##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-KSB
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 001-31547
 FOOTHILLS RESOURCES, INC.
  Nevada
    
    98-0339560(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification Number)4540 California Avenue, Suite 550Bakersfield, California
    
    93309(Address of principal executive offices)
    
    (Zip Code)
 (661) 716-1320
  None
    
    None(Title of Class)
    
    (Name of Each Exchangeon Which Registered)
  Common Stock, $0.001 par value
    
    None(Title of Class)
    
    (Name of Each Exchangeon Which Registered)
 o
 þ o
 o
 o þ




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##### 



FOOTHILLS RESOURCES, INC. AND SUBSIDIARIES
 FORM 10-KSB
 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
 INDEX
 PagesPART I.
    
    
    
    
    1Item 1.
    
    Description of Business
    
    
    1Item 2.
    
    Description of Property
    
    
    4Item 3.
    
    Legal Proceedings
    
    
    11Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    11PART II.
    
    
    
    
    11Item 5.
    
    Market for Common Equity and Related Stockholders Matters
    
    
    11Item 6.
    
    Managements Discussion and Analysis or Plan of Operation
    
    
    11Item 7.
    
    Financial Statements
    
    
    25Item 8.
    
    Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
    
    
    25Item 8A.
    
    Controls and Procedures
    
    
    47Item 8B.
    
    Other Information
    
    
    47PART III.
    
    
    
    
    47Item 9.
    
    Directors, Executive Officers, Promoters, Control Persons and
Corporate Governance; compliance with Section 16(a) of the Exchange Act
    
    
    47Item 10.
    
    Executive Compensation
    
    
    49Item 11.
    
    Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
    
    
    49Item 12.
    
    Certain Relationships and Related Transactions, and Director
Independence
    
    
    49Item 13.
    
    Exhibits
    
    
    49Item 14.
    
    Principal Accountant Fees and Services
    
    
    53SIGNATURES
    
    
    
    
    54Certificate of Amendment of the Articles of IncorporationList of SubsidiariesConsent of Independent Registered Public Accounting FirmConsent of Independent Reservoir EngineersCertification of PEO Pursuant to Rule 13a-14Certification of PFO Pursuant to Rule 13a-14Certification of PEO Pursuant to Section 906Certification of PFO Pursuant to Section 906
  i




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References in this Annual Report on Form 10-KSB (this Form 10-KSB or this Report) to
Foothills, the Company, we, our, and us refers to Foothills Resources, Inc., a Nevada
corporation, and our wholly owned subsidiaries.
  This Form 10-KSB contains statements that constitute forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act
of 1933. This Report includes statements regarding our plans, goals, strategies, intent, beliefs
or current expectations. These statements are expressed in good faith and based upon a reasonable
basis when made, but there can be no assurance that these expectations will be achieved or
accomplished. These forward looking statements can be identified by the use of terms and phrases
such as believe, plan, intend, anticipate, target, estimate, expect, and the like,
and/or future-tense or conditional constructions may, could, should, etc. Items contemplating
or making assumptions about, actual or potential future sales, market size, collaborations, and
trends or operating results also constitute such forward-looking statements. These
forward-looking statements are not guarantees of future performance and involve risks and
uncertainties, and actual results may differ materially from those projected in this Report, for
the reasons, among others, discussed in the Sections  Managements Discussion and Analysis of
Financial Condition and Results of Operations, Although we believe that the
expectations reflected in our forward-looking statements are reasonable, actual results could
differ materially from those projected or assumed. Our future financial condition, as well as any
forward-looking statements, are subject to change and to inherent risks and uncertainties,
including those disclosed in this Report. We undertake no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after the date hereof.
 
 PART I.
 
 Item 1. Description of Business.
 Company Overview




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Markets and Customers
   Regulations
 General
    Federal Regulation of Sales and Transportation of Natural Gas
  2




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State Regulation
   Environmental Matters
     3




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Competition
  Employees
  
 Item 2. Description of Property.
  California
 Eel River Basin
   4




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
    
    We serve as operator of a joint venture with INNEX California, Inc., and have the
right to earn an interest in approximately 4,000 existing leasehold acres held by INNEX
California, Inc. in the basin, and to participate as operator with INNEX California,
Inc. in oil and gas acquisition, exploration and development activities within an area
of mutual interest consisting of the entire Eel River Basin.
    
    The agreement provides for drill-to-earn terms, and consists of three phases.
    
    In Phase I, we were obligated to pay 100% of the costs of drilling two shallow wells
on the Grizzly Bluff Prospect, acquiring 1,000 acres of new leases, and certain other
activities. We have fulfilled our obligations under Phase I, and have received an
assignment from INNEX California, Inc. of a 75% working interest (representing an
approximate 56.3% net revenue interest) in the leases held by INNEX California, Inc. in
the two drilling units to the deepest depth drilled in the two Phase I obligation
wells.
    
    We then had the option, but not the obligation, to proceed into Phase II. We
elected to proceed into Phase II and have paid the costs of conducting a 3D seismic
survey covering approximately 12.7 square miles on the Grizzly Bluff Prospect and of
drilling one additional shallow well. We have fulfilled our obligations under Phase
II, and have received an assignment from INNEX California, Inc. of a 75% working
interest (representing an approximate 56.3% net revenue interest) in the leases held by
INNEX California, Inc. in the drilling unit for the well drilled in Phase II and a 75%
working interest (representing an approximate 59.3% net revenue interest) in all
remaining leases held by INNEX California, Inc. to the deepest depth drilled in the
three Phase I and II obligation wells.
    
    We then had the option, but not the obligation, to proceed into Phase III. We
elected to proceed into Phase III, and are paying 100% of the costs of drilling one
deep well on the Grizzly Bluff Prospect. Upon completion of Phase III, we will receive
an assignment from INNEX California, Inc. of a 75% working interest (representing an
approximate 56.3% net revenue interest) in the leases held by INNEX California, Inc. in
the drilling unit and a 75% working interest (representing an approximate 59.3% net
revenue interest) in all remaining leases held by INNEX California, Inc. with no depth
limitation.
 5




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
    
    After completion of Phase III, the two parties will each be responsible for funding
their working interest share of the joint ventures costs and expenses. We will
generally have a 75% working interest in activities conducted on specified prospects
existing at the time of execution of the agreement, and a 70% working interest in other
activities. Each party will be able to elect not to participate in exploratory wells
on a prospect-by-prospect basis, and a non-participating party will lose the
opportunity to participate in development activities and all rights to production
relating to that prospect.
    
    We are also entitled to a proportionate assignment from INNEX California, Inc. of
its rights to existing permits, drill pads, roads, rights-of-way, and other
infrastructure, as well as its pipeline access and marketing arrangements.
    
    INNEX California, Inc. has an option to participate for a 25% working interest in
certain producing property acquisitions by us in the area of mutual interest.
      6




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Texas
      7




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Oklahoma
 Anadarko Basin
    Oil and Gas Reserves
  California
    
    Texas
    
    TotalTotal Proved Reserves:Oil (Bbls)
    
    
    
    
    
    
    4,173,798
    
    
    
    4,173,798Gas (Mcf)
    
    
    20,981,597
    
    
    
    821,471
    
    
    
    21,803,168Total barrels of oil equivalent (BOE)
    
    
    3,496,933
    
    
    
    4,310,710
    
    
    
    7,807,643Total Proved Developed Reserves:Oil (Bbls)
    
    
    
    
    
    
    3,884,302
    
    
    
    3,884,302Gas (Mcf)
    
    
    1,707,100
    
    
    
    729,903
    
    
    
    2,437,003Total barrels of oil equivalent (BOE)
    
    
    284,517
    
    
    
    4,005,953
    
    
    
    4,290,470Standardized measure of discounted
future net cash flow (in thousands)
    
    
    
    
    
    
    
    
    
    $
    136,128
 8




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Net Quantities of Oil and Gas Produced
  2007
    
    2006Net sales volumesOil (Bbls)
    
    
    185,110
    
    
    
    69,973Gas (Mcf)
    
    
    135,146
    
    
    
    30,135Total (BOE)
    
    
    207,634
    
    
    
    74,995Average sales priceOil (per Bbl), excluding the effects of price risk management activities
    
    $
    77.62
    
    
    $
    58.17Oil (per Bbl), including the effects of price risk management activities
    
    $
    76.54
    
    
    $
    63.09Gas (per Mcf)
    
    $
    7.42
    
    
    $
    6.34Average production costs (per BOE):Lease operating expense
    
    $
    16.98
    
    
    $
    11.61Severance and ad valorem taxes
    
    $
    6.33
    
    
    $
    6.17Marketing and transportation expense
    
    $
    0.32
    
    
    $
    0.18Total average production costs
    
    $
    23.63
    
    
    $
    17.96
 Productive Wells
  Number of WellsOil
    
    Natural Gas
    
    TotalGross (1)
    
    Net (2)
    
    Gross (1)
    
    Net (2)
    
    Gross (1)
    
    Net (2)California
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    0.8
    
    
    
    1
    
    
    
    0.8Texas
    
    
    78
    
    
    
    77.9
    
    
    
    
    
    
    
    
    
    
    
    78
    
    
    
    77.9Total
    
    
    78
    
    
    
    77.9
    
    
    
    1
    
    
    
    0.8
    
    
    
    79
    
    
    
    78.7
 
 (1)
    
    Represents the total number of wells at each property.(2)
    
    Represents our interests in the total number of wells at each property. Developed and Undeveloped Acreage
  9




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AcresDeveloped
    
    Undeveloped
    
    TotalGross (1)
    
    Net (2)
    
    Gross (1)
    
    Net (2)
    
    Gross (1)
    
    Net (2)California
    
    
    729
    
    
    
    547
    
    
    
    15,378
    
    
    
    11,381
    
    
    
    16,107
    
    
    
    11,928Texas
    
    
    2,722
    
    
    
    2,694
    
    
    
    320
    
    
    
    320
    
    
    
    3.042
    
    
    
    3,014Total
    
    
    3,451
    
    
    
    3,241
    
    
    
    15,698
    
    
    
    11,701
    
    
    
    19,149
    
    
    
    14,942
 
 (1)
    
    Represents the total acreage at each property.(2)
    
    Represents our interests in the total acreage at each property. Drilling Activity
  Period from Commencementof Present BusinessActivitiesYear Ended
    
    in April 2006 throughDecember 31, 2007
    
    December 31, 2006Gross (1)
    
    Net (2)
    
    Gross (1)
    
    Net (2)Exploration:Productive
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    1.5Dry
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Development:Productive
    
    
    3
    
    
    
    3.0
    
    
    
    
    
    
    
    Dry
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalProductive
    
    
    3
    
    
    
    3.0
    
    
    
    2
    
    
    
    1.5Dry
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Represents the total number of wells for which there was drilling activity.(2)
    
    Represents our interests in the total number of wells for which there is drilling activity. Present Activities
   
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Item 3. Legal Proceedings.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 PART II.
 
 Item 5. Market for Common Equity and Related Stockholders Matters.
  Fiscal Period
    
    High
    
    Low2007:Fourth Quarter 2007
    
    $
    1.11
    
    
    $
    0.79Third Quarter 2007
    
    $
    1.32
    
    
    $
    0.81Second Quarter 2007
    
    $
    1.50
    
    
    $
    0.86First Quarter 2007
    
    $
    2.10
    
    
    $
    1.022006:Fourth Quarter 2006
    
    $
    2.41
    
    
    $
    1.15Third Quarter 2006
    
    $
    3.88
    
    
    $
    2.08Second Quarter 2006 (from April 7)
    
    $
    4.16
    
    
    $
    1.67
  Dividend Policy
  Recent Sales of Unregistered Securities
  
 Item 6. Managements Discussion and Analysis or Plan of Operation.
 Forward Looking Statements
  11




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Overview
       12




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
    
    Foothills California serves as operator of a joint venture with INNEX, and has the
right to earn an interest in approximately 4,000 existing leasehold acres held by INNEX
in the basin, and to participate as operator with INNEX in oil and gas acquisition,
exploration and development activities within an area of mutual interest consisting of
the entire Eel River Basin.
    
    The agreement provides for drill-to-earn terms, and consists of three phases.
    
    In Phase I, Foothills California was obligated to pay 100% of the costs of drilling
two shallow wells, acquiring 1,000 acres of new leases, and certain other activities.
The Company has fulfilled its obligations under Phase I, and has received an assignment
from INNEX of a 75% working interest (representing an approximate 56.3% net revenue
interest) in the leases held by INNEX in the two drilling units to the deepest depth
drilled in the two Phase I obligation wells.
    
    Foothills California then had the option, but not the obligation, to proceed into
Phase II. It elected to proceed into Phase II, and has paid the costs of conducting a
3D seismic survey covering approximately 12.7 square miles and of drilling one
additional shallow well. The Company has fulfilled its obligations under Phase II, and
has received an assignment from INNEX of a 75% working interest (representing an
approximate 56.3% net revenue interest) in the leases held by INNEX in the drilling
unit for the well drilled in Phase II and a 75% working interest (representing an
approximate 59.3% net revenue interest) in all remaining leases held by INNEX to the
deepest depth drilled in the three Phase I and II obligation wells.
    
    Foothills California then had the option, but not the obligation, to proceed into
Phase III. It elected to proceed into Phase III, and is paying 100% of the costs of
drilling one deep well. Upon completion of Phase III, the Company will receive an
assignment from INNEX of a 75% working interest (representing an approximate 56.3% net
revenue interest) in the leases held by INNEX in the drilling unit and a 75% working
interest (representing an approximate 59.3% net revenue interest) in all remaining
leases held by INNEX with no depth limitation.
    
    After completion of Phase III, the two parties will each be responsible for funding
their working interest share of the joint ventures costs and expenses. Foothills
California will generally have a 75% working interest in activities conducted on
specified prospects existing at the time of execution of the agreement, and a 70%
working interest in other activities. Each party will be able to elect not to
participate in exploratory wells on a prospect-by-prospect basis, and a
non-participating party will lose the opportunity to participate in development
activities and all rights to production relating to that prospect.
    
    Foothills California is also entitled to a proportionate assignment from INNEX of
its rights to existing permits, drill pads, roads, rights-of-way, and other
infrastructure, as well as its pipeline access and marketing arrangements.
    
    INNEX has an option to participate for a 25% working interest in certain producing
property acquisitions by the Company in the area of mutual interest.
 Results of Operations
 Year Ended December 31, 2007 compared with the Year Ended December 31, 2006
  13




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Year Ended December 31, 2006 compared with the Period from Inception (December 29, 2005) through
December 31, 2005
  Off-Balance Sheet Arrangements
  Hedging Transactions
   14




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RISK FACTORS
 Several of the matters discussed in this Report contain forward-looking statements that involve
risks and uncertainties. Factors associated with the forward-looking statements that could cause
actual results to differ from those projected or forecasted in this Report are included in the
statements below. In addition to other information contained in this Report, you should carefully
consider the following cautionary statements and risk factors. The risks and uncertainties
described below are not the only risks and uncertainties we face. If any of the following risks
actually occur, our business, financial condition, and results of operations could suffer. In that
event, the trading price of our common stock could decline, and you may lose all or part of your
investment in our common stock. The risks discussed below also include forward-looking statements
and our actual results may differ substantially from those discussed in these forward-looking
statements.
 RISKS RELATED TO OUR BUSINESS
 We have a limited operating history for you to evaluate our business. We may never attain
profitability.
   Our lack of diversification will increase the risk of an investment in Foothills, and our financial
condition and results of operations may deteriorate if we fail to diversify.
  15




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Strategic relationships upon which we may rely are subject to change, which may diminish our
ability to conduct our operations.
   Competition in obtaining rights to explore and develop oil and gas reserves and to market our
production may impair our business.
  We may be unable to obtain additional capital that we will require to implement our business plan,
which could restrict our ability to grow.
    16




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We may not be able to effectively manage our growth, which may harm our profitability.
  
    
    meet our capital needs;
    
    expand our systems effectively or efficiently or in a timely manner;
    
    allocate our human resources optimally;
    
    identify and hire qualified employees or retain valued employees; or
    
    incorporate effectively the components of any business that we may acquire in our
effort to achieve growth.
  Our business may suffer if we do not attract and retain talented personnel.
   17




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Our management team does not have extensive experience in public company matters, which could
impair our ability to comply with legal and regulatory requirements.
  Risks related to our prior business may adversely affect our business.
  Our hedging activities could result in financial losses or could reduce our net income, which may
adversely affect an investment in our common stock.
   
    
    our production is less than expected;
    
    there is a widening of price differentials between delivery points for our
production and the delivery point assumed in the hedge arrangement; or
    
    the counterparties to our hedging agreements fail to perform under the contracts.
 18




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RISKS RELATED TO OUR INDUSTRY
 Our exploration for oil and gas is risky and may not be commercially successful, and the 3D seismic
data and other advanced technologies we use can not eliminate exploration risk, which could impair
our ability to generate revenues from our operations.
   We may not be able to develop oil and gas reserves on an economically viable basis, and our
reserves and production may decline as a result.
   Estimates of oil and natural gas reserves that we make may be inaccurate and our actual revenues
may be lower than our financial projections.
  19




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Drilling new wells could result in new liabilities, which could endanger our interests in our
properties and assets.
  Decommissioning costs are unknown and may be substantial. Unplanned costs could divert resources
from other projects.
  Our inability to obtain necessary facilities could hamper our operations.
  We may have difficulty distributing our production, which could harm our financial condition.
  20




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Prices and markets for oil and natural gas are unpredictable and tend to fluctuate significantly,
which could reduce profitability, growth and the value of our business.
  Increases in our operating expenses will impact our operating results and financial condition.
  Penalties we may incur could impair our business.
  Environmental risks may adversely affect our business.
  21




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Our insurance may be inadequate to cover liabilities we may incur.
  Our business will suffer if we cannot obtain or maintain necessary licenses.
  Challenges to our properties may impact our financial condition.
   We will rely on technology to conduct our business and our technology could become ineffective or
obsolete.
  RISKS RELATED TO OUR COMMON STOCK
 There has been a limited trading market for our common stock and no market for our warrants.
  22




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You may have difficulty trading and obtaining quotations for our common stock or warrants.
  The market price of our common stock is, and is likely to continue to be, highly volatile and
subject to wide fluctuations.
  
    
    dilution caused by our issuance of additional shares of common stock and other forms
of equity securities, which we expect to make in connection with future capital
financings to fund our operations and growth, to attract and retain valuable personnel
and in connection with future strategic partnerships with other companies;
    
    announcements of new acquisitions, reserve discoveries or other business initiatives
by our competitors;
    
    our ability to take advantage of new acquisitions (such as our acquisition of
certain properties of TARH E&P Holdings, L.P., reserve discoveries or other business
initiatives);
    
    fluctuations in revenue from our oil and gas business as new reserves come to
market;
    
    changes in the market for oil and natural gas commodities and/or in the capital
markets generally;
    
    changes in the demand for oil and natural gas, including changes resulting from the
introduction or expansion of alternative fuels;
    
    quarterly variations in our revenues and operating expenses;
    
    changes in the valuation of similarly situated companies, both in our industry and
in other industries;
    
    changes in analysts estimates affecting our company, our competitors and/or our
industry;
    
    changes in the accounting methods used in or otherwise affecting our industry;
    
    additions and departures of key personnel;
    
    announcements of technological innovations or new products available to the oil and
gas industry;
    
    announcements by relevant governments pertaining to incentives for alternative
energy development programs;
    
    fluctuations in interest rates and the availability of capital in the capital
markets; and
    
    significant sales of our common stock or warrants.
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Our operating results may fluctuate significantly, and these fluctuations may cause the price of
our common stock and our warrants to decline.
  We do not expect to pay dividends in the foreseeable future.
  Stockholders will experience dilution upon the exercise of warrants and options.
  Directors and officers of the Company have a high concentration of common stock ownership.
  Applicable SEC rules governing the trading of penny stocks limit the trading and liquidity of our
common stock, which may affect the trading price of our common stock.
  24




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Item 7. Financial Statements
 FOOTHILLS RESOURCES, INC. AND SUBSIDIARIES
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    26Consolidated Balance Sheets as of December 31, 2007 and December 31, 2006
    
    
    27Consolidated Statements of Operations
for the years ended December 31, 2007 and 2006 and the period from inception
(December 29, 2005) through December 31, 2005
    
    
    28Consolidated Statements of Cash Flows
for the years ended December 31, 2007 and 2006 and the period from inception
(December 29, 2005) through December 31, 2005
    
    
    29Consolidated Statements of Stockholders Equity
for the years ended December 31, 2007 and 2006 and the period from inception
(December 29, 2005) through December 31, 2005
    
    
    30Notes to Consolidated Financial Statements
    
    
    32
 25




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    
 
 26




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FOOTHILLS RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
 December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    165
    
    
    $
    8,673Accounts receivable
    
    
    1,880
    
    
    
    1,452Prepaid expenses
    
    
    212
    
    
    
    212Fair value of derivative financial instruments
    
    
    
    
    
    
    8332,257
    
    
    
    11,170Property and equipment, at cost:Oil and gas properties, using full-cost accounting -
Proved properties
    
    
    75,215
    
    
    
    64,850Unproved properties not being amortized
    
    
    760
    
    
    
    420Other property and equipment
    
    
    533
    
    
    
    47576,508
    
    
    
    65,745Less accumulated depreciation, depletion and amortization
    
    
    (3,554
    )
    
    
    (814
    )72,954
    
    
    
    64,931Other assets
    
    
    3,413
    
    
    
    1,466$
    78,624
    
    
    $
    77,567LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    
    
    
    $
    2,509Accounts payable and accrued liabilities
    
    
    5,669
    
    
    
    2,600Fair value of derivative financial instruments
    
    
    3,228
    
    
    
    Liquidated damages
    
    
    2,591
    
    
    
    11,488
    
    
    
    5,109Long-term debt
    
    
    52,243
    
    
    
    29,666Asset retirement obligations
    
    
    628
    
    
    
    570Fair value of derivative financial instruments
    
    
    3,571
    
    
    
    Stockholders equity:Preferred
stock, $0.001 par value - 25,000,000 shares authorized, none issued and outstanding
    
    
    
    
    
    
    Common
stock, $0.001 par value - 250,000,000 shares authorized, 60,572,442 and 60,376,829
shares issued and outstanding at December 31, 2007 and 2006
    
    
    61
    
    
    
    60Additional paid-in capital
    
    
    47,224
    
    
    
    44,331Accumulated deficit
    
    
    (29,792
    )
    
    
    (3,764
    )Accumulated other comprehensive income (loss)
    
    
    (6,799
    )
    
    
    1,59510,694
    
    
    
    42,222$
    78,624
    
    
    $
    77,567
  27




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##### Table of Contents



FOOTHILLS RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
 Inception(December29, 2005)Year Ended
    
    
    throughDecember 31,
    
    
    December2007
    
    
    2006
    
    
    31, 2005Income:Oil and gas revenues
    
    $
    15,171
    
    
    $
    4,605
    
    
    $
    Interest income
    
    
    256
    
    
    
    248
    
    
    
    15,427
    
    
    
    4,853
    
    
    
    Expenses:Production costs
    
    
    4,907
    
    
    
    1,346
    
    
    
    General and administrative
    
    
    3,374
    
    
    
    3,352
    
    
    
    Interest
    
    
    10,205
    
    
    
    3,090
    
    
    
    Liquidated damages
    
    
    2,591
    
    
    
    
    
    
    
    Depreciation, depletion and amortization
    
    
    2,785
    
    
    
    829
    
    
    
    Loss on early extinguishment of debt
    
    
    17,593
    
    
    
    
    
    
    
    41,455
    
    
    
    8,617
    
    
    
    Net loss
    
    $
    (26,028
    )
    
    $
    (3,764
    )
    
    $
    Basic and diluted net loss per share
    
    $
    (0.43
    )
    
    $
    (0.09
    )
    
    $
    Weighted average number of common
shares outstanding  basic and diluted
    
    
    60,454,510
    
    
    
    43,966,775
    
    
    
    17,375,000
  28




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##### Table of Contents



FOOTHILLS RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
 Inception(December29, 2005)Year Ended
    
    
    throughDecember 31,
    
    
    December2007
    
    
    2006
    
    
    31, 2005Cash flows from operating activities:Net loss
    
    $
    (26,028
    )
    
    $
    (3,764
    )
    
    $
    Adjustments to reconcile net loss to
net cash used for operating activities -Stock-based compensation
    
    
    500
    
    
    
    388
    
    
    
    Depreciation, depletion and amortization
    
    
    2,741
    
    
    
    815
    
    
    
    Accretion of asset retirement obligation
    
    
    44
    
    
    
    14
    
    
    
    Amortization of discount on long-term debt
    
    
    3,370
    
    
    
    1,101
    
    
    
    Amortization of debt issue costs
    
    
    239
    
    
    
    64
    
    
    
    Loss on early extinguishment of debt
    
    
    7,429
    
    
    
    
    
    
    
    Changes in assets and liabilities -Accounts receivable
    
    
    (429
    )
    
    
    (1,452
    )
    
    
    Prepaid expenses
    
    
    (1
    )
    
    
    (212
    )
    
    
    Other assets
    
    
    35
    
    
    
    
    
    
    
    Accounts payable and accrued liabilities
    
    
    451
    
    
    
    1,557
    
    
    
    Liquidated damages
    
    
    2,591
    
    
    
    
    
    
    
    Net cash used for operating activities
    
    
    (9,058
    )
    
    
    (1,489
    )
    
    
    Cash flows from investing activities:Additions to oil and gas properties
    
    
    (7,850
    )
    
    
    (64,656
    )
    
    
    (50
    )Additions to other property and equipment
    
    
    (58
    )
    
    
    (476
    )
    
    
    (Increase) decrease in other assets
    
    
    
    
    
    
    (79
    )
    
    
    Net cash used for investing activities
    
    
    (7,908
    )
    
    
    (65,211
    )
    
    
    (50
    )Cash flows from financing activities:Proceeds of borrowings
    
    
    56,000
    
    
    
    42,500
    
    
    
    Repayments of borrowings
    
    
    (44,000
    )
    
    
    
    
    
    
    Debt issuance costs
    
    
    (3,434
    )
    
    
    (685
    )
    
    
    Members capital contributions
    
    
    
    
    
    
    50
    
    
    
    50Proceeds from issuance of common stock and warrants
    
    
    
    
    
    
    35,616
    
    
    
    Stock issuance costs
    
    
    (110
    )
    
    
    (2,108
    )
    
    
    Net cash provided by financing activities
    
    
    8,458
    
    
    
    75,373
    
    
    
    50Net increase (decrease) in cash and cash equivalents
    
    
    (8,508
    )
    
    
    8,673
    
    
    
    Cash and cash equivalents at beginning of the period
    
    
    8,673
    
    
    
    
    
    
    
    Cash and cash equivalents at end of the period
    
    $
    165
    
    
    $
    8,673
    
    
    $
    Supplemental disclosures of cash flow information:Cash paid for -Interest
    
    $
    6,370
    
    
    $
    1,816
    
    
    $
    Income taxes
    
    
    
    
    
    
    
    
    
    
    Noncash investing activities -Net increases in accrued capital expenditures
    
    
    2,618
    
    
    
    1,014
    
    
    
    Oil and gas properties acquired for common stock
    
    
    223
    
    
    
    4,174
    
    
    
    
  29




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##### Table of Contents



FOOTHILLS RESOURCES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(dollars in thousands, except per share amounts)
 Accum-ulatedOtherCompre-Common Stock
    
    
    
    
    
    Mem-
    
    
    Accum-
    
    
    hensivePar
    
    
    Additional
    
    
    bers
    
    
    ulated
    
    
    IncomeNumber
    
    
    Value
    
    
    Paid-in Capital
    
    
    Capital
    
    
    Deficit
    
    
    (Loss)
    
    
    TotalBalance, December
29, 2005 (date of
inception)
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Contributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    50Balance, December
31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    50Contributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    50Exchange of
members capital
for common shares
and conversion from
limited liability
company to
corporation
    
    
    17,375,000
    
    
    
    17
    
    
    
    83
    
    
    
    (100
    )
    
    
    
    
    
    
    
    
    
    
    Issuance of common
stock and warrants
    
    
    42,112,753
    
    
    
    42
    
    
    
    42,972
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,014Exercise of warrants
    
    
    889,076
    
    
    
    1
    
    
    
    888
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    889Stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    388
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    388Change in fair
value of derivative
financial
instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,595
    
    
    
    1,595Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,764
    )
    
    
    
    
    
    
    (3,764
    )Balance, December
31, 2006
    
    
    60,376,829
    
    
    
    60
    
    
    
    44,331
    
    
    
    
    
    
    
    (3,764
    )
    
    
    1,595
    
    
    
    42,222
  30




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##### Table of Contents



FOOTHILLS RESOURCES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(dollars in thousands, except per share amounts)
 Accum-ulatedOtherCompre-Common Stock
    
    
    
    
    
    Mem-
    
    
    Accum-
    
    
    hensivePar
    
    
    Additional
    
    
    bers
    
    
    ulated
    
    
    IncomeNumber
    
    
    Value
    
    
    Paid-in Capital
    
    
    Capital
    
    
    Deficit
    
    
    (Loss)
    
    
    TotalIssuance of common
stock and warrants
    
    
    85,841
    
    
    
    
    
    
    
    2,504
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,504Stock-based
compensation
    
    
    109,772
    
    
    
    1
    
    
    
    499
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500Change in fair
value of derivative
financial
instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,394
    )
    
    
    (8,394
    )Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    (110
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (110
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,028
    )
    
    
    
    
    
    
    (26,028
    )Balance, December
31, 2007
    
    
    60,572,442
    
    
    $
    61
    
    
    $
    47,224
    
    
    $
    
    
    
    $
    (29,792
    )
    
    $
    (6,799
    )
    
    $
    10,694
  31




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##### Table of Contents



FOOTHILLS RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
 Note 1  Summary of Operations
   Note 2  Significant Accounting Policies
 Principles of consolidation
  Use of estimates
  Cash and cash equivalents
  Oil and gas properties
  32




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##### Table of Contents



Other property and equipment
  Other assets
  Asset retirement obligations
  2007
    
    
    2006Asset retirement obligation, beginning of year
    
    $
    570
    
    
    $
    Liabilities incurred
    
    
    14
    
    
    
    556Accretion expense
    
    
    44
    
    
    
    14Asset retirement obligation, end of year
    
    $
    628
    
    
    $
    570
 Income taxes
  Revenue recognition
  Stock-based compensation
  33




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##### Table of Contents



Earnings per common share
  Fair value of financial instruments
  Derivative instruments and hedging activities
  Concentration of credit risk
   34




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##### Table of Contents



New accounting pronouncements
        35




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##### Table of Contents



Note 3  Long-term Debt
  2007
    
    
    2006Senior term loan
    
    $
    50,000
    
    
    $
    Revolving loan
    
    
    4,500
    
    
    
    Secured promissory note
    
    
    
    
    
    
    42,50054,500
    
    
    
    42,500Less: unamortized discount
    
    
    (2,257
    )
    
    
    (10,325
    )52,243
    
    
    
    32,175Less: current portion
    
    
    
    
    
    
    (2,509
    )$
    52,243
    
    
    $
    29,666
    2008
    
    $
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    54,500Total
    
    $
    54,500
 36




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##### Table of Contents



Note 4  Stockholders Equity
 Registration rights payments
     Warrants
  ExerciseNumber of Shares Subject to Warrants
    
    Expiration Date
    
    Price2,580,159
    
    
    December 2017
    
    $
    0.0112,077,399
    
    
    April 2011
    
    $
    1.00473,233
    
    
    September 2011
    
    $
    2.258,046,919
    
    
    September 2011
    
    $
    2.75
 Note 5  Stock and Other Compensation Plans
  37




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##### Table of Contents



2007
    
    
    2006Risk free interest rate
    
    
    4.6  5.2
    %
    
    
    4.4  5.0
    %Expected volatility
    
    
    85  116
    %
    
    
    79  138
    %Weighted-average volatility
    
    
    102
    %
    
    
    88
    %Dividend yield
    
    
    0
    %
    
    
    0
    %Expected years until exercise
    
    
    0.5  3.0
    
    
    
    0.5  3.0
   2007
    
    
    2006Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    Aggregate
    
    
    
    
    
    
    Average
    
    
    AggregateExercise
    
    
    Intrinsic
    
    
    
    
    
    
    Exercise
    
    
    IntrinsicShares
    
    
    Price
    
    
    Value
    
    
    Shares
    
    
    Price
    
    
    ValueOutstanding, beginning of year
    
    
    1,790,000
    
    
    $
    1.53
    
    
    
    
    
    
    
    
    
    
    $
    Granted
    
    
    95,000
    
    
    
    1.19
    
    
    
    
    
    
    
    1,790,000
    
    
    
    1.53Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (5,000
    )
    
    
    1.42
    
    
    
    
    
    
    
    
    
    
    
    Outstanding, end of year
    
    
    1,880,000
    
    
    $
    1.52
    
    
    $
    88,000
    
    
    
    1,790,000
    
    
    $
    1.53
    
    
    $
    463,000Exercisable, end of year
    
    
    1,078,750
    
    
    $
    1.62
    
    
    $
    44,000
    
    
    
    560,000
    
    
    $
    1.82
    
    
    $
    116,000
  38




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##### Table of Contents



Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    
    
    
    
    AverageRemaining
    
    
    Weighted
    
    
    
    
    
    
    Remaining
    
    
    WeightedContractual
    
    
    Average
    
    
    
    
    
    
    Contractual
    
    
    AverageRange of
    
    
    Number
    
    
    Term In
    
    
    Exercise
    
    
    Number
    
    
    Term In
    
    
    ExerciseExercise Prices
    
    
    Outstanding
    
    
    Years
    
    
    Price
    
    
    Exercisable
    
    
    Years
    
    
    Price$
    0.70
    
    
    
    800,000
    
    
    
    8.3
    
    
    $
    0.70
    
    
    
    400,000
    
    
    
    8.3
    
    
    $
    0.701.17  1.99
    
    
    
    770,000
    
    
    
    8.8
    
    
    
    1.65
    
    
    
    473,750
    
    
    
    8.7
    
    
    
    1.642.50  3.59
    
    
    
    310,000
    
    
    
    8.3
    
    
    
    3.29
    
    
    
    205,000
    
    
    
    8.3
    
    
    
    3.36$
    0.70  3.59
    
    
    
    1,880,000
    
    
    
    8.5
    
    
    $
    1.52
    
    
    
    1,078,750
    
    
    
    8.5
    
    
    $
    1.62
   AggregateShares
    
    
    ValueOutstanding, beginning of year
    
    
    Awarded
    
    
    141,176Canceled / forfeited
    
    
    (31,404
    )Outstanding, end of year
    
    
    109,772
    
    
    $
    89,000Vested, end of year
    
    
    39,183
    
    
    $
    44,000
   39




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##### Table of Contents



Note 6  Income Taxes
  2007
    
    
    2006Income tax provision (benefit) at 34%
    
    $
    (8,850
    )
    
    $
    (1,280
    )Changes in prior year estimate
    
    
    (504
    )
    
    
    Non-deductible expenses
    
    
    185
    
    
    
    139Change in valuation allowance
    
    
    9,169
    
    
    
    1,141Income tax provision (benefit)
    
    $
    
    
    
    $
    
  2007
    
    
    2006Deferred tax assets:Net operating loss carryforwards
    
    $
    14,616
    
    
    $
    3,483Stock-based compensation
    
    
    311
    
    
    
    14,927
    
    
    
    3,483Deferred tax liabilities:Differences between book and tax bases of
property, plant and equipment
    
    
    4,652
    
    
    
    2,377Net deferred tax asset before valuation allowance
    
    
    10,275
    
    
    
    1,106Valuation allowance
    
    
    (10,275
    )
    
    
    (1,106
    )Net deferred tax asset (liability)
    
    $
    
    
    
    $
    
   Note 7  Derivative Instruments and Price Risk Management Activities
  40




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##### Table of Contents



NYMEXTotal
    
    
    Swap
    
    
    Fair ValueContract Period and Type
    
    Volume
    
    
    Price
    
    
    (in thousands)Crude oil contracts (barrels)Swap contracts:January 2008  December 2008
    
    
    148,994
    
    
    $
    71.01
    
    
    $
    (3,228
    )January 2009  December 2009
    
    
    135,041
    
    
    
    69.39
    
    
    
    (2,366
    )January 2010  September 2010
    
    
    74,206
    
    
    
    68.00
    
    
    
    (1,205
    )Total
    
    
    
    
    
    
    
    
    
    $
    (6,799
    )
 Note 8  Related Party Transactions
   41




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##### Table of Contents



Note 9  Commitments and Contingencies
 Rental commitments
  2008
    
    $
    1192009
    
    
    1142010
    
    
    1122011
    
    
    37Total
    
    $
    382
  Property obligations
  
    
    Foothills California serves as operator of a joint venture with INNEX, and has the
right to earn an interest in approximately 4,000 existing leasehold acres held by INNEX
in the basin, and to participate as operator with INNEX in oil and gas acquisition,
exploration and development activities within an area of mutual interest consisting of
the entire Eel River Basin.
    
    The agreement provides for drill-to-earn terms, and consists of three phases.
    
    In Phase I, Foothills California was obligated to pay 100% of the costs of drilling
two shallow wells, acquiring 1,000 acres of new leases, and certain other activities.
The Company has fulfilled its obligations under Phase I, and has received an assignment
from INNEX of a 75% working interest (representing an approximate 56.3% net revenue
interest) in the leases held by INNEX in the two drilling units to the deepest depth
drilled in the two Phase I obligation wells.
    
    Foothills California then had the option, but not the obligation, to proceed into
Phase II. It elected to proceed into Phase II, and has paid the costs of conducting a
3D seismic survey covering approximately 12.7 square miles and of drilling one
additional shallow well. The Company has fulfilled its obligations under Phase II, and
has received an assignment from INNEX of a 75% working interest (representing an
approximate 56.3% net revenue interest) in the leases held by INNEX in the drilling
unit for the well drilled in Phase II and a 75% working interest (representing an
approximate 59.3% net revenue interest) in all remaining leases held by INNEX to the
deepest depth drilled in the three Phase I and II obligation wells.
    
    Foothills California then had the option, but not the obligation, to proceed into
Phase III. It elected to proceed into Phase III, and is paying 100% of the costs of
drilling one deep well. Upon completion of Phase III, the Company will receive an
assignment from INNEX of a 75% working interest (representing an approximate 56.3% net
revenue interest) in the leases held by INNEX in the drilling unit and a 75% working
interest (representing an approximate 59.3% net revenue interest) in all remaining
leases held by INNEX with no depth limitation.
    
    After completion of Phase III, the two parties will each be responsible for funding
their working interest share of the joint ventures costs and expenses. Foothills
California will generally have a
 42




---



##### Table of Contents



75% working interest in activities conducted on specified prospects existing at the
time of execution of the agreement, and a 70% working interest in other activities.
Each party will be able to elect not to participate in exploratory wells on a
prospect-by-prospect basis, and a non-participating party will lose the opportunity
to participate in development activities and all rights to production relating to
that prospect.
 
    
    Foothills California is also entitled to a proportionate assignment from INNEX of
its rights to existing permits, drill pads, roads, rights-of-way, and other
infrastructure, as well as its pipeline access and marketing arrangements.
    
    INNEX has an option to participate for a 25% working interest in certain producing
property acquisitions by the Company in the area of mutual interest.
 43




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##### Table of Contents



SUPPLEMENTAL OIL AND GAS INFORMATION
   Capitalized Costs
 2007
    
    
    2006Proved properties
    
    $
    75,215
    
    
    $
    64,850Unproved properties
    
    
    760
    
    
    
    42075,975
    
    
    
    65,270Accumulated depreciation, depletion and amortization
    
    
    (3,389
    )
    
    
    (775
    )Net capitalized costs
    
    $
    72,586
    
    
    $
    64,495
  Costs Incurred
 2007
    
    
    2006Property acquisition:Proved properties
    
    $
    
    
    
    $
    62,939Unproved properties
    
    
    537
    
    
    
    195Exploration
    
    
    1,936
    
    
    
    5,818Development
    
    
    8,218
    
    
    
    1,448Total costs incurred
    
    $
    10,691
    
    
    $
    70,400
  Oil and Gas Reserve Quantities
    44




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##### Table of Contents



2007
    
    2006Oil
    
    Gas
    
    Oil
    
    GasProved developed and undeveloped reserves, beginning of year
    
    
    4,431
    
    
    
    21,916
    
    
    
    
    
    
    
    Extensions and discoveries 1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,500Purchase of reserves in-place 2
    
    
    
    
    
    
    
    
    
    
    4,501
    
    
    
    446Revisions of previous estimates
    
    
    (72
    )
    
    
    22
    
    
    
    
    
    
    
    Production
    
    
    (185
    )
    
    
    (135
    )
    
    
    (70
    )
    
    
    (30
    )Proved developed and undeveloped reserves, end of year 3
    
    
    4,174
    
    
    
    21,803
    
    
    
    4,431
    
    
    
    21,916Proved developed reserves, end of year 3
    
    
    3,884
    
    
    
    2,437
    
    
    
    4,030
    
    
    
    2,190
  
 1
    
    During 2006, the Company drilled two successful wells
in the Eel River Basin in California (see Note 9). The estimate of proved
reserves attributable to these discoveries was approximately 21.5 billion cubic
feet of natural gas.2
    
    In 2006, the Company acquired producing properties in
the Texas Gulf Coast area. The estimated proved reserves acquired totaled
approximately 4.5 million barrels of crude oil and 446 million cubic feet of
natural gas.3
    
    Subsequent to December 31, 2007, the Company completed
the drilling of two wells in the Eel River Basin in California. After
perforating the indicated gas-bearing zones in both wells, the Company did not
recover natural gas from either well. The Company believes this result is
inconsistent with the mud log shows, electric log interpretations, and the
offsetting well information. The Companys preliminary conclusion is that
polymer fluids used during drilling operations most likely damaged the
reservoirs near the wellbores. The Company has temporarily suspended further
testing on the two wells, and is in the process of designing stimulation
programs to fracture the formations beyond the damaged zones in the wells. An
aggregate of approximately 893 million cubic feet of natural gas was
attributable to the two wells in the Companys estimate of proved developed
reserves as of December 31, 2007. 45




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##### Table of Contents



Standardized Measure of Discounted Future Net Cash Flows
 2007
    
    
    2006Future cash inflows
    
    $
    537,791
    
    
    $
    395,868Future costs Production
    
    
    139,969
    
    
    
    116,104Development
    
    
    27,230
    
    
    
    20,783Future net cash flows before income taxes
    
    
    370,592
    
    
    
    258,981Future income taxes
    
    
    91,859
    
    
    
    71,393Future net cash flows
    
    
    278,733
    
    
    
    187,58810% discount factor
    
    
    142,605
    
    
    
    88,661Standardized measure of discounted future net cash flows
    
    $
    136,128
    
    
    $
    98,927
 Changes in Standardized Measure of Discounted Future Net Cash Flows
 2007
    
    
    2006Standardized measure, beginning of year
    
    $
    98,927
    
    
    $
    Increases (decreases) Sales, net of production costs
    
    
    (10,464
    )
    
    
    (2,914
    )Net change in sales prices, net of production costs
    
    
    60,163
    
    
    
    Extensions and discoveries
    
    
    
    
    
    
    40,341Changes in estimated future development costs
    
    
    (4,618
    )
    
    
    Development costs incurred during the year that reduced
future development costs
    
    
    2,092
    
    
    
    Revisions of quantity estimates
    
    
    (22,543
    )
    
    
    Accretion of discount
    
    
    11,805
    
    
    
    Net change in income taxes
    
    
    (1,076
    )
    
    
    (19,130
    )Purchase of reserves in-place
    
    
    
    
    
    
    80,630Changes in production rates (timing) and other
    
    
    1,842
    
    
    
    Standardized measure, end of year
    
    $
    136,128
    
    
    $
    98,927
  2007
    
    2006Oil
    
    Gas
    
    Oil
    
    GasCalifornia
    
    $
    
    
    
    $
    6.54
    
    
    $
    
    
    
    $
    6.08Texas
    
    $
    94.46
    
    
    $
    7.67
    
    
    $
    59.21
    
    
    $
    6.77
 46




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##### Table of Contents



Item 8.
    
    Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 8A.
    
    Controls and Procedures.
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting.
    Changes in Internal Control Over Financial Reporting
  
 Item 8B.
    
    Other Information.
  
 PART III.
 
 Item 9.
    
    Directors, Executive Officers, Promoters, Control Persons and Corporate Governance;
compliance with Section 16(a) of the Exchange Act.
  Name
    
    Age
    
    PositionDennis B. Tower
    
    
    61
    
    
    Chief Executive Officer; DirectorJohn L. Moran
    
    
    62
    
    
    President; DirectorW. Kirk Bosché
    
    
    57
    
    
    Chief Financial OfficerJames H. Drennan
    
    
    61
    
    
    Vice President, Land and LegalMichael L. Moustakis
    
    
    50
    
    
    Vice President, Engineering
  Dennis B. Tower, Chief Executive Officer and Director
 47




---



##### Table of Contents



John L. Moran, President and Director
 W. Kirk Bosché, Chief Financial Officer
 James H. Drennan, Vice President, Land and Legal
 Michael L. Moustakis, Vice President, Engineering
 48




---



##### Table of Contents



Item 10.
    
    Executive Compensation.
  
 Item 11.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
  
 Item 12.
    
    Certain Relationships and Related Transactions, and Director Independence.
  
 Item 13.
    
    Exhibits.
 (a)
    
    
    (1
    )
    
    FINANCIAL STATEMENTS The following consolidated financial statements of
Foothills Resources, Inc. and Subsidiaries contained under Item 8 of this
Form 10-KSB are incorporated herein by reference:
 
    
    Consolidated Balance Sheets as of December 31, 2007 and December 31, 2006
    
Consolidated Statements of Operations for the years ended December 31, 2007
and 2006 and the period from inception (December 29, 2005) through December
31, 2005
    
    Consolidated Statements of Cash Flows for the years ended December 31, 2007
and 2006 and the period from inception (December 29, 2005) through December
31, 2005
    
    Consolidated Statements of Stockholders Equity for the years ended
December 31, 2007 and 2006 and the period from inception (December 29, 2005)
through December 31, 2005
 (2
    )
    
    FINANCIAL STATEMENT SCHEDULES  All financial statement schedules have been
omitted because they are not applicable or are not required, or because the
information required to be set forth therein is included in the Consolidated
Financial Statements or Notes thereto.(3
    )
    
    EXHIBITS  See Exhibit Index on page 49 of this Annual Report on Form 10-KSB.
 EXHIBIT INDEX
 Exhibit No.
    
    Description
    
    Reference2.1
    
    Agreement and Plan of Merger and
Reorganization, dated as of April 6, 2006, by
and between Foothills Resources, Inc., a
Nevada corporation, Brasada Acquisition Corp.,
a Delaware corporation and Brasada California,
Inc., a Delaware corporation.
    
    Incorporated by
reference to
Exhibit 2.1 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on April 6, 2006
(File No.
001-31547).
 49




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##### Table of Contents



Exhibit No.
    
    Description
    
    Reference3.1
    
    Articles of Incorporation of Foothills
Resources, Inc.
    
    Incorporated by
reference to
Exhibit 3.1 to the
Registration
Statement on Form
SB-2/A filed with
the Securities and
Exchange Commission
on June 18, 2001
(File No.
333-59708).3.2
    
    Certificate of Amendment of the Articles of
Incorporation of Foothills Resources, Inc.
    
    Incorporated by
reference to
Exhibit 3.2 to the
Registration
Statement on Form
SB-2/A filed with
the Securities and
Exchange Commission
on June 18, 2001
(File No.
333-59708).3.3
    
    Certificate of Amendment of the Articles of
Incorporation of Foothills Resources, Inc. 3.4
    
    Bylaws of Foothills Resources, Inc.
    
    Incorporated by
reference to
Exhibit 3.3 to the
Registration
Statement on Form
SB-2/A filed with
the Securities and
Exchange Commission
on June 18, 2001
(File No.
333-59708).4.1
    
    Specimen Stock Certificate of Foothills
Resources, Inc.
    
    Incorporated by
reference to
Exhibit 4.1 to the
Registration
Statement on Form
SB-2/A filed with
the Securities and
Exchange Commission
on June 18, 2001
(File No.
333-59708).4.2
    
    Form of Warrant issued to the Investors in the
Private Placement Offering, April 6, 2006.
    
    Incorporated by
reference to
Exhibit 4.2 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on April 6, 2006
(File No.
001-31547).4.3
    
    Form of Lock-Up Agreement by and between
Foothills Resources, Inc. and the Brasada
Stockholders.
    
    Incorporated by
reference to
Exhibit 4.3 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on April 6, 2006
(File No.
001-31547).4.4
    
    Warrant issued to Goldman, Sachs & Co. in
connection with the Credit Agreement, dated as
of September 8, 2006.
    
    Incorporated by
reference to
Exhibit 4.1 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on September 11,
2006 (File No.
001-31547).4.5
    
    Warrant issued to Goldman, Sachs & Co. in the
offering, dated as of September 8, 2006.
    
    Incorporated by
reference to
Exhibit 4.2 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on September 11,
2006 (File No.
001-31547).4.6
    
    Form of Warrant issued to the Investors in the
Private Placement Offering, September 8, 2006.
    
    Incorporated by
reference to
Exhibit 4.3 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on September 11,
2006 (File No.
001-31547).4.7
    
    Warrant to Purchase Common Stock, issued
December 13, 2007, to Regiment Capital Special
Situations Fund III, L.P.
    
    Incorporated by
reference to
Exhibit 4.1 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on December 13,
2007 (File No.
001-31547).
 50




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##### Table of Contents



Exhibit No.
    
    Description
    
    Reference10.1
    
    Form of Subscription Agreement by and between
Foothills Resources, Inc. and the investors in
the Offering.
    
    Incorporated by
reference to
Exhibit 10.1 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on April 6, 2006
(File No.
001-31547).10.2
    
    Form of Registration Rights Agreement by and
between Foothills Resources, Inc. and the
investors in the Offering.
    
    Incorporated by
reference to
Exhibit 10.2 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on April 6, 2006
(File No.
001-31547).10.3
    
    Split Off Agreement, dated April 6, 2006, by
and among Foothills Resources, Inc., J. Earl
Terris, Foothills Leaseco, Inc. and Brasada
California, Inc.
    
    Incorporated by
reference to
Exhibit 10.3 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on April 6, 2006
(File No.
001-31547).10.4
    
    Employment Agreement, dated April 6, 2006, by
and between Foothills Resources, Inc. and
Dennis B. Tower.
    
    Incorporated by
reference to
Exhibit 10.4 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on April 6, 2006
(File No.
001-31547).10.5
    
    Employment Agreement, dated April 6, 2006, by
and between Foothills Resources, Inc. and John
L. Moran.
    
    Incorporated by
reference to
Exhibit 10.5 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on April 6, 2006
(File No.
001-31547).10.6
    
    Employment Agreement, dated April 6, 2006, by
and between Foothills Resources, Inc. and W.
Kirk Bosché.
    
    Incorporated by
reference to
Exhibit 10.6 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on April 6, 2006
(File No.
001-31547).10.7
    
    Employment Offer Letter and Agreement, dated
April 21, 2006, by and between Foothills
Resources, Inc. and James Drennan.
    
    Incorporated by
reference to
Exhibit 10.7 to the
Registration
Statement on Form
SB-2 filed with the
Securities and
Exchange Commission
on October 10, 2006
(File No.
333-137925).10.8
    
    Form of Indemnity Agreement by and between
Foothills Resources, Inc. and the Directors
and Officers of Foothills Resources, Inc.
    
    Incorporated by
reference to
Exhibit 10.7 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on April 6, 2006
(File No.
001-31547).10.9
    
    Farmout and Participation Agreement, dated as
of January 3, 2006, by and between INNEX
California, Inc. and Brasada Resources, LLC.
    
    Incorporated by
reference to
Exhibit 10.8 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on April 6, 2006
(File No.
001-31547).10.10
    
    Notice and Acknowledgement of Increase of
Offering.
    
    Incorporated by
reference to
Exhibit 10.9 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on April 6, 2006
(File No.
001-31547).
 51




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##### Table of Contents



Exhibit No.
    
    Description
    
    Reference10.11
    
    Purchase and Sale Agreement, dated as of June
21, 2006, by and between Foothills Texas, Inc.
and TARH E&P Holdings, L.P. relating to
properties in Goose Creek Field and East Goose
Creek Field, Harris County, Texas.
    
    Incorporated by
reference to
Exhibit 10.1 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on June 27, 2006
(File No.
001-31547).10.12
    
    Purchase and Sale Agreement, dated as of June
21, 2006, by and between Foothills Texas, Inc.
and TARH E&P Holdings, L.P. relating to
properties in Cleveland Field, Liberty County,
Texas and in Saratoga Field, Hardin County,
Texas.
    
    Incorporated by
reference to
Exhibit 10.2 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on June 27, 2006
(File No.
001-31547).10.13
    
    Supplemental Agreement, dated as of June 21,
2006, by and between Foothills Texas, Inc. and
TARH E&P Holdings, L.P.
    
    Incorporated by
reference to
Exhibit 10.3 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on June 27, 2006
(File No.
001-31547).10.14
    
    Registration Rights Agreement, dated as of
September 8, 2006, by and between Foothills
Resources, Inc. and TARH E&P Holdings, L.P.
    
    Incorporated by
reference to
Exhibit 10.1 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on September 11,
2006 (File No.
001-31547).10.15
    
    Conveyance of Overriding Royalty Interest,
dated as of September 8, 2006, from Foothills
Texas, Inc. to MTGLQ Investors, L.P.
    
    Incorporated by
reference to
Exhibit 10.7 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on September 11,
2006 (File No.
001-31547).10.16
    
    Form of Subscription Agreement and Investor
Questionnaire, dated as of September 8, 2006,
by and among Foothills Resources, Inc. and the
investors in the Offering.
    
    Incorporated by
reference to
Exhibit 10.8 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on September 11,
2006 (File No.
001-31547).10.17
    
    Form of Securities Purchase Agreement, dated
as of September 8, 2006, by and among
Foothills Resources, Inc. and the investors in
the Offering.
    
    Incorporated by
reference to
Exhibit 10.9 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on September 11,
2006 (File No.
001-31547).10.18
    
    Form of Registration Rights Agreement, dated
as of September 8, 2006, by and among
Foothills Resources, Inc. and the investors in
the Offering.
    
    Incorporated by
reference to
Exhibit 10.10 to
the Current Report
on Form 8-K filed
with the Securities
and Exchange
Commission on
September 11, 2006
(File No.
001-31547).10.19
    
    Employment Agreement, dated October 4, 2006,
by and between Foothills Resources, Inc. and
Michael Moustakis.
    
    Incorporated by
reference to
Exhibit 10.24 to
the Registration
Statement on Form
SB-2/A filed with
the Securities and
Exchange Commission
on December 14,
2006 (File No.
333-137925).10.20
    
    Credit Agreement, dated as of December 13,
2007, by and among Foothills and each of its
subsidiaries as borrowers, various lenders and
Wells Fargo Foothill, LLC, as agent.
    
    Incorporated by
reference to
Exhibit 10.1 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on December 13,
2007 (File No.
001-31547).
 52




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##### Table of Contents



Exhibit No.
    
    Description
    
    Reference10.21
    
    Security Agreement, dated as of December 13,
2007, among Foothills California, Inc.,
Foothills Texas, Inc. and Foothills Oklahoma,
Inc. as Grantors and Wells Fargo Foothill,
LLC.
    
    Incorporated by
reference to
Exhibit 10.2 to the
Current Report on
Form 8-K filed with
the Securities and
Exchange Commission
on December 13,
2007 (File No.
001-31547).16.1
    
    Letter from Amisano Hanson regarding Change in
Certifying Accountant.
    
    Incorporated by
reference to
Exhibit 16.1 to the
Current Report on
Form 8-K/A filed
with the Securities
and Exchange
Commission on May
5, 2006 (File No.
001-31547).21.1
    
    List of subsidiaries 23.1
    
    Consent of Independent Registered Public
Accounting Firm. 23.2
    
    Consent of Independent Reservoir Engineers. 24.1
    
    Powers of Attorney. 31.1
    
    Certification of Principal Executive Officer,
pursuant to Rule 13a-14 and 15d-14 of the
Securities Exchange Act of 1934. 31.2
    
    Certification of Principal Financial Officer,
pursuant to Rule 13a-14 and 15d-14 of the
Securities Exchange Act of 1934. 32.1
    
    Certification of Principal Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
    
    Certification of Principal 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. 
 Item 14.
    
    Principal Accountant Fees and Services.
  53




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##### Table of Contents



Dated: March 28, 2008
    FOOTHILLS RESOURCES, INC./s/ Dennis B. TowerDennis B. TowerChief Executive Officer POWER OF ATTORNEY
   Name
    
    Position
    
    Date/s/ Dennis B. Tower

Dennis B. Tower
    
    Chief Executive Officer, Director
(Principal Executive Officer)
    
    March 28, 2008/s/ John L. Moran

John L. Moran
    
    President, Director
    
    March 28, 2008/s/ W. Kirk Bosché

W. Kirk Bosché
    
    Chief Financial Officer
(Principal Financial Officer)
    
    March 28, 2008/s/ John A. Brock

John A. Brock
    
    Director
    
    March 28, 2008/s/ Frank P. Knuettel

Frank P. Knuettel
    
    Director
    
    March 28, 2008/s/ David A. Melman

David A. Melman
    
    Director
    
    March 28, 2008/s/ Christopher P. Moyes

Christopher P. Moyes
    
    Director
    
    March 28, 2008
 54