thecarrying amount of the related long-lived asset. The liability is accreted toits present value each period, and the capitalized cost is depreciated over theuseful life of the related asset. If the liability is settled for an amountother than the recorded amount, a gain or loss is recognized. In 2005, twoseparate incidents occurred offshore Turkey in the Black Sea, which resulted inthe sinking of the Fallen Structures and the loss of three natural gas wells.We have not been requested, or ordered by any governmental or regulatory body,to remove the Fallen Structures. Therefore, we believe it is unlikely that wewill receive such a request or order, and no liability has been recorded.

 

Holding all other factors constant, if our estimate of futureabandonment costs is revised upward, earnings would decrease due to higherdepreciation, depletion and amortization expense. Likewise, if these estimateswere revised downward, earnings would increase due to lower depreciation,depletion and amortization expense.

 

***Income Taxes***

 

For financial reporting purposes, we generally provide taxes at therate applicable for the appropriate tax jurisdiction. Because our presentintention is to reinvest the unremitted earnings in our foreign operations, wedo not provide U.S. income taxes on unremitted earnings of foreignsubsidiaries. Management periodically assesses the need to utilize theseunremitted earnings to finance our foreign operations. This assessment is basedon cash flow projections that are the result of estimates of future production,commodity prices and expenditures by tax jurisdiction for our operations. Suchestimates are inherently imprecise since many assumptions utilized in the cashflow projections are subject to revision in the future.

 

Management also periodically assesses, by tax jurisdiction, theprobability of recovery of recorded deferred tax assets based on its assessmentof future earnings estimates. Such estimates are inherently imprecise sincemany assumptions utilized in the assessments are subject to revision in thefuture.

 

***Derivatives***

 

We periodically utilize derivatives instruments such as futures andswaps for purposes of hedging our exposure to fluctuations in the price ofcrude oil sales. In accordance with FASB ASC 815, “Derivatives and Hedging ,”we have elected not to designate the derivative financial instruments to whichwe are a party as hedges, and accordingly, we record such contracts at fairvalue as an asset or a liability and recognize changes in such fair value incurrent earnings as they occur. We determine the fair value of futures and swapcontracts based on the difference between their fixed contract price and theunderlying market price at the determination date. The realized and unrealizedgains and losses on derivatives are recorded as a derivative fair value gain orloss in the income statement.

 

32

----

Table of Contents

 

***Foreign Currency Translation***

 

The functional currency for France is the Euro. Translation gains andlosses resulting from transactions in Euros are included in other comprehensiveincome for the current period. We periodically review the operations of ourentities to ensure the functional currency of each entity is the currency ofthe primary economic environment in which we operate.

 

**RESULTS OF OPERATIONS**

 

***COMPARISON OF THE THREE MONTHS ENDEDJUNE 30, 2010 AND 2009***

 

The discussion below, with the exception of the discussion under theheading “Discontinued Operations,” relates to our corporate activities in theUnited States and France and oil exploration and production operations inFrance. Certain prior-year amounts have been reclassified and adjusted topresent the operations of Turkey, Hungary and Romania as discontinuedoperations and are discussed under the heading “Discontinued Operations.”

 
| ** **      | ** ** | **For the Three** | ** ** |
|-----------------|------------|-------------------|------------|
| ** **      | ** ** | **Months Ended**  | ** ** |
| ** **      | ** ** | **June 30,** | ** ** |
| ** **      | ** ** | **2010**          | ** ** | **2009** | ** ** |
| **Production:** |       |              |       |   |   |
| Oil (MBbls):    |       |              |       |   |   |
| France          |       | 82                |       | 81 |   |

 
| ** **          | ** ** | **For the Three** | ** ** |
|---------------------|------------|-------------------|------------|
| ** **          | ** ** | **Months Ended**  | ** ** |
| ** **          | ** ** | **June 30,** | ** ** |
| ** **          | ** ** | **2010**          | ** ** | **2009** | ** ** |
| **Average  Price:** |       |              |       |   |   |
| Oil  ($/Bbl):       |       |              |       |   |   |
| France              |       | $                 | 74.24      |   | $ | 54.74 |   |
|                     |            |                   |            |  |  |  |  |

 

***Revenue and other income***

 

*Sales and other operating revenue*

 

Sales and other operating revenue for the three months ended June 30,2010 was $5.9 million, as compared to salesand other operating revenue of $4.5 million for the three months ended June 30,2009, an increase primarily due to the increase in global oil prices over theperiod, which led to an increase in the prices at which we sell our oil from anaverage of $54.74 per barrel in the three months ended June 30, 2009 to anaverage of $74.24 per barrel in the three months ended June 30, 2010.  Production remained relatively stable, increasingfrom 81 MBbls in the three months ended June 30, 2009 to 82 MBbls in thethree months ended June 30, 2010.

 

The above table compares both volumes and prices received for oil forthe three months ended June 30, 2010 and 2009. Oil prices have been veryvolatile over the second quarter of 2010, and we expect, will continue to be,extremely volatile for the remainder of the fiscal year 2010.  The results of our operations are highlydependent upon the prices received from our oil production, which are dependenton numerous factors beyond our control. Accordingly, significant changes to oil prices are likely to have amaterial impact on our financial condition, results of operation, cash flowsand revenue.

 

*Other income*

 

Other income for the three months ended June 30, 2010 was $15million, which represented the $15 million upfront payment received from Hesson June 10, 2010 under the Investment Agreement, compared to $121,000recorded for the same period of 2009 related to a sale of a royalty interest inproducing properties located in Canada. These properties had a zero cost basisand were acquired in connection with the acquisition of Madison Oil in 2003.

 

33

----

Table of Contents

 

***Operating costs and expenses***

 

*Lease operating expense*

 

Lease operating expense was $3.1 million, or $38.21 per BOE produced,for the three months ended June 30, 2010, as compared to $1.8 million, or$22.22 per BOE produced, for the three months ended June 30, 2009.

 

This increase is due to an increase in certain production costs, mainlytransportation costs, as well as higher headquarter expense, inventory changeand to taxes associated with oil production reclassified in lease operatingexpenses.

 

*Exploration expense*

 

Exploration expense for the three months ended June 30, 2010 was$1.1 million, as compared to $146,000 for the three months ended June 30,2009. This increase is due primarily to expenses associated with geological andtechnical studies the Company conducted and commissioned in connection with theshale oil development project. Out of these expenses $173,733 has been invoicedto Hess under the terms of the Investment Agreement.

 

*Depreciation, depletion and amortization*

 

Depreciation, depletion and amortization for the three months ended June 30,2010 was $0.7 million or $8.19 per BOE produced, as compared to $1.5 million,or $18.25 per BOE produced for the three months ended June 30, 2009.  This decrease is due to a longer productionlife estimate for our existing wells according to a Gaffney, Cline &Associates Ltd. report of our reserves at December 31, 2009.

 

*Accretion on discounted assets and liabilities*

 

Accretionexpense for the three months ended June 30, 2010 was $31,000 as comparedto $123,000 for the three months ended June 30, 2009.  The accretion expense is composed of $86,000as ARO expense and $55,000 of accretion impact (positive) related to the fairvalue of the 8.00/7.00% Convertible Senior Notes.

 

*General and administrative before stock compensation* expense

 

General and administrative expense, excluding stock compensationexpense, for the three months ended June 30, 2010 totaled $1.7 million, ascompared to $2.2 million for the comparable period in 2009. This decrease isdue to a reclassification of certain oil production related expenses to leaseoperating expenses, including headquarter expense and taxes related to oilproduction, as well as an increase in certain production costs, mainlytransportation costs. For the three months ended June 30, 2010 the amountreclassified included $500,000 of professional fees and general expense of$600,000 associated with operations in France.

 

*Stock compensation expense*

 

Stock compensation expense was $1.1 million for the three months endedJune 30, 2010 compared with $2.2 million for the three months ended June 30,2009.  This includes the annual stockawards to outside directors of $650,000 of immediately vested shares comparedto $1.2 million of annual stock awards to directors in June 2009 (whichincluded one-time inducement to service).

 

*Impairment of oil and gas properties*

 

There were no impairment charges for the three months ended June 30,2010 and June 30, 2009.

 

*Gain on oil and gas derivative contracts*

 

We recorded an unrealized gain on oil and gas derivative contracts forthe three months ended June 30, 2010 of $783,000 (as compared to zero inthe three months ended June 30, 2009 in the absence of such derivativecontract), representing the unrealized gain on the commodity derivativecontracts with Vitol Trading.  Presentedin the table below is a summary of the contract entered into:

 

34

----

Table of Contents

 
| **Type** | ** ** | **Period**                                          | ** ** | **Barrels** | ** ** | **Floor** | ** ** | **Ceiling** | ** ** | **Unrealized Gain for the  three months ended  June ****30,****2010** | ** ** |
|----------|------------|-----------------------------------------------------|------------|-------------|------------|-----------|------------|-------------|------------|----------------------------------------------------------------------------|------------|
|     |       |                                                |       |        |       |      |       |        |       |                                                                       |       |
| Collar   |       | January 1,  2010 — December 31, 2010 |       | 182,500     |       | $         | 68.00      |        | $          | 81.00                                                                      |       | $ | 783 |   |
|          |            |                                                     |            |             |            |           |            |             |            |                                                                            |            |  |  |  |

 

*Foreign currency exchange gain (loss)*

 

We recorded a loss on foreign currency exchange of $83,000 for thethree months ended June 30, 2010 compared with a loss of $653,000 for thethree months ended June 30, 2009. This decrease is primarily due to thestrengthening of the U.S. dollar over the period combined to the fact that theCompany had access to dollar resources following the Convertible NotesExchange, our February 2010 public offering and the $15 million upfrontpayment from Hess under the Investment Agreement in excess of its oil salerevenue paid in Euros.

 

*Interest expense, net of capitalized interest*

 

Interestexpense, net of capitalized interest was $1.0 million for the three monthsended June 30, 2010 as compared to $546,000 for the three months ended June 30,2009.  The increase is mainly due to theinterest payments relating to the New Convertible Senior Notes issued in February 2010,which was offset by decreased interest payments relating to the 5.00%Convertible Senior Notes, of which $22.2 million of the aggregate principalamount outstanding were exchanged for a portion of the New Convertible SeniorNotes in the Convertible Notes Exchange. Interest expense for the New Convertible Senior Notes was $633,000 forthe three months ended June 30, 2010 as compared to zero for the threemonths ended June 30, 2009. Interest expense for the 5.00% Convertible Senior Notes was $404,000 forthe three months ended June 30, 2010 as compared to $830,000 for the threemonths ended June 30, 2009. Amortization of loan fees of $49,996 was recorded for the three monthsended June 30, 2010 compared to $39,031 for the three months ended June 30,2009.

 

*Income tax (benefit) provision*

 

Anincome tax provision of $6.4 million was recorded in the three months ended June 30,2010, compared to a tax benefit of $691,000 recognized for the three monthsended June 30, 2009. This increase is due to the provision for income taxpayable in France for the year ended December 31, 2010 as a result of the$15 million upfront payment from Hess under the Investment Agreement togetherwith earnings estimate for operations in France based on oil productionactivity.

 

*Discontinued operations*

 

In the fourth quarter of 2008 and during the first quarter of 2009,Toreador farmed out or sold all of its working interests in Romania to threedifferent companies and closed its office; thus, we no longer have anyoperational involvement in Romania. This resulted in a gain of $5.8 million,which was recorded in the first quarter of 2009.

 

On March 3, 2009 we completed the sale of a 26.75% interest in theSouth Akcakoca Sub-Basin (SASB) project associated licenses located in theBlack Sea offshore Turkey, to Petrol Ofisi for $55 million. In accordance withthe revised assignment announced on February 3, 2009, $50 million of theproceeds was paid by Petrol Ofisi on March 3, 2009, and the remaining $5million was paid on September 1, 2009. There was no gain or loss resultingfrom this sale.

 

On September 30, 2009, the Company entered into a Share PurchaseAgreement (the “Share Purchase Agreement”) with Tiway Oil BV, a companyorganized under the laws of the Netherlands (“Tiway”), and Tiway Oil AS, acompany organized under the laws of Norway, pursuant to which the Companyagreed to sell 100% of the outstanding shares of Toreador Turkey Ltd. to Tiwayfor total consideration consisting of: (1) a cash payment of $10.5 millionto be paid at closing, (2) exploration success payments dependent uponcertain future commercial discoveries as provided in the Share PurchaseAgreement, up to a maximum aggregate consideration of $40 million, and (3) futurequarterly 10% pre-tax net profit interest payments if a field goes intoproduction that was discovered by an exploration well drilled within four yearsof closing on certain of the licenses then still held by Tiway. The sale ofToreador Turkey Ltd. was completed on October 7, 2009 and resulted in again of $1.8 million.

 

35

----

Tableof Contents

 

On September 30, 2009, the Company entered into a Quota PurchaseAgreement (the “Quota Purchase Agreement”) with RAG (Rohöl AufsuchungsAktiengesellschaft), a corporation organized under the laws of Austria (“RAG”),pursuant to which the Company agreed to sell 100% of its equity interests inToreador Hungary Limited to RAG for total consideration consisting of (1) acash payment of $5.4 million (€ 3.7 million) paid at closing, (2) $435,000(€ 300,000), which was held back subject to a post-closing adjustment and waspaid to us on November 5, 2009 and (3) a contingent payment of $2.9million (€2 million) to be paid upon post-transaction completion of agreementsrelating to certain assets of Toreador Hungary. The sale of Toreador Hungarywas completed on September 30, 2009 and resulted in a loss of $4.1million.

 

The results of operations of assets in Romania, Turkey and Hungary havebeen presented as discontinued operations in the accompanying consolidatedstatement of operations.  Results forthese assets reported as discontinued operations were as follows:

 
| ** **                                              | ** ** | **Three Months********Ended********June 30,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                              | ** ** | **2010**                                           | ** ** | **2009** | ** ** |
| Revenue:                                                |       |                                               |       |   |   |
| Sales and other operating revenue                       |       | $                                                  | —     |   | $ | 1,551 |   |
| Operating costs and expenses:                           |       |                                               |       |   |   |
| Lease operating expense                                 |       | —                                             |       | 237 |   |
| Exploration expense                                     |       | —                                             |       | 32 |   |
| Depreciation, depletion and amortization                |       | —                                             |       | — |   |
| Impairment of oil and natural gas properties            |       | —                                             |       | — |   |
| General and administrative expense                      |       | 161                                                | (1)        | 732 | (1) |
| Gain on sale of properties and other assets in  Romania |       | —                                             |       | — |   |
| Total operating costs and expenses                      |       | 161                                                |       | 1,001 |   |
| Operating income (loss)                                 |       | (161                                               | )          | 550 |   |
| Other income (expense)                                  |       |                                               |       |   |   |
| Foreign currency exchange gain                          |       | —                                             |       | 3,752 |   |
| Other expense                                           |       | 86                                                 | (1)        | — |   |
| Interest expense, net of interest capitalized           |       | —                                             |       | 310 |   |
| Loss before income taxes                                |       | (247                                               | )          | 4,612 |   |
| Income tax benefit                                      |       |                                               |       |   |   |
| Net (loss) income from discontinued operations          |       | $                                                  | (247       | ) | $ | 4,612 |   |

 

----

(1)         Residual exitcosts.

 

We had no sales and other operating revenue from discontinuedoperations for the three months ended June 30, 2010 due to the sale of allour discontinued operations in 2009.  Wehad general administrative expense of $161,000 from discontinued operations inthe three months ended June 30, 2010 due to the legal costs associatedwith the Scowcroft Settlement Agreement and thus recorded a loss of $161,000.

 

The following tables present production and average unit prices forTurkey:

 
| ** **      | ** ** | **For the Three** | ** ** |
|-----------------|------------|-------------------|------------|
| ** **      | ** ** | **Months Ended**  | ** ** |
| ** **      | ** ** | **June 30,** | ** ** |
| ** **      | ** ** | **2010**          | ** ** | **2009** | ** ** |
| **Production:** | ** ** | ** **        | ** ** | ** ** | ** ** |
| Oil (MBbls):    |       |              |       |   |   |
| Turkey          |       | —            |       | 13 |   |
| Gas (MMcf):     |       |              |       |   |   |
| Turkey          |       | —            |       | 107 |   |
| MBOE:           |       |              |       |   |   |
| Turkey          |       | —            |       | 31 |   |

 
| ** **         | ** ** | **For the Three** | ** ** |
|--------------------|------------|-------------------|------------|
| ** **         | ** ** | **Months Ended**  | ** ** |
| ** **         | ** ** | **June 30,** | ** ** |
| ** **         | ** ** | **2010**          | ** ** | **2009** | ** ** |
| **Average Price:** | ** ** | ** **        | ** ** | ** ** | ** ** |
| Oil ($/Bbl):       |       |              |       |   |   |
| Turkey             |       | —            |       | $ | 50.73 |   |
| Gas ($/Mcf):       |       |              |       |   |   |
| Turkey             |       | —            |       | $ | 8.28 |   |
| $/BOE:             |       |              |       |   |   |
| Turkey             |       | —            |       | $ | 50.11 |   |

 

36

----

Tableof Contents

 

***Other comprehensive income***

 

The most significant element of comprehensive income, other than netincome, is foreign currency translation. For the three months ended June 30,2010, we had accumulated an unrealized loss of $1.8 million as compared to anunrealized income of $3.8 million for the comparable period in 2009.  This change is primarily due to thestrengthening of the U.S. dollar compared to the Euro for the three monthsended June 30, 2010 compared to the three months ended June 30, 2009.

 

The functional currency of our operations in France is the U.S. dollar.The functional currency in Turkey and Hungary was the U.S. dollar. The exchangerates at June 30, 2010 and June 30, 2009 were:

 
| ** **       | ** ** | **June 30** | ** ** | **June 30,** | ** ** |
|------------------|------------|------------------|------------|-------------------|------------|
| ** **       | ** ** | **2010**         | ** ** | **2009**          | ** ** |
| Euro             |       | $                | 1.22711    |              | $          | 1.4134 |   |
| New Turkish Lira |       | —           |       | $                 | 0.5991     |   |
| Hungarian Forint |       | —           |       | $                 | 0.0043     |   |
|                  |            |                  |            |                   |            |  |  |

 

***COMPARISON OF THE SIX MONTHS ENDED JUNE 30,2010 AND 2009***

 

The following tables present production and average unit prices for thegeographic segments indicated:

 
| ** **      | ** ** | **For the Six**   | ** ** |
|-----------------|------------|-------------------|------------|
| ** **      | ** ** | **Months Ended**  | ** ** |
| ** **      | ** ** | **June 30,** | ** ** |
| ** **      | ** ** | **2010**          | ** ** | **2009** | ** ** |
| **Production:** | ** ** | ** **        | ** ** | ** ** | ** ** |
| Oil (MBbls):    |       |              |       |   |   |
| France          |       | 161               |       | 165 |   |

 
| ** **         | ** ** | **For the Six**   | ** ** |
|--------------------|------------|-------------------|------------|
| ** **         | ** ** | **Months Ended**  | ** ** |
| ** **         | ** ** | **June 30,** | ** ** |
| ** **         | ** ** | **2010**          | ** ** | **2009** | ** ** |
| **Average Price:** | ** ** | ** **        | ** ** | ** ** | ** ** |
| Oil ($/Bbl):       |       |              |       |   |   |
| France             |       | $                 | 73.38      |   | $ | 46.80 |   |
|                    |            |                   |            |  |  |  |  |

 

***Revenue***

 

*Sales and other operating revenue*

 

Sales and other operating revenue for the six months ended June 30,2010 were $11.5 million, as compared to $7.9 million for the six months ended June 30,2009.  This increase is primarily due tothe global increase in oil prices, which led to an increase in the prices atwhich we sell our oil from an average of $46.80 per barrel in the six monthsended June 30, 2009 to an average of $73.38 per barrel in the six monthsended June 30, 2010.

 

The above table compares both volumes and prices received for oil forthe six months ended June 30, 2010 and 2009. Oil prices have been veryvolatile over the first half of 2010, and we expect, will continue to be,extremely volatile for the remainder of the fiscal year 2009.  The results of our operations are highlydependent upon the prices received from our oil and natural gas production,which are dependent on numerous factors beyond our control.  Accordingly, significant changes to oil andnatural gas prices are likely to have a material impact on our financial condition,results of operation, cash flows and revenue.

 

*Other income*

 

Other income for the six months ended June 30, 2010 was $15million, which represented the $15 million upfront payment received from Hesson June 10, 2010 under the Investment Agreement, compared to $121,000recorded for the same period of 2009 related to the sale of a royalty interestin producing properties located in Canada. These properties had a zero costbasis and were acquired in connection with the acquisition of Madison Oil in2003.

 

37

----

Table of Contents

 

***Costs and expenses***

 

*Lease operating expense*

 

Lease operating expense was $4.4 million, or $27.24 per BOE produced,for the six months ended June 30, 2010, as compared to $3.6 million, or$21.81 per BOE produced for the six months ended June 30, 2009.  This increase is due to an increase incertain production costs, mainly transportation costs, as well as higherheadquarter expense, inventory change ($287,000 as of June 30, 2010 as comparedto $30,000 for the six months ended June 30, 2009) and to taxes associated withoil production reclassified in lease operating expenses.

 

*Exploration expense*

 

Exploration expense for the six months ended June 30, 2010 was$1.1 million, as compared to $610,000 for the six months ended June 30,2009. This increase is due primarily to expenses associated with geological andtechnical studies the Company conducted and commissioned in connection with theshale oil development project. Out of these expenses $173,733 has been invoicedto Hess under the terms of the Investment Agreement.

 

*Depreciation, depletion and amortization*

 

Depreciation, depletion and amortization for the six months ended June 30,2010 was $1.7 million compared to $3.0 million for the six months ended June 30,2009.  This decrease is due to a longerproduction life estimate for our existing wells according to a Gaffney, Cline &Associates Ltd. report of our reserves at December 31, 2009.

 

*Accretion expense*

 

Accretion expense for the six months ended June 30, 2010 was$87,000 as compared to $238,000 for the six months ended June 30, 2009.  The accretion expense is composed of $178,000as ARO expense and $91,000 of accretion impact (positive) related to the fairvalue of the 8.00/7.00% Convertible Senior Notes.

 

*Impairment of oil and gas properties*

 

Weincurred no impairment charge for the six months ended June 30, 2010. At June 30,2009, we recorded impairment to oil and gas properties totaling $5.3 million.We review our proved and unproved oil and natural gas properties for impairmenton an annual basis or whenever events and circumstances indicate a potentialdecline in the recoverability of their carrying value. As explained below, ourreview at June 30, 2009, indicated a potential decline in therecoverability of our South Akcakoca Sub-Basin and Trinidad assets.

 

*General and administrative before stock compensation, costincurred due to resignation of former officers and costs associated with theDallas office/relocation of headquarters*

 

General and administrative expense, not including stock compensationexpense, cost incurred due to the resignation of former officers and the costsassociated with the relocation of the corporate headquarters from Dallas, Texasto Paris, France, was $5.6 million for the six months ended June 30, 2010compared to $4.3 million for the six months ended June 30, 2009. Theincrease is primarily due to additional expenses associated with financingactivities and the partnership process for the Paris Basin oil shale whichincluded legal fees of $672,000 (compared to $468,000 for the same period in2009), professional fees of $626,000 (compared to $319,000 for the same periodin 2009), listing and communication cost of $224,000 (compared to $130,000 forthe same period in 2009), partnership process success fee of $567,000 (comparedto zero for the same period in 2009), investor relations expenses of $570,000(compared to $178,000 for the same period in 2009) and travel expenses of$338,000 (compared to $283,000 for the same period in 2009).

 

*Stock compensation expense*

 

Stock compensation expense was $2.2 million for the six months ended June 30,2010 compared to $2.2 million for the six months ended June 30, 2009.  It includes directors annual stock grantingof immediately vested shares for $650,000.

 

38

----

Tableof Contents

 

*Cost incurred due to resignation of former officers*

 

The Company and Nigel Lovett, our former President and Chief ExecutiveOfficer, entered into a Separation and Mutual Release Agreement (the “LovettRelease”) in connection with his resignation from the Company in January 2009.Pursuant to the Lovett Release, Toreador amended certain terms and conditionsof Mr. Lovett’s 2009 employment agreement (the “2009 Employment Agreement”)with Toreador. The terms of the 2009 Employment Agreement, as amended, providefor Toreador to:  (i) pay Mr. Lovettall unpaid compensation earned but not paid, (ii) pay Mr. Lovettcertain severance payments totaling $720,000 to be paid in 24 equal monthlyinstallments, (iii) issue 90,000 shares of Toreador common stock to Mr. Lovett,and (iv) vest 6,800 shares of Toreador restricted stock held by Mr. Lovett.  The cost associated with the Lovett Releasetotaled $832,000, which was recorded in the first quarter of 2009.

 

*Cost associated with the Dallas office/ relocation ofcorporate headquarters from Dallas, Texas to Paris, France*

 

For the six months ended June 30, 2010, we did not have anyrelocation costs. For the six months ended June 30, 2009 we had $3.4million of costs associated with the Dallas office/ relocation of ourheadquarters to Paris, France. The major components are: 1) salaries and wagesassociated with Dallas office employees $969,000; 2) severance payments $1.4million; 3) corporate restructuring expenses $626,000; 4) travel associatedwith Dallas office employees $312,000 and 5) Dallas office rent $137,000.

 

*Gain on oil and gas derivative contracts*

 

Gain on oil and gas derivative contracts for the six months ended June 30,2010 was $814,000 (as compared to zero for the six months ended June 30,2009) representing the unrealized gain on the commodity derivative contractswith Vitol Trading. We had no derivative contract covering the period in 2009.Presented in the table below is a summary of the contract entered into:

 
| **Type** | ** ** | **Period**                                          | ** ** | **Barrels** | ** ** | **Floor** | ** ** | **Ceiling** | ** ** | **Unrealized gain for the  three months ended  June ****30,****2010** | ** ** |
|----------|------------|-----------------------------------------------------|------------|-------------|------------|-----------|------------|-------------|------------|----------------------------------------------------------------------------|------------|
|     |       |                                                |       |        |       |      |       |        |       |                                                                       |       |
| Collar   |       | January 1,  2010 – December 31, 2010 |       | 182,500     |       | $         | 68.00      |        | $          | 81.00                                                                      |       | $ | 814 |   |
|          |            |                                                     |            |             |            |           |            |             |            |                                                                            |            |  |  |  |

 

*Foreign currency exchange gain (loss)*

 

We recorded a loss on foreign currency exchange of $77,000 for the sixmonths ended June 30, 2010 compared with a loss of $557,000 for the sixmonths ended June 30, 2009. This decrease is primarily due to thestrengthening of the U.S. dollar over the period combined with the fact thatthe Company had access to U.S. dollar capital resources due to the ConvertibleNotes Exchange, our February 2010 public offering and the $15 millionupfront payment from Hess under the Investment Agreement, which exceeded ouroil sale revenue, which is paid in Euros.

 

*(Loss) gain on the early extinguishment of debt*

 

We recorded a loss of $4.3 million on the early extinguishment of debtcompared to a gain of $3.4 million in the six months ended June 30, 2009. Thisloss occurred following the Convertible Notes Exchange on February 1,2010. In 2009 the Company repurchased $25.7 million face value of the 5.00%Convertible Senior Notes on the open market for $21.3 million, resulting in again on the early extinguishment of debt of $3.4 million after writing offdeferred loan costs of approximately $1 million.

 

*Interest expense, net of capitalized interest*

 

Interest expense, net of capitalized interest was $1.7 million for thesix months ended June 30, 2010, as compared to $1.4 million for the sixmonths ended June 30, 2009. The increase is mainly due to the interestpayments relating to the New Convertible Senior Notes issued in February 2010,which was offset by decreased interest payments relating to the 5.00% ConvertibleSenior Notes, of which $22.2 million of the aggregate principal amountoutstanding were exchanged for a portion of the New Convertible Senior Notes inthe Convertible Notes Exchange. Interest expense for the New Convertible SeniorNotes was $843,000 for the six months ended June 30,

 

39

----

Table of Contents

 

2010 as compared to zero for the six months ended June 30,2009.  Interest expense for the 5.00%Convertible Senior Notes was $902,000 for the six months ended June 30,2010 as compared to $1,800,000 for the six months ended June 30, 2009.Amortization of loan fees of $98,464 was recorded for the period ended June 30,2010 compared to $107,569 for the period ended June 30, 2009.

 

*Income tax (benefit) provision*

 

Anincome tax provision of $6.4 million was recorded in the six months ended June 30,2010, compared to a tax benefit of $769,000 recognized for the six months endedJune 30, 2009. This increase is due to the provision for income taxpayable in France for the year ended December 31, 2010 as a result of the$15 million upfront payment from Hess under the Investment Agreement togetherwith earnings estimate for operations in France based on oil productionactivity.

 

*Discontinued operations*

 

In the fourth quarter of 2008 and during the first quarter of 2009,Toreador farmed out or sold all of its working interests in Romania to threedifferent companies and closed its office; thus, we no longer have anyoperational involvement in Romania. This resulted in a gain of $5.8 million,which was recorded in the first quarter of 2009.

 

On March 3, 2009 we completed the sale of a 26.75% interest in theSouth Akcakoca Sub-Basin (SASB) project associated licenses located in theBlack Sea offshore Turkey, to Petrol Ofisi for $55 million. In accordance withthe revised assignment announced on February 3, 2009, $50 million of theproceeds was paid by Petrol Ofisi on March 3, 2009, and the remaining $5million was paid on September 1, 2009. There was no gain or loss resultingfrom this sale.

 

On September 30, 2009, the Company entered into the Share PurchaseAgreement with Tiway, and Tiway Oil AS, a company organized under the laws ofNorway, pursuant to which the Company agreed to sell 100% of the outstandingshares of Toreador Turkey Ltd. to Tiway for total consideration consisting of: (1) acash payment of $10.5 million to be paid at closing, (2) explorationsuccess payments dependent upon certain future commercial discoveries asprovided in the Share Purchase Agreement, up to a maximum aggregateconsideration of $40 million, and (3) future quarterly 10% pre-tax netprofit interest payments if a field goes into production that was discovered byan exploration well drilled within four years of closing on certain of thelicenses then still held by Tiway. The sale of Toreador Turkey Ltd. wascompleted on October 7, 2009 and resulted in a gain of $1.8 million.

 

On September 30, 2009, the Company entered into the Quota PurchaseAgreement RAG, pursuant to which the Company agreed to sell 100% of its equityinterests in Toreador Hungary Limited to RAG for total consideration consistingof (1) a cash payment of $5.4 million (€ 3.7 million) paid at closing, (2) $435,000(€ 300,000), which was held back subject to a post-closing adjustment and waspaid to us on November 5, 2009 and (3) a contingent payment of $2.9million (€2 million) to be paid upon post-transaction completion of agreementsrelating to certain assets of Toreador Hungary. The sale of Toreador Hungarywas completed on September 30, 2009 and resulted in a loss of $4.1million.

 

The results of operations of assets in Romania, Turkey and Hungary havebeen presented as discontinued operations in the accompanying consolidatedstatement of operations.  Results forthese assets reported as discontinued operations were as follows:

 
| ** **                                              | ** ** | **Six Months Ended********June 30,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                              | ** ** | **2010**                                  | ** ** | **2009** | ** ** |
| Revenue and other income                                |       |                                      |       |   |   |
| Sales and other operating revenue                       |       | $                                         | —     |   | $ | 2,913 |   |
| Operating costs and expenses:                           |       |                                      |       |   |   |
| Lease operating expense                                 |       | —                                    |       | 503 |   |
| Exploration expense                                     |       | —                                    |       | 230 |   |
| Depreciation, depletion and amortization                |       | —                                    |       | — |   |
| Impairment of oil and natural gas properties            |       | —                                    |       | 5,300 |   |
| General and administrative expense                      |       | 657                                       | (1)        | 1,524 |   |
| Gain on sale of properties and other assets in  Romania |       | —                                    |       | (5,846 | ) |
| Total operating costs and expenses                      |       | 657                                       |       | 1,711 |   |
| Operating income (loss)                                 |       | (657                                      | )          | 1,202 |   |
| Other income (expense)                                  |       |                                      |       |   |   |
| Foreign currency exchange gain                          |       | —                                    |       | 3,319 |   |
| Interest and other income                               |       | —                                    |       | 314 |   |
| Loss on early extinguishment of debt                    |       | —                                    |       | (4,881 | ) |
| Other expense                                           |       | 165                                       |       | — |   |
| Interest expense                                        |       | —                                    |       | (23 | ) |
| Net loss before income taxes                            |       | —                                    |       | (69 | ) |
| Income tax benefit                                      |       | —                                    |       | — |   |
| Loss from discontinued operations                       |       | $                                         | (822       | ) | $ | (69 | ) |

 

----

(1)         Residual exitcosts.

 

40

----

Table of Contents

 

We had no sales and other operating revenue from discontinuedoperations for the six months ended June 30, 2010 due to the sale of allour discontinued operations in 2009.  Wehad general and administrative expenses of $657,000 as a result of the paymentmade to Scowcroft under the Settlement Agreement on April 30, 2010 andassociated legal costs, and thus recorded a loss of $657,000.

 

The following tables present production and average unit prices forTurkey:

 
| ** **      | ** ** | **For the Six********Months Ended********June 30,** | ** ** |
|-----------------|------------|----------------------------------------------------------|------------|
| ** **      | ** ** | **2010**                                                 | ** ** | **2009** | ** ** |
| **Production:** |       |                                                     |       |   |   |
| Oil (MBbls):    |       |                                                     |       |   |   |
| Turkey          |       | —                                                   |       | 25 |   |
| Gas (MMcf):     |       |                                                     |       |   |   |
| Turkey          |       | —                                                   |       | 196 |   |
| MBOE:           |       |                                                     |       |   |   |
| Turkey          |       | —                                                   |       | 58 |   |

 
| ** **              | ** ** | **For the Six********Months Ended********June 30,** | ** ** |
|-------------------------|------------|----------------------------------------------------------|------------|
| ** **              | ** ** | **2010**                                                 | ** ** | **2009** | ** ** |
| **Average Price:** |       |                                                     |       |   |   |
| Oil  ($/Bbl):           |       |                                                     |       |   |   |
| Turkey                  |       | —                                                   |       | $ | 44.69 |   |
| Gas  ($/Mcf):           |       |                                                     |       |   |   |
| Turkey                  |       | —                                                   |       | $ | 9.18 |   |
| $/BOE:                  |       |                                                     |       |   |   |
| Turkey                  |       | —                                                   |       | $ | 50.62 |   |

 

***Other comprehensive income***

 

The most significant element of comprehensive income, other than netincome, is foreign currency translation. For the six months ended June 30,2010, we had accumulated an unrealized loss of $6.5 million, as compared to anunrealized income of $2.3 million for the six months ended June 30,2009.  This is primarily due to thestabilization of the U.S. dollar compared to the Euro.

 

The functional currency of our operations in France is U.S. dollar. Thefunctional currency in Turkey and Hungary was the U.S. dollar. The exchangerates at June 30, 2010 and 2009 were:

 
| ** **       | ** ** | **June 30,** | ** ** |
|------------------|------------|-------------------|------------|
| ** **       | ** ** | **2010**          | ** ** | **2009** | ** ** |
| Euro             |       | $                 | 1.22711    |   | $ | 1.4134 |   |
| New Turkish Lira |       | —            |       | $ | 0.6539 |   |
| Hungarian Forint |       | —            |       | $ | 0.0052 |   |
|                  |            |                   |            |  |  |  |  |

 

**Off-balance sheet arrangements**

 

We have no off-balance sheet arrangements that have or are reasonablylikely to have a current or future material effect on our financial condition,changes in financial condition, revenues or expenses, results of operations,liquidity, capital expenditures or capital resources.

 

**ITEM 3.*  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK***

 

There have been no material changes in the Company’s market risk duringthe three months ended June 30, 2010. For additional information, refer tothe market risk disclosure in Item 7A as presented in the Company’s

 

41

----

Table of Contents

 

Annual Report on Form 10-K, for the year ended December 31,2009, which was filed with the SEC on March 16, 2010.

 

**ITEM 4.*  CONTROLS AND PROCEDURES***

 

**Evaluation of Disclosure Controlsand Procedures - Change in Internal Control over Financial Reporting**

 

We maintain disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)that are designed to provide reasonable assurance that the information requiredto be disclosed by us in reports filed under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in therules and forms of the SEC.

 

We carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and our Chief Financial Officer of the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisinterim report.

 

During the evaluation of our disclosurecontrols and procedures conducted as of June 30, 2010, management concludedthat the following material weakness it identified as of December 31, 2009(disclosed in its Annual Report on Form 10-K filed on March 16, 2010) has notyet been remedied.

 

•      Our accounting and financial reporting procedures were not sufficientlydesigned to ensure consistent and complete application of our accountingpolicies and to prepare financial statements in accordance with accountingprinciples generally accepted in the United States. This includes the lack of asufficient review of sensitive calculations, reconciliations and criticalspreadsheets by personnel in key financial reporting positions.

 

Despite the measures taken over the firsthalf 2010, which include additional corporate and external resources and thestrengthening of control and review of sensitive calculations, reconciliationsand critical spreadsheets, the Company's accounting procedures remain notsufficiently designed to ensure consistent and complete application of our accountingpolicies and to prepare financial statements in accordance with accountingprinciples generally accepted in the United States.

 

Consequently, the Company, followingdiscussions with management, intends to hire an external consultant to reviewits accounting and financial reporting procedures and propose necessarychanges. Further, following the analysis and recommendations of a majorconsultant firm, the Company has initiated the process to receive and reviewproposals for implementation of a new group accounting software adapted to thecurrent needs of the Company and to its future development, and we expect toreceive offers from providers in September 2010.

 

42

----

Table of Contents

 

**PART II. OTHER INFORMATION**

 

**ITEM 1.*  LEGAL PROCEEDINGS***

 

SeeNote 11, which is incorporated into this “Item 1. Legal Proceedings” byreference.

 

**ITEM 1A.*RISKFACTORS***

 

There have been no material changes to the risk factors previouslydiscussed in the Company’s Annual Report on Form 10-K for the year ended December 31,2009, which was filed with the SEC on March 16, 2010.

 

**ITEM 2.  *UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS***

 

**Share Repurchase Program**

 

OnMay 27, 2010, the Board of Directors authorized a share repurchase programfor the repurchase of up to $5 million of shares of Toreador common stock inthe open market or in private transactions at the discretion of management overthe next 12 months.  The Company has noobligation to repurchase shares under the program, and the program may besuspended at any time.  As of June 30,2010, no shares of Toreador common stock have been repurchased pursuant to theshare repurchase program.

 

**ITEM 6.*  EXHIBITS***

 
| **Exhibit********Number** | ** ** | **Description**                                                                                                                                                                                   | ** ** | **Incorporation by Reference**                                      |
|---------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|
| 10.1                      |       | Investment  Agreement, dated May 10, between Toreador and Hess                                                                                                                               |       | Exhibit 10.1  to the Form 8-K filed on May 10, 2010. |
| 31.1                      |       | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                    |       | Filed  Herewith.                                                    |
|                      |       |                                                                                                                                                                                              |       |                                                                |
| 31.2                      |       | Certification  of— Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                              |       | Filed  Herewith.                                                    |
|                      |       |                                                                                                                                                                                              |       |                                                                |
| 32.1                      |       | Certification  of Chief Executive Officer and— Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |       | Filed  Herewith.                                                    |

 

43

----

Table of Contents

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this Form 10-Q report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                 |   | TOREADOR  RESOURCES CORPORATION        |
|----------------------|--------|----------------------------------------|
|                 |   |                                   |
|                 |   |                                   |
| August 9,  2010 |   | /s/  Craig M. McKenzie                 |
|                 |   | Craig  M. McKenzie                     |
|                 |   | President  and Chief Executive Officer |
|                 |   |                                   |
|                 |   |                                   |
| August 9,  2010 |   | /s/  Marc Sengès                  |
|                 |   | Marc  Sengès                      |
|                 |   | Chief  Financial Officer               |

 

44

----