UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 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 Exchange
on Which Registered)
  Common Stock, $0.001 par value
    
    None(Title of Class)
    
    (Name of Each Exchange
on Which Registered)
 o þ
 o þ
 þ o
 o o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 o þ




---



##### 



FOOTHILLS RESOURCES, INC. AND SUBSIDIARIES
 FORM 10-K
 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
 INDEX
 PagesPART I
    
    
    1Item 1. Description of Business
    
    
    1Item 1A. Risk Factors
    
    
    5Item 2. Properties
    
    
    16Item 3. Legal Proceedings
    
    
    23Item 4. Submission of Matters to a Vote of Security Holders
    
    
    23PART II
    
    
    24Item 5. Market for Registrants Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities
    
    
    24Item 6. Selected Financial Data
    
    
    25Item 7. Managements Discussion and Analysis or Plan of Operation
    
    
    25Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 8. Financial Statements and Supplementary Data
    
    
    37Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    61Item 9A. Controls and Procedures
    
    
    61Item 9B. Other Information
    
    
    61PART III
    
    
    62Item 10. Directors, Executive Officers and Corporate Governance
    
    
    62Item 11. Executive Compensation
    
    
    68Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    73Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    74Item 14. Principal Accountant Fees and Services
    
    
    75Item 15. Exhibits and Financial Statement Schedules
    
    
    76SIGNATURES
    
    
    80




---



##### 



References in this Annual Report on Form 10-K (this Form 10-K or this Report) to Foothills,
the Company, we, our, and us refers to Foothills Resources, Inc., a Nevada corporation, and
our wholly owned subsidiaries.
 Forward-Looking Statements
 This Form 10-K 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 Form 10-K 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, and variations of these
words. Items contemplating or making assumptions about, actual or potential future oil and gas
production, oil and gas reserve estimates, drilling activities and 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 Form 10-K, for the reasons, among others, discussed in the Sections 
Managements Discussion and Analysis of Financial Condition and Results of Operations, and Risk
Factors. 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
    1




---



##### 



Recent DevelopmentsChapter 11 Proceedings
 Foothills Texas, Inc., et al., Debtors, Chapter 11 Case No. 09-10452
(CSS)
        2




---



##### 




    
    May 19, 2009,
    
    the date of substantial consummation of a plan of reorganization in the Chapter 11
Cases that has been confirmed by an order of the Bankruptcy Court,
    
    the date of a sale of substantially all of the assets of the Company, and
    
    such earlier date on which all Loans and other obligations for the payment of money
shall become due and payable in accordance with the terms of the DIP Credit Agreement.
   Markets and Customers
   Regulations
   3




---



##### 



State Regulation
   Environmental Matters
      4




---



##### 



Competition
  Employees
  
 Item 1A. 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.
 5




---



##### 



RISKS RELATED TO OUR CHAPTER 11 BANKRUPTCY PROCEEDINGS
 We filed for reorganization under Chapter 11 of the Bankruptcy Code on February 11, 2009, and we do
not presently believe that there will be any meaningful recovery, or any recovery at all, for
holders of our common stock.
  We intend to deregister our common stock under the Securities Exchange Act of 1934, which could
negatively affect the liquidity and trading prices of our common stock.
  Our operations are subject to the risks and uncertainties associated with the Chapter 11 Cases.
  
    
    our ability to continue as a going concern;
    
    our ability to operate within the restrictions of the DIP Credit Agreement;
    
    the actions and decisions of our creditors and other third parties with interests in
our Chapter 11 Cases, which may be inconsistent with our plans;
    
    our ability to obtain Bankruptcy Court approval with respect to motions in the
Chapter 11 Cases that we may seek from time to time and potentially adverse decisions
by the Bankruptcy Court with respect to such motions;
    
    our ability to obtain and maintain normal terms with vendors and service providers;
    
    our ability to obtain additional financing to fund our operations and capital
expenditures;
    
    our ability to retain and motivate key employees through the process of
reorganization; and
    
    the substantial costs for professional fees and other expenses.
 6




---



##### 



Our liquidity position imposes significant risks to our operations.
   We may not continue to operate as a going concern.
   
    
    comply with the terms of the DIP Credit Agreement,
    
    reduce administrative, operating and interest costs and liabilities through the
bankruptcy process,
    
    generate sufficient cash flow from operations,
    
    obtain confirmation of a plan of reorganization under the Bankruptcy Code, and
    
    obtain financing in order to exit from bankruptcy.
 Our credit facility will expire on May 19, 2009, unless a plan of reorganization is approved by the
Bankruptcy Court by that date or we are able to obtain an extension.
  7




---



##### 



We may not be able to obtain confirmation of our plan of reorganization.
   Transfers of our equity, or issuances of equity in connection with our restructuring, may impair
our ability to utilize our federal income tax net operating loss carryforwards in future years.
  RISKS RELATED TO OUR BUSINESS
 Our debt may negatively impact our liquidity, limit our ability to obtain additional financing and
harm our competitive position.
  
 
 
 
 8




---



##### 




 We may need to finance ordinary business operations through borrowings under our DIP Credit
Agreement. As a result our flexibility in operating our business and our ability to repay our
indebtedness may be limited as a result of certain covenant restrictions in the DIP Credit
Agreement.
  
    
    incur additional indebtedness and guarantee obligations;
    
    create liens;
    
    engage in mergers, consolidations, or liquidations;
    
    sell, lease or otherwise dispose of assets;
    
    change the nature of our business;
    
    make equity investments or loans;
    
    pay dividends, make distributions or redeem any equity securities;
    
    modify our organizational documents or certain debt documents;
    
    change our accounting treatment and reporting practices; and
    
    prepay certain indebtedness.
 The Company must comply with various covenants to maintain access to financing under the DIP Credit
Agreement and its right to use the pre-petition lenders cash collateral.
  We may not be able to generate sufficient cash flow to service our outstanding debt and fund
operations.
  9




---



##### 



We have a limited operating history for you to evaluate our business. We had net losses in recent
years and may never attain profitability.
  Our lack of diversification has had a negative effect on our financial condition and results of
operations and increases the risk of an investment in Foothills.
  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.
  Our hedging activities could result in financial losses or could reduce our net income, which may
adversely affect an investment in our common stock.
  10




---



##### 




    
    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.
  The recent global credit and financial crisis could have adverse effects on the Company.
  
    
    downturns in the business or financial condition of any of the Companys key
customers or services and equipment providers;
    
    the creditworthiness of customers, services and equipment providers, and
counterparties could deteriorate resulting in a financial loss or a disruption in our
access to services and equipment;
    
    the deterioration of any of the lending parties under the DIP Credit Agreement which
could result in such parties failure to satisfy their obligations under their
arrangements with the Company; and
    
    the current lack of available funding sources, which could have a negative impact
upon the liquidity of the Company as well as that of its customers or services and
equipment providers.
 RISKS RELATED TO OUR INDUSTRY
 Drilling for oil and gas is risky and may not be commercially successful, and the 3D seismic data
and other advanced technologies we use cannot eliminate exploration risk, which could impair our
ability to generate revenues from our operations.
  11




---



##### 



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 reserve report projections.
  Drilling new wells could result in new liabilities, which could endanger our interests in our
properties and assets.
  12




---



##### 



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.
   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.
  13




---



##### 



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.
  Our business will suffer if we cannot obtain or maintain necessary licenses.
  Challenges to title to our properties may impact our financial condition.
  14




---



##### 



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.
  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.
  Our operating results may fluctuate significantly, and these fluctuations may cause the price of
our common stock and our warrants to decline.
  15




---



##### 



We do not expect to pay dividends in the foreseeable future.
  Stockholders will experience dilution upon the exercise of warrants and options.
  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.
  
 Item 2. Properties.
  Texas
   16




---



##### 



California
 Eel River Basin
    17




---



##### 




    
    We serve as operator of a joint venture with INNEX California, Inc., and had 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 provided for drill-to-earn terms, and consisted 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 fulfilled our obligations under Phase I, and 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 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 fulfilled our obligations under Phase II, and 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 paid 100% of the costs of drilling one deep well
on the Grizzly Bluff Prospect. We fulfilled our obligations under Phase III, and
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 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.
    
    Following the completion of Phase III, the Farmout and Participation Agreement
expired, and the two parties are each responsible for funding their working interest
share of the joint ventures costs and expenses. We 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 were 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.
 18




---



##### 




    
    INNEX California, Inc. had an option to participate for a 25% working interest in
certain producing property acquisitions by us in the area of mutual interest.
         Oklahoma
 Anadarko Basin
  19




---



##### 



Oil and Gas Reserves
  California
    
    Texas
    
    TotalTotal Proved Reserves:Oil (Bbls)
    
    
    
    
    
    
    2,803,972
    
    
    
    2,803,972Gas (Mcf)
    
    
    559,794
    
    
    
    217,235
    
    
    
    777,029Total barrels of oil equivalent (BOE)
    
    
    93,299
    
    
    
    2,840,178
    
    
    
    2,933,477Total Proved Developed Reserves:Oil (Bbls)
    
    
    
    
    
    
    2,708,265
    
    
    
    2,708,265Gas (Mcf)
    
    
    559,794
    
    
    
    217,235
    
    
    
    777,029Total barrels of oil equivalent (BOE)
    
    
    93,299
    
    
    
    2,744,271
    
    
    
    2,837,570Standardized measure of discounted
net cash flow (in thousands)
    
    
    
    
    
    
    
    
    
    $
    25,607
  20




---



##### 



Net Quantities of Oil and Gas Produced
  2008
    
    2007
    
    2006Net sales volumes:Oil (Bbls)
    
    
    182,774
    
    
    
    185,110
    
    
    
    69,973Gas (Mcf)
    
    
    79,136
    
    
    
    135,146
    
    
    
    30,135Total (BOE)
    
    
    195,963
    
    
    
    207,634
    
    
    
    74,995Daily average net sales volumes:Oil (Bbls)
    
    
    499
    
    
    
    507
    
    
    
    574
    1Gas (Mcf)
    
    
    216
    
    
    
    370
    
    
    
    247
    1Total (BOE)
    
    
    535
    
    
    
    569
    
    
    
    615
    1Average sales price:Oil (per Bbl), excluding the effects of price risk management activities
    
    $
    99.21
    
    
    $
    77.62
    
    
    $
    58.17Oil (per Bbl), including the effects of price risk management activities
    
    $
    75.40
    
    
    $
    76.54
    
    
    $
    63.09Gas (per Mcf)
    
    $
    8.41
    
    
    $
    7.42
    
    
    $
    6.34Average production costs (per BOE):Lease operating expense
    
    $
    19.01
    
    
    $
    17.10
    
    
    $
    11.61Severance and ad valorem taxes
    
    $
    6.25
    
    
    $
    6.34
    
    
    $
    6.17Marketing and transportation expense
    
    $
    0.25
    
    
    $
    0.32
    
    
    $
    0.18Total average production costs
    
    $
    25.51
    
    
    $
    23.76
    
    
    $
    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
    
    
    72
    
    
    
    71.9
    
    
    
    
    
    
    
    
    
    
    
    72
    
    
    
    71.9Total
    
    
    72
    
    
    
    71.9
    
    
    
    1
    
    
    
    0.8
    
    
    
    73
    
    
    
    72.7
 
 (1)
    
    Represents the total number of wells at each property.(2)
    
    Represents our interests in the total number of wells at each property.1
    
    Daily average sales volumes for 2006 are based on the
period from September 1, 2006, through December 31, 2006. The effective date of
the acquisition of the Texas oil and gas properties was September 1, 2006, and
production activities in California were commenced in September 2006. 21




---



##### 



Developed and Undeveloped Acreage
  AcresDeveloped
    
    Undeveloped
    
    TotalGross (1)
    
    Net (2)
    
    Gross (1)
    
    Net (2)
    
    Gross (1)
    
    Net (2)California
    
    
    1,089
    
    
    
    817
    
    
    
    14,694
    
    
    
    10,777
    
    
    
    15,783
    
    
    
    11,594Oklahoma
    
    
    
    
    
    
    
    
    
    
    257
    
    
    
    257
    
    
    
    257
    
    
    
    257Texas
    
    
    2,547
    
    
    
    2,519
    
    
    
    320
    
    
    
    320
    
    
    
    2,867
    
    
    
    2,839Total
    
    
    3,636
    
    
    
    3,336
    
    
    
    15,138
    
    
    
    11,221
    
    
    
    18,650
    
    
    
    14,433
 
 (1)
    
    Represents the total acreage at each property.(2)
    
    Represents our interests in the total acreage at each property. Drilling Activity
  Period fromCommencement ofPresent BusinessActivitiesin April 2006Year Ended
    
    Year Ended
    
    through DecemberDecember 31, 2008
    
    December 31, 2007
    
    31, 2006Gross (1)
    
    Net (2)
    
    Gross (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. 22




---



##### 



Present Activities
     Our Offices
  
 Item 3. Legal Proceedings.
 Foothills
Texas, Inc., et al., Debtors, Chapter 11 Case No. 09-10452 (CSS)
   
 Item 4. Submission of Matters to a Vote of Security Holders.
  23




---



##### 



PART II.
 
 Item 5. Market for Registrants Common Equity, Related Stockholders Matters and Issuer Purchases
of Equity Securities.
  Fiscal Period
    
    High
    
    Low2008:Fourth Quarter 2008
    
    $
    0.08
    
    
    $
    0.01Third Quarter 2008
    
    $
    0.45
    
    
    $
    0.06Second Quarter 2008
    
    $
    1.09
    
    
    $
    0.43First Quarter 2008
    
    $
    1.04
    
    
    $
    0.512007:Fourth Quarter 2007
    
    $
    1.11
    
    
    $
    0.79Third Quarter 2007
    
    $
    1.32
    
    
    $
    0.81Second Quarter 2007
    
    $
    1.50
    
    
    $
    0.86First Quarter 2007
    
    $
    2.10
    
    
    $
    1.02
   Dividend Policy
  24




---



##### 



Securities Authorized for Issuance Under Equity Compensation Plans
  Number of SecuritiesRemaining Available forNumber of Securities to be
    
    Weighted-Average
    
    Future Issuances UnderIssued upon Exercise of
    
    Exercise Price of
    
    Equity CompensationOutstanding Options,
    
    Outstanding Options,
    
    Plans (excluding securitiesPlan Category
    
    Warrants and Rights
    
    Warrants and Rights
    
    reflected in column (a))Equity Compensation
Plans Approved by
Security Holders
    
    
    483,125
    
    
    $
    0.14
    
    
    
    4,375,699Equity Compensation
Plans Not Approved
by Security Holders
    
    
    
    
    
    
    
    
    
    
    2,000,000Total
    
    
    483,125
    
    
    $
    0.14
    
    
    
    6,375,699
  Recent Sales of Unregistered Securities
  
 Item 6. Selected Financial Data.
  
 Item 7. Managements Discussion and Analysis or Plan of Operation.
 This discussion 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. The words expect, estimate, anticipate, predict, believe and similar expressions
and variations thereof are intended to identify forward-looking statements. These statements
appear in a number of places in this discussion and include statements regarding the intent, belief
or current expectations of Foothills Resources, Inc., our directors or officers with respect to,
among other things, (a) trends affecting our financial condition or results of operation,
(b) our
ability to meet our debt service obligations,
and (c) our business and growth strategies. Readers
are cautioned not to put undue reliance on these 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. 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.
 25




---



##### 



General
    Overview
  Texas
    26




---



##### 



California
  
    
    We serve as operator of a joint venture with INNEX, and had 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 provided for drill-to-earn terms, and consisted of three phases.
    
    In Phase I, we were 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
fulfilled its obligations under Phase I, and 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.
    
    We then had the option, but not the obligation, to proceed into Phase II. We
elected to proceed into Phase II, and paid the costs of conducting a 3D seismic survey
covering approximately 12.7 square miles and of drilling one additional shallow well.
The Company fulfilled its obligations under Phase II, and 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.
    
    We then had the option, but not the obligation, to proceed into Phase III. We
elected to proceed into Phase III, and paid 100% of the costs of drilling one deep
well. The Company fulfilled its obligations under Phase III, and 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 and a 75% working
interest (representing an approximate 59.3% net revenue interest) in all remaining
leases held by INNEX with no depth limitation.
    
    Following the completion of Phase III, the Farmout and Participation Agreement
expired, and the two parties are each responsible for funding their working interest
share of the joint ventures costs and expenses. We 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 were 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.
 27




---



##### 




    
    INNEX had an option to participate for a 25% working interest in certain producing
property acquisitions by the Company in the area of mutual interest.
       Oklahoma
  Liquidity and Capital Resources
   28




---



##### 



29




---



##### 



Foothills Texas, Inc., et al., Debtors, Chapter 11 Case No. 09-10452 (CSS)
    
    
    May 19, 2009,
    
    the date of substantial consummation of a plan or reorganization in the Chapter 11
Cases that has been confirmed by an order of the Bankruptcy Court,
    
    the date of a sale of substantially all of the assets of the Company, and
    
    such earlier date on which all Loans and other obligations for the payment of money
shall become due and payable in accordance with the terms of the DIP Credit Agreement.
  30




---



##### 



Going Concern Matters
  Results of Operations
  2008
    
    2007
    
    2006Annual net sales volumes:Oil (Bbls)
    
    
    182,774
    
    
    
    185,110
    
    
    
    69,973Gas (Mcf)
    
    
    79,136
    
    
    
    135,146
    
    
    
    30,135Total (BOE)
    
    
    195,963
    
    
    
    207,634
    
    
    
    74,996Daily average net sales volumes:Oil (Bbls)
    
    
    499
    
    
    
    507
    
    
    
    574
    1Gas (Mcf)
    
    
    216
    
    
    
    370
    
    
    
    247
    1Total (BOE)
    
    
    535
    
    
    
    569
    
    
    
    615
    1Average sales price:Oil (per Bbl), excluding the effects of price risk management activities
    
    $
    99.21
    
    
    $
    77.62
    
    
    $
    58.17Oil (per Bbl), including the effects of price risk management activities
    
    $
    75.40
    
    
    $
    76.54
    
    
    $
    63.09Gas (per Mcf)
    
    $
    8.41
    
    
    $
    7.32
    
    
    $
    6.54Average production costs (per BOE):Lease operating expense
    
    $
    19.01
    
    
    $
    16.98
    
    
    $
    11.61Severance and ad valorem taxes
    
    $
    6.25
    
    
    $
    6.33
    
    
    $
    6.35Marketing and transportation expense
    
    $
    0.25
    
    
    $
    0.32
    
    
    $
    0.18Total average production costs
    
    $
    25.51
    
    
    $
    23.63
    
    
    $
    17.95
  Year Ended December 31, 2008 compared with the Year Ended December 31, 2007
  
 1
    
    Daily average sales volumes for 2006 are based on the
period from September 1, 2006, through December 31, 2006. The effective date of
the acquisition of the Texas oil and gas properties was September 1, 2006, and
production activities in California were commenced in September 2006. 31




---



##### 



Oil and Gas Revenues.
 Production Costs.
 General and Administrative Expenses.
 Interest Expense.
 Liquidated Damages.
 Depreciation, Depletion and Amortization.
 Ceiling Write-Down of Oil & Gas Properties.
 Year Ended December 31, 2007 compared with the Year Ended December 31, 2006
  32




---



##### 



Oil and Gas Revenues.
 Production Costs.
 General and Administrative Expenses.
 Interest Expense.
 Liquidated Damages.
 Depreciation, Depletion and Amortization.
 Loss on Early Extinguishment of Debt.
 Critical Accounting Policies and Estimates
  Oil and Gas Properties Accounting
  33




---



##### 



Oil and Gas Reserves
  Asset Retirement Obligations
  Price Risk-Management Activities
  34




---



##### 



Valuation of Deferred Tax Assets
  Stock-Based Compensation
  Off-Balance Sheet Arrangements
  Hedging Transactions
   35




---



##### 



Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
  36




---



##### 



Item 8. Financial Statements and Supplementary Data.
 FOOTHILLS RESOURCES, INC. AND SUBSIDIARIES
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    38Consolidated Balance Sheets as of December 31, 2008 and December 31, 2007
    
    
    39Consolidated Statements of Operations
for the years ended December 31, 2008, 2007 and 2006
    
    
    40Consolidated Statements of Cash Flows
for the years ended December 31, 2008, 2007 and 2006
    
    
    41Consolidated Statements of Stockholders Equity (Deficit)
for the years ended December 31, 2008, 2007 and 2006
    
    
    42Notes to Consolidated Financial Statements
    
    
    44
 37




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 
 38




---



##### 



FOOTHILLS RESOURCES, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (dollars in thousands, except per share amounts)
 December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    29
    
    
    $
    165Accounts receivable
    
    
    1,114
    
    
    
    1,880Prepaid expenses
    
    
    181
    
    
    
    212Fair value of derivative financial instruments
    
    
    2,016
    
    
    
    3,340
    
    
    
    2,257Property and equipment, at cost:Oil and gas properties, using full-cost accounting -Proved properties
    
    
    90,516
    
    
    
    75,215Unproved properties not being amortized
    
    
    898
    
    
    
    760Other property and equipment
    
    
    503
    
    
    
    53391,917
    
    
    
    76,508Less accumulated depreciation, depletion and amortization
    
    
    (60,456
    )
    
    
    (3,554
    )31,461
    
    
    
    72,954Other assets
    
    
    6,299
    
    
    
    3,413$
    41,100
    
    
    $
    78,624LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Current portion of long-term debt
    
    $
    74,546
    
    
    $
    Accounts payable and accrued liabilities
    
    
    2,186
    
    
    
    5,669Fair value of derivative financial instruments
    
    
    
    
    
    
    3,228Liquidated damages
    
    
    2,593
    
    
    
    2,59179,325
    
    
    
    11,488Long-term debt
    
    
    
    
    
    
    52,243Asset retirement obligations
    
    
    809
    
    
    
    628Fair value of derivative financial instruments
    
    
    
    
    
    
    3,571Stockholders equity (deficit):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, 60,557,637 and 60,572,442
shares issued and outstanding at December 31, 2008 and 2007
    
    
    61
    
    
    
    61Additional paid-in capital
    
    
    47,576
    
    
    
    47,224Accumulated deficit
    
    
    (89,049
    )
    
    
    (29,792
    )Accumulated other comprehensive income (loss)
    
    
    2,378
    
    
    
    (6,799
    )(39,034
    )
    
    
    10,694$
    41,100
    
    
    $
    78,624
  39




---



##### 



FOOTHILLS RESOURCES, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (dollars in thousands, except per share amounts)
 Year Ended December 31,2008
    
    
    2007
    
    
    2006Income:Oil and gas revenues
    
    $
    14,439
    
    
    $
    15,171
    
    
    $
    4,605Interest income
    
    
    12
    
    
    
    256
    
    
    
    24814,451
    
    
    
    15,427
    
    
    
    4,853Expenses:Production costs
    
    
    4,999
    
    
    
    4,907
    
    
    
    1,346General and administrative
    
    
    3,612
    
    
    
    3,374
    
    
    
    3,352Interest
    
    
    8,137
    
    
    
    10,205
    
    
    
    3,090Liquidated damages
    
    
    1
    
    
    
    2,591
    
    
    
    Depreciation, depletion and amortization
    
    
    5,968
    
    
    
    2,785
    
    
    
    829Ceiling write-down of oil and gas properties
    
    
    50,991
    
    
    
    
    
    
    
    Loss on early extinguishment of debt
    
    
    
    
    
    
    17,593
    
    
    
    73,708
    
    
    
    41,455
    
    
    
    8,617Net loss
    
    $
    (59,257
    )
    
    $
    (26,028
    )
    
    $
    (3,764
    )Basic and diluted net loss per share
    
    $
    (0.98
    )
    
    $
    (0.43
    )
    
    $
    (0.09
    )Weighted average number of common
shares outstanding  basic and diluted
    
    
    60,561,561
    
    
    
    60,454,510
    
    
    
    43,966,775
  40




---



##### 



FOOTHILLS RESOURCES, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (dollars in thousands)
 Year Ended December 31,2008
    
    
    2007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (59,257
    )
    
    $
    (26,028
    )
    
    $
    (3,764
    )Adjustments to reconcile net loss to
net cash used for operating activities -Stock-based compensation
    
    
    450
    
    
    
    500
    
    
    
    388Depreciation, depletion and amortization
    
    
    5,913
    
    
    
    2,741
    
    
    
    815Accretion of asset retirement obligation
    
    
    55
    
    
    
    44
    
    
    
    14Non-cash interest expense
    
    
    242
    
    
    
    
    
    
    
    Amortization of discount on long-term debt
    
    
    456
    
    
    
    3,370
    
    
    
    1,101Amortization of debt issue costs
    
    
    862
    
    
    
    239
    
    
    
    64Ceiling write-down of oil and gas properties
    
    
    50,991
    
    
    
    
    
    
    
    Casualty loss
    
    
    30
    
    
    
    
    
    
    
    Loss on early extinguishment of debt
    
    
    
    
    
    
    7,429
    
    
    
    Changes in assets and liabilities -Accounts receivable
    
    
    766
    
    
    
    (429
    )
    
    
    (1,452
    )Prepaid expenses
    
    
    32
    
    
    
    
    
    
    
    (212
    )Other assets
    
    
    3
    
    
    
    35
    
    
    
    Accounts payable and accrued liabilities
    
    
    (173
    )
    
    
    451
    
    
    
    1,557Liquidated damages
    
    
    1
    
    
    
    2,591
    
    
    
    Net cash provided by (used for) operating activities
    
    
    371
    
    
    
    (9,057
    )
    
    
    (1,489
    )Cash flows from investing activities:Additions to oil and gas properties
    
    
    (18,636
    )
    
    
    (7,850
    )
    
    
    (64,656
    )Additions to other property and equipment
    
    
    (2
    )
    
    
    (58
    )
    
    
    (476
    )Decrease in other assets
    
    
    
    
    
    
    
    
    
    
    (79
    )Net cash used for investing activities
    
    
    (18,638
    )
    
    
    (7,908
    )
    
    
    (65,211
    )Cash flows from financing activities:Proceeds of borrowings
    
    
    31,590
    
    
    
    56,000
    
    
    
    42,500Repayments of borrowings
    
    
    (13,135
    )
    
    
    (44,000
    )
    
    
    Debt issuance costs
    
    
    (238
    )
    
    
    (3,433
    )
    
    
    (685
    )Members capital contributions
    
    
    
    
    
    
    
    
    
    
    50Proceeds from issuance of common stock and warrants
    
    
    
    
    
    
    
    
    
    
    35,616Stock issuance costs
    
    
    (86
    )
    
    
    (110
    )
    
    
    (2,108
    )Net cash provided by financing activities
    
    
    18,131
    
    
    
    8,457
    
    
    
    75,373Net increase (decrease) in cash and cash equivalents
    
    
    (136
    )
    
    
    (8,508
    )
    
    
    8,673Cash and cash equivalents at beginning of the period
    
    
    165
    
    
    
    8,673
    
    
    
    Cash and cash equivalents at end of the period
    
    $
    29
    
    
    $
    165
    
    
    $
    8,673Supplemental disclosures of cash flow information:Cash paid for -Interest
    
    $
    6,251
    
    
    $
    6,370
    
    
    $
    1,816Income taxes
    
    
    
    
    
    
    
    
    
    
    Noncash investing activities -Net increases (decreases) in accrued capital expenditures
    
    
    (3,322
    )
    
    
    2,618
    
    
    
    1,014Oil and gas properties acquired for common stock
    
    
    
    
    
    
    223
    
    
    
    4,174
  41




---



##### 



FOOTHILLS RESOURCES, INC.
 
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
 (dollars in thousands, except per share amounts)
 Accum-ulatedOtherAddi-
    
    
    
    
    
    
    
    
    
    
    Compre-Common Stock
    
    
    tional
    
    
    Mem-
    
    
    Accum-
    
    
    hensivePar
    
    
    Paid-in
    
    
    bers
    
    
    ulated
    
    
    IncomeNumber
    
    
    Value
    
    
    Capital
    
    
    Capital
    
    
    Deficit
    
    
    (Loss)
    
    
    TotalBalance, 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
  42




---



##### 



FOOTHILLS RESOURCES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
(dollars in thousands, except per share amounts)
 Accum-ulatedOtherAddi-
    
    
    
    
    
    
    
    
    
    
    Compre-Common Stock
    
    
    tional
    
    
    Mem-
    
    
    Accum-
    
    
    hensivePar
    
    
    Paid-in
    
    
    bers
    
    
    ulated
    
    
    IncomeNumber
    
    
    Value
    
    
    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
    )
    
    
    10,694Stock-based
compensation
    
    
    (14,805
    )
    
    
    
    
    
    
    438
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    438Change in fair
value of derivative
financial
instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,177
    
    
    
    9,177Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    (86
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (86
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59,257
    )
    
    
    
    
    
    
    (59,257
    )Balance, December
31, 2008
    
    
    60,557,637
    
    
    $
    61
    
    
    $
    47,576
    
    
    $
    
    
    
    $
    (89,049
    )
    
    $
    2,378
    
    
    $
    (39,034
    )
  43




---



##### 



FOOTHILLS RESOURCES, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008
 Note 1  General
 Summary of Operations
   Chapter 11 Cases
 Foothills Texas, Inc., et al., Debtors, Chapter 11 Case No. 09-10452
(CSS)
    44




---



##### 



Note 2  Significant Accounting Policies
 Principles of consolidation
  Use of estimates
  Cash and cash equivalents
  Oil and gas properties
    45




---



##### 



Other property and equipment
  Other assets
  Asset retirement obligations
  2008
    
    
    2007Asset retirement obligation, beginning of year
    
    $
    628
    
    
    $
    570Liabilities incurred
    
    
    126
    
    
    
    14Accretion expense
    
    
    55
    
    
    
    44Asset retirement obligation, end of year
    
    $
    809
    
    
    $
    628
 Income taxes
  46




---



##### 



Revenue recognition
  Stock-based compensation
  Earnings per common share
  Fair value of financial instruments
  Derivative instruments and hedging activities
  47




---



##### 



Concentration of credit risk
   New accounting pronouncements
     48




---



##### 



Note 3  Long-term Debt
  2008
    
    
    2007Senior term loan
    
    $
    52,807
    
    
    $
    50,000Revolving loan
    
    
    23,540
    
    
    
    4,50076,347
    
    
    
    54,500Less: unamortized discount
    
    
    (1,801
    )
    
    
    (2,257
    )74,546
    
    
    
    52,243Less: current portion
    
    
    (74,546
    )
    
    
    $
    
    
    
    $
    52,243
      49




---



##### 



Note 4  Stockholders Equity
 Registration rights payments
     50




---



##### 



Warrants
  Number ofShares Subject
    
    
    
    Exerciseto Warrants
    
    Expiration Date
    
    Price2,580,159
    
    
    December 2017
    
    $
    0.0112,077,380
    
    
    April 2011
    
    $
    1.00473,233
    
    
    September 2011
    
    $
    2.258,046,919
    
    
    September 2011
    
    $
    2.75
 Note 5  Stock and Other Compensation Plans
    2008
    
    2007
    
    2006Risk free interest rate
    
    
    2.5
    %
    
    
    4.6  5.2
    %
    
    
    4.4  5.0
    %Expected volatility
    
    
    95
    %
    
    
    85  116
    %
    
    
    79  138
    %Weighted-average volatility
    
    
    95
    %
    
    
    102
    %
    
    
    88
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected years until exercise
    
    
    3.0
    
    
    
    0.5  3.0
    
    
    
    0.5  3.0
   51




---



##### 



2008
    
    
    2007
    
    
    2006Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding, beginning of year
    
    
    1,880,000
    
    
    $
    1.52
    
    
    
    1,790,000
    
    
    $
    1.53
    
    
    
    
    
    
    $
    Granted
    
    
    597,500
    
    
    
    0.14
    
    
    
    95,000
    
    
    
    1.19
    
    
    
    1,790,000
    
    
    
    1.53Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (188,125
    )
    
    
    0.62
    
    
    
    (5,000
    )
    
    
    1.42
    
    
    
    
    
    
    
    Outstanding, end of year
    
    
    2,289,375
    
    
    $
    1.23
    
    
    
    1,880,000
    
    
    $
    1.52
    
    
    
    1,790,000
    
    
    $
    1.53Exercisable, end of year
    
    
    1,078,750
    
    
    $
    1.43
    
    
    
    1,078,750
    
    
    $
    1.62
    
    
    
    560,000
    
    
    $
    1.82
   Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    
    
    
    
    AverageRemaining
    
    
    Weighted
    
    
    
    
    
    
    Remaining
    
    
    WeightedRange of
    
    
    
    
    
    
    Contractual
    
    
    Average
    
    
    
    
    
    
    Contractual
    
    
    AverageExercise
    
    
    Number
    
    
    Term In
    
    
    Exercise
    
    
    Number
    
    
    Term In
    
    
    ExercisePrices
    
    
    Outstanding
    
    
    Years
    
    
    Price
    
    
    Exercisable
    
    
    Years
    
    
    Price$
    0.14
    
    
    
    483,125
    
    
    
    9.6
    
    
    $
    0.14
    
    
    
    149,375
    
    
    
    9.6
    
    
    $
    0.140.70
    
    
    
    800,000
    
    
    
    7.3
    
    
    
    0.70
    
    
    
    600,000
    
    
    
    7.3
    
    
    
    0.701.17  1.99
    
    
    
    696,250
    
    
    
    7.8
    
    
    
    1.68
    
    
    
    563,750
    
    
    
    7.7
    
    
    
    1.682.50  3.59
    
    
    
    310,000
    
    
    
    7.3
    
    
    
    3.32
    
    
    
    257,500
    
    
    
    7.3
    
    
    
    3.29$
    0.14  3.59
    
    
    
    2,289,375
    
    
    
    7.9
    
    
    $
    1.23
    
    
    
    1,570,625
    
    
    
    7.7
    
    
    $
    1.43
  52




---



##### 



Shares2008
    
    
    2007Outstanding, beginning of year
    
    
    109,772
    
    
    
    Awarded
    
    
    
    
    
    
    141,176Canceled / forfeited
    
    
    (14,805
    )
    
    
    (31,404
    )Outstanding, end of year
    
    
    94,967
    
    
    
    109,772Vested, end of year
    
    
    59,671
    
    
    
    39,183
    Note 6  Income Taxes
  2008
    
    
    2007
    
    
    2006Income tax provision (benefit) at 34%
    
    $
    (20,147
    )
    
    $
    (8,850
    )
    
    $
    (1,280
    )Changes in prior year estimate
    
    
    (232
    )
    
    
    (504
    )
    
    
    Non-deductible expenses
    
    
    158
    
    
    
    185
    
    
    
    139Change in valuation allowance
    
    
    20,221
    
    
    
    9,169
    
    
    
    1,141Income tax provision (benefit)
    
    $
    
    
    
    $
    
    
    
    $
    
 53




---



##### 



2008
    
    
    2007Deferred tax assets:Net operating loss carryforwards
    
    $
    20,869
    
    
    $
    14,616Stock-based compensation
    
    
    464
    
    
    
    311Differences between book and tax bases of
property, plant and equipment
    
    
    9,163
    
    
    
    30,496
    
    
    
    14,927Deferred tax liabilities:Differences between book and tax bases of
property, plant and equipment
    
    
    
    
    
    
    4,652Net deferred tax asset before valuation allowance
    
    
    30,496
    
    
    
    10,275Valuation allowance
    
    
    (30,496
    )
    
    
    (10,275
    )Net deferred tax asset (liability)
    
    $
    
    
    
    $
    
   Potential implications of Chapter 11 Cases
  Note 7  Derivative Instruments and Price Risk Management Activities
  54




---



##### 



NYMEXTotal
    
    
    Swap
    
    
    Fair ValueContract Period and Type
    
    Volume
    
    
    Price
    
    
    (in thousands)Crude oil contracts (barrels)Swap contracts:January 2009  December 2009
    
    
    135,041
    
    
    $
    69.39
    
    
    $
    2,016January 2010  September 2010
    
    
    74,206
    
    
    
    68.00
    
    
    
    362Total
    
    
    $
    2,378
 Note 8  Fair Value Measurements
  
    
    Level 1  Quoted prices in active markets for identical assets or liabilities
    
    Level 2  Quoted prices in active markets for similar assets and liabilities, quoted
prices for identical or similar instruments in markets that are not active, and
model-derived valuations whose inputs are observable or whose significant value drivers
are observable
    
    Level 3  Significant inputs to the valuation model are unobservable.
  Level 1
    
    Level 2
    
    Level 3Fair value of derivative financial instruments
    
    $
    
    
    
    $
    2,378
    
    
    $
    
   55




---



##### 



Note 9  Related Party Transactions
   Note 10  Commitments and Contingencies
 Rental commitments
  2009
    
    $
    1292010
    
    
    1242011
    
    
    42Total
    
    $
    295
  Note 11  Legal Proceedings
  56




---



##### 



Foothills Texas, Inc., et al., Debtors,
Chapter 11 Case No. 09-10452 (CSS)
     Note 12  Subsequent Events
   57




---



##### 



SUPPLEMENTAL OIL AND GAS INFORMATION
   Capitalized Costs
 2008
    
    
    2007Proved properties
    
    $
    90,516
    
    
    $
    75,215Unproved properties
    
    
    898
    
    
    
    76091,414
    
    
    
    75,975Accumulated depreciation, depletion and amortization
    
    
    (60,164
    )
    
    
    (3,389
    )Net capitalized costs
    
    $
    31,250
    
    
    $
    72,586
  Costs Incurred
 2008
    
    
    2007
    
    
    2006Property acquisition:Proved properties
    
    $
    
    
    
    $
    
    
    
    $
    62,939Unproved properties
    
    
    390
    
    
    
    537
    
    
    
    195Exploration
    
    
    10,744
    
    
    
    1,936
    
    
    
    5,818Development
    
    
    4,180
    
    
    
    8,218
    
    
    
    1,448Total costs incurred
    
    $
    15,314
    
    
    $
    10,691
    
    
    $
    70,400
  Oil and Gas Reserve Quantities
    58




---



##### 



2008
    
    
    2007
    
    
    2006Oil
    
    
    Gas
    
    
    Oil
    
    
    Gas
    
    
    Oil
    
    
    GasProved developed and undeveloped reserves, beginning of year
    
    
    4,174
    
    
    
    21,803
    
    
    
    4,431
    
    
    
    21,916
    
    
    
    
    
    
    
    Extensions and discoveries 1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,500
    1Purchase of reserves in-place 2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,501
    
    
    
    446Revisions of previous estimates 3
    
    
    (1,187
    )
    
    
    (20,947
    )
    
    
    (72
    )
    
    
    22
    
    
    
    
    
    
    
    Production
    
    
    (183
    )
    
    
    (79
    )
    
    
    (185
    )
    
    
    (135
    )
    
    
    (70
    )
    
    
    (30
    )Proved developed and undeveloped reserves, end of year 3
    
    
    2,804
    
    
    
    777
    
    
    
    4,174
    
    
    
    21,803
    
    
    
    4,431
    
    
    
    21,916Proved developed reserves, end
of year 3
    
    
    2,708
    
    
    
    777
    
    
    
    3,884
    
    
    
    2,437
    
    
    
    4,030
    
    
    
    2,190
  
 1
    
    During 2006, the Company drilled two successful
wells in the Eel River Basin in California. 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
    
    During 2008, 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 believed this result was inconsistent with the mud
log shows, electric log interpretations, and the offsetting well information.
The Companys conclusion was that polymer fluids used during drilling
operations most likely damaged the reservoirs near the wellbores. The Company
subsequently attempted to fracture the formations beyond the damaged zones in
the wells. Following these operations, the Company was unable to produce
natural gas in commercial quantities from either well, and revised its
estimates of reserves as of December 31, 2008 by eliminating all proved
developed and undeveloped reserves attributable to these formations. 59




---



##### 



Standardized Measure of Discounted Future Net Cash Flows
 2008
    
    
    2007
    
    
    2006Future cash inflows
    
    $
    127,305
    
    
    $
    537,791
    
    
    $
    395,868Future costs Production
    
    
    71,341
    
    
    
    139,969
    
    
    
    116,104Development
    
    
    5,250
    
    
    
    27,230
    
    
    
    20,783Future net cash flows before income taxes
    
    
    50,714
    
    
    
    370,592
    
    
    
    258,981Future income taxes
    
    
    
    
    
    
    91,859
    
    
    
    71,393Future net cash flows
    
    
    50,714
    
    
    
    278,733
    
    
    
    187,58810% discount factor
    
    
    25,107
    
    
    
    142,605
    
    
    
    88,661Standardized measure of discounted future net cash flows
    
    $
    25,607
    
    
    $
    136,128
    
    
    $
    98,927
 Changes in Standardized Measure of Discounted Future Net Cash Flows
 2008
    
    
    2007
    
    
    2006Standardized measure, beginning of year
    
    $
    136,128
    
    
    $
    98,927
    
    
    $
    Increases (decreases) -Sales, net of production costs
    
    
    (13,792
    )
    
    
    (10,464
    )
    
    
    (2,914
    )Net change in sales prices, net of production costs
    
    
    (113,748
    )
    
    
    60,163
    
    
    
    Extensions and discoveries
    
    
    
    
    
    
    
    
    
    
    40,341Changes in estimated future development costs
    
    
    17,911
    
    
    
    (4,618
    )
    
    
    Development costs incurred during the year that reduced
future development costs
    
    
    905
    
    
    
    2,092
    
    
    
    Revisions of quantity estimates
    
    
    (39,734
    )
    
    
    (22,543
    )
    
    
    Accretion of discount
    
    
    15,633
    
    
    
    11,805
    
    
    
    Net change in income taxes
    
    
    20,206
    
    
    
    (1,076
    )
    
    
    (19,130
    )Purchase of reserves in-place
    
    
    
    
    
    
    
    
    
    
    80,630Changes in production rates (timing) and other
    
    
    2,098
    
    
    
    1,842
    
    
    
    Standardized measure, end of year
    
    $
    25,607
    
    
    $
    136,128
    
    
    $
    98,927
  2008
    
    2007
    
    2006Oil
    
    Gas
    
    Oil
    
    Gas
    
    Oil
    
    GasCalifornia
    
    $
    
    
    
    $
    5.54
    
    
    $
    
    
    
    $
    6.54
    
    
    $
    
    
    
    $
    6.08Texas
    
    $
    43.87
    
    
    $
    5.49
    
    
    $
    94.46
    
    
    $
    7.67
    
    
    $
    59.21
    
    
    $
    6.77
 60




---



##### 



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A. Controls and Procedures.
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
  Managements Annual Report on Internal Control Over Financial Reporting.
    Changes in Internal Control Over Financial Reporting
  
 Item 9B. Other Information.
  61




---



##### 



PART III.
 
 Item 10. Directors, Executive Officers and Corporate Governance.
 Directors and Executive Officers
  Directors
    
    Age
    
    Present PositionDennis B. Tower
    
    62
    
    Director, Chairman of the Board and Chief Executive OfficerJohn L. Moran
    
    63
    
    Director and PresidentJohn A. Brock
    
    78
    
    DirectorRalph J. Goehring
    
    52
    
    DirectorFrank P. Knuettel
    
    67
    
    DirectorDavid A. Melman
    
    66
    
    DirectorChristopher P. Moyes
    
    62
    
    Director
  Executive Officers
    
    Age
    
    Present PositionDennis B. Tower
    
    62
    
    Chief Executive Officer, Chairman of the Board and DirectorJohn L. Moran
    
    63
    
    President and DirectorW. Kirk Bosché
    
    58
    
    Chief Financial Officer, Treasurer and SecretaryJames H. Drennan
    
    63
    
    Vice President, Land and LegalMichael L. Moustakis
    
    51
    
    Vice President, Engineering
  , Chairman of the Board, Chief Executive Officer and Director
 62




---



##### 



, President and Director
 , Chief Financial Officer, Treasurer and Secretary
 , Vice President, Land and Legal
 , Vice President, Engineering
 , Director
 63




---



##### 



Director
 , Director
 , Director
 , Director
 Meetings and Committees
   64




---



##### 



Audit Committee
   
    
    Discusses with management and the independent registered public accounting firm the
quality of our accounting principles and financial reporting;
    
    Engages and replaces the independent registered public accounting firm as
appropriate;
    
    Evaluates the performance of, independence of and pre-approves all services provided
by the independent registered public accounting firm; and
    
    Oversees our internal controls.
 Compensation Committee
   
    
    Assists the Board in ensuring that a proper system of long-term and short-term
compensation is in place to provide performance-oriented incentives to management, and
that compensation plans are appropriate and competitive and properly reflect the
objectives and performance of management and the Company;
    
    Establishes the compensation of all of our executive officers;
    
    Prepares a report of the Compensation Committee for inclusion in the Companys
annual proxy statement; and
    
    Administers the Companys equity incentive programs, including the 2007 Equity
Incentive Plan.
   65




---



##### 



Compensation Policies
   Director Nominations
    66




---



##### 



Policy on Attending the Annual Meeting
  Stockholder Communications with the Board
  Section 16(a) Beneficial Ownership Reporting Compliance
             Code of Ethics
  67




---



##### 



Item 11. Executive Compensation.
 Summary Compensation Table
  NonqualifiedStock
    
    
    Option
    
    
    Non-equity
    
    
    Deferred
    
    
    All OtherName and
    
    
    
    
    
    Salary
    
    
    Bonus
    
    
    Awards
    
    
    Awards ($)
    
    
    Incentive Plan
    
    
    Compensation
    
    
    CompensationPrincipal Position
    
    Year
    
    
    ($) (1)
    
    
    ($)
    
    
    ($)(2)
    
    
    (2)
    
    
    Compensation
    
    
    Earnings ($)
    
    
    ($) (3)
    
    
    Total ($)Dennis B. Tower
    
    
    2008
    
    
    
    190,000
    
    
    
    
    
    
    
    15,000
    
    
    
    37,964
    
    
    
    
    
    
    
    
    
    
    
    7,600
    
    
    
    250,564Chief Executive
    
    
    2007
    
    
    
    190,000
    
    
    
    
    
    
    
    26,048
    
    
    
    37,964
    
    
    
    
    
    
    
    
    
    
    
    2,850
    
    
    
    256,862Officer
    
    
    2006
    
    
    
    124,028
    
    
    
    66,500
    
    
    
    
    
    
    
    27,806
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    218,334John L. Moran
    
    
    2008
    
    
    
    190,000
    
    
    
    
    
    
    
    15,000
    
    
    
    37,964
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    242,964President
    
    
    2007
    
    
    
    190,000
    
    
    
    
    
    
    
    26,048
    
    
    
    37,964
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    254,0122006
    
    
    
    124,028
    
    
    
    66,500
    
    
    
    
    
    
    
    27,806
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    218,334W. Kirk Bosché
    
    
    2008
    
    
    
    175,000
    
    
    
    
    
    
    
    10,000
    
    
    
    26,335
    
    
    
    
    
    
    
    
    
    
    
    9,095
    
    
    
    220,430Chief Financial
    
    
    2007
    
    
    
    175,000
    
    
    
    
    
    
    
    17,365
    
    
    
    25,309
    
    
    
    
    
    
    
    
    
    
    
    5,012
    
    
    
    222,686Officer and
Secretary
    
    
    2006
    
    
    
    114,236
    
    
    
    111,250
    
    
    
    
    
    
    
    18,537
    
    
    
    
    
    
    
    
    
    
    
    2,692
    
    
    
    246,715Michael L. Moustakis
    
    
    2008
    
    
    
    180,000
    
    
    
    
    
    
    
    
    
    
    
    75,753
    
    
    
    
    
    
    
    
    
    
    
    8,880
    
    
    
    264,633Vice President,
    
    
    2007
    
    
    
    180,000
    
    
    
    
    
    
    
    
    
    
    
    74,728
    
    
    
    
    
    
    
    
    
    
    
    1,553
    
    
    
    218,181Engineering
    
    
    2006
    
    
    
    37,500
    
    
    
    45,000
    
    
    
    
    
    
    
    10,936
    
    
    
    
    
    
    
    
    
    
    
    95
    
    
    
    93,531James H. Drennan
    
    
    2008
    
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    66,390
    
    
    
    
    
    
    
    
    
    
    
    6,317
    
    
    
    222,707Vice President,
    
    
    2007
    
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    65,364
    
    
    
    
    
    
    
    
    
    
    
    2,817
    
    
    
    256,281Land and Legal
    
    
    2006
    
    
    
    85,417
    
    
    
    
    
    
    
    
    
    
    
    43,576
    
    
    
    
    
    
    
    
    
    
    
    185
    
    
    
    129,178
 
 (1)
    
    Salaries are provided for 2008, 2007 and that part of 2006 during which each Named Executive
Officer served as such. Messrs. Tower, Moran and Bosché commenced employment with the Company
on April 6, 2006. Mr. Moustakis and Mr. Drennan commenced employment with the Company on
October 16, 2006, and May 1, 2006, respectively.(2)
    
    Represents the dollar value recognized in 2008 as compensation expense for financial
statement reporting purposes of restricted shares and options awarded in 2008 or earlier. See
Note 5 to our Notes to Consolidated Financial Statements for a description of the assumptions
made in the valuation of the restricted shares and options.(3)
    
    Consists of the following: (a)
    
    Matching contributions to our 401(k) savings plan during 2008 and 2007,
respectively, for the benefit of the Named Executive Officers in the amounts of
$7,600 and $2,850 for Mr. Tower, $7,000 and $2,917 for Mr. Bosché, $7,200 and $903
for Mr. Moustakis, and $6,000 and $2,500 for Mr. Drennan; and(b)
    
    Life insurance premiums paid during 2008, 2007 and 2006, respectively,
for the benefit of the Named Executive Officers in the amounts of $2,095, $2,095 and
$2,692 for Mr. Bosché, $1,680, $650 and $95 for Mr. Moustakis, and $317, $317 and
$185 for Mr. Drennan.
 Employment Agreements
  68




---



##### 



Dennis B. Tower  Chief Executive Officer
   John L. Moran  President
   W. Kirk Bosché  Chief Financial Officer
   James H. Drennan  Vice President, Land and Legal
  69




---



##### 



Michael L. Moustakis  Vice President, Engineering
    70




---



##### 



Outstanding Equity Awards at Fiscal Year End
  Option Awards
    
    Stock AwardsEquityIncentivePlanEquity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Awards:
    
    Equity IncentiveIncentive Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Number of
    
    Plan Awards:Awards:
    
    
    
    
    
    
    
    
    
    
    
    
    
    Market
    
    Unearned
    
    Market or PayoutNumber of
    
    Number of
    
    Number of
    
    
    
    
    
    
    
    
    
    Number of
    
    Value of
    
    Shares,
    
    Value ofSecurities
    
    Securities
    
    Securities
    
    
    
    
    
    
    
    
    
    Share or
    
    Shares or
    
    Units or
    
    Unearned Shares,Underlying
    
    Underlying
    
    Underlying
    
    
    
    
    
    
    
    
    
    Units of
    
    Units of
    
    Other
    
    Units or OtherUnexercised
    
    Unexercised
    
    Unexercised
    
    Option
    
    Option
    
    Stock That
    
    Stock That
    
    Rights That
    
    Rights ThatOptions (#)
    
    Options (#)
    
    Unearned
    
    Exercise
    
    Expiration
    
    Have Not
    
    Have Not
    
    Have Not
    
    Have NotName
    
    Exercisable
    
    Unexercisable
    
    Options (#)
    
    Price ($)
    
    Date
    
    Vested (#)
    
    Vested ($)
    
    Vested (#)
    
    Vested ($)Dennis B. Tower
    
    
    225,000
    
    
    
    75,000
    (1)
    
    
    
    
    
    $
    0.70
    
    
    
    4/6/2016
    
    
    
    13,236
    (3)
    
    
    199
    
    
    
    
    
    
    
    John L. Moran
    
    
    225,000
    
    
    
    75,000
    (1)
    
    
    
    
    
    $
    0.70
    
    
    
    4/6/2016
    
    
    
    13,236
    (3)
    
    
    199
    
    
    
    
    
    
    
    W. Kirk Bosché
    
    
    150,000
    
    
    
    50,000
    (1)
    
    
    
    
    
    $
    0.70
    
    
    
    4/6/2016
    
    
    
    8,824
    (3)
    
    
    132
    
    
    
    
    
    
    
    W. Kirk Bosché
    
    
    25,000
    
    
    
    75,000
    (2)
    
    
    
    
    
    $
    0.14
    
    
    
    8/20/2018
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Michael L. Moustakis
    
    
    150,000
    
    
    
    50,000
    (1)
    
    
    
    
    
    $
    1.99
    
    
    
    11/7/2016
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Michael L. Moustakis
    
    
    25,000
    
    
    
    75,000
    (2)
    
    
    
    
    
    $
    0.14
    
    
    
    8/20/2018
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    James H. Drennan
    
    
    75,000
    
    
    
    25,000
    (1)
    
    
    
    
    
    $
    3.59
    
    
    
    5/2/2016
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    James H. Drennan
    
    
    25,000
    
    
    
    75,000
    (2)
    
    
    
    
    
    $
    0.14
    
    
    
    8/20/2018
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    The right to exercise these shares will vest on April 6, 2009, for Messrs. Tower, Moran and
Bosché, on November 7, 2009, for Mr. Moustakis, and on May 2, 2009, for Mr. Drennan, in each
such case if the Named Executive Officer is still employed by the Company on such date.(2)
    
    The right to exercise these shares will vest in three equal annual installments beginning
August 20, 2009, in each case if the Named Executive Officer is still employed by the Company
on such date.(3)
    
    These shares will vest on April 6, 2009, in each case if the Named Executive Officer is still
employed by the Company on such date. Director Compensation
  Non-equity
    
    NonqualifiedFees Earned or
    
    
    
    
    
    
    
    
    
    Incentive Plan
    
    Deferred
    
    All OtherPaid in Cash
    
    Stock
    
    Option
    
    Compensation
    
    Compensation
    
    CompensationName
    
    ($)
    
    Awards ($)
    
    Awards ($)
    
    ($)
    
    Earnings ($)
    
    ($)
    
    Total ($)John A. Brock
    
    
    15,000
    
    
    
    
    
    
    
    37,364
    (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,364Ralph J. Goehring
    
    
    5,000
    
    
    
    
    
    
    
    1,025
    (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,025Frank P. Knuettel
    
    
    10,000
    
    
    
    
    
    
    
    50,157
    (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,157David A. Melman
    
    
    15,000
    
    
    
    
    
    
    
    22,832
    (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,832Christopher P. Moyes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    207,665
    (3)
    
    
    207,665
 
 (1)
    
    Represents the dollar value recognized in 2008 as compensation expense for financial
statement reporting purposes of options awarded prior to fiscal year 2008. See Note 5 to our
Notes to Consolidated Financial Statements for a description of the assumptions made in the
valuation of the options. The grant-date fair values per option for Messrs. Brock, Knuettel
and Melman were $1.12, $1.50 and $0.68, respectively. One-hundred thousand stock option
awards remain outstanding.(2)
    
    Represents the dollar value recognized in 2008 as compensation expense for financial
statement reporting purposes of options awarded in fiscal year 2008. See Note 5 to our Notes
to Consolidated Financial 71




---



##### 



Statements for a description of the assumptions made in the
valuation of the options. The grant-date fair
value per option for Mr. Goehring was $0.08. One-hundred thousand stock option awards
remain outstanding.(3)
    
    Includes fees payable for fiscal year 2008 under our consulting agreement with Moyes & Co.,
Inc. Prior to the termination of the agreement effective November 30, 2008, Moyes & Co., Inc.
identified potential acquisition, development, exploitation and exploration opportunities that
fit with our strategy, and was expected to screen opportunities and perform detailed
evaluation of those opportunities that we decided to pursue, as well as assist with due
diligence and negotiations with respect to such opportunities. Mr. Moyes is a major
stockholder and the President of Moyes & Co., Inc. Pursuant to the terms of our agreement
with Moyes & Co., Inc., Mr. Moyes did not receive any further compensation for serving on our
Board.     Compensation Committee Interlocks and Insider Participation
  Compensation Committee Report
  
 72




---



##### 



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
 Principal Stockholders
  Beneficial OwnershipBeneficial Owner
    
    Number of Shares (#)
    
    Percent of Total (%)Dennis B. Tower (1)
    
    
    5,329,783
    
    
    
    8.7
    %John L. Moran (2)
    
    
    5,287,158
    
    
    
    8.7
    %W. Kirk Bosché (3)
    
    
    3,458,176
    
    
    
    5.7
    %Christopher P. Moyes (4)
    
    
    1,520,475
    
    
    
    2.5
    %Michael L. Moustakis (5)
    
    
    368,000
    
    
    
    
    *James H. Drennan (6)
    
    
    125,000
    
    
    
    
    *Frank P. Knuettel (7)
    
    
    225,001
    
    
    
    
    *John A. Brock (8)
    
    
    75,000
    
    
    
    
    *David A. Melman (9)
    
    
    112,500
    
    
    
    
    *Ralph J. Goehring (10)
    
    
    125,000
    
    
    
    
    *Goldman, Sachs & Co. (11)
    
    
    8,000,000
    
    
    
    12.3
    %Executive Officers and Directors as Group
    
    
    16,626,093
    
    
    
    26.7
    %
 
 *
    
    Denotes less than 1% 73




---



##### 



Notes:(1)
    
    Includes warrants to acquire 112,500 shares of common stock purchased in the April 2006
offering and exercisable within 60 days of March 31, 2009. Includes options exercisable
within 60 days to acquire 300,000 shares of common stock. Includes 35,564 shares of
restricted stock awarded under our 2007 Equity Incentive Plan. Includes 4,467,383 shares of
common stock owned by The Tower Family Trust.(2)
    
    Includes options exercisable within 60 days of March 31, 2009, to acquire 300,000 shares of
common stock. Includes 35,439 shares of restricted stock awarded under our 2007 Equity
Incentive Plan.(3)
    
    Includes warrants to acquire 54,000 shares of common stock purchased in the April 2006
offering and exercisable within 60 days of March 31, 2009. Includes options exercisable
within 60 days of March 31, 2009, to acquire 225,000 shares of common stock. Includes 23,964
shares of restricted stock awarded under our 2007 Equity Incentive Plan.(4)
    
    Includes 217,188 shares of common stock held by MMP LLP, in which Mr. Moyes is a partner.
Includes warrants to acquire 25,500 shares of common stock exercisable within 60 days of March
31, 2009, which warrants were purchased by Choregus Master Trust, Plan I, Money Purchase and
Choregus Master Trust, Plan II, Profit Sharing in the April 2006 offering, and of which
warrants Mr. Moyes is deemed to be the beneficial owner.(5)
    
    Includes options exercisable within 60 days of March 31, 2009, to acquire 175,000 shares of
common stock.(6)
    
    Includes options exercisable within 60 days of March 31, 2009, to acquire 125,000 shares of
common stock.(7)
    
    Includes options exercisable within 60 days of March 31, 2009, to acquire 100,000 shares of
common stock. Also includes 71,429 shares of common stock and warrants to acquire 53,572
shares of common stock exercisable within 60 days, which shares and warrants were purchased by
Francis P. Knuettel as Trustee of the Francis P. Knuettel Rev LVG TR UA DTD 3/7/03.(8)
    
    Includes options exercisable within 60 days of March 31, 2009, to acquire 75,000 shares of
common stock.(9)
    
    Includes options exercisable within 60 days of March 31, 2009, to acquire 75,000 shares of
common stock. Also includes warrants to acquire 37,500 shares of common stock purchased in the
April 2006 offering and exercisable within 60 days of March 31, 2009.(10)
    
    Includes options exercisable within 60 days of March 31, 2009, to acquire 25,000 shares of
common stock.(11)
    
    Includes warrants to acquire 4,666,667 shares of common stock acquired in the September 2006
offering and exercisable within 60 days of March 31, 2009. The address of Goldman, Sachs &
Co. is 85 Broad Street, New York, New York 10004. The information included herein is based
solely upon a Schedule 13G filed by Goldman Sachs & Co. on October 10, 2006. 
 Item 13. Certain Relationships and Related Transactions, and Director Independence.
 Certain Transactions with Directors and Executive Officers
   74




---



##### 



Director Independence
  
 Item 14. Principal Accountant Fees and Services.
  Year Ended December 31,2008
    
    
    2007Audit fees
    
    $
    62,477
    
    
    $
    67,393Audit-related fees
    
    
    1,600
    
    
    
    3,500Tax fees
    
    
    46,043
    
    
    
    23,408All other fees
    
    
    
    
    
    
    Total fees
    
    $
    110,120
    
    
    $
    94,301
  Pre-Approval Policy
  75




---



##### 



Item 15. Exhibits and Financial Statement Schedules.
 (a)
    
    (1)    FINANCIAL STATEMENTS  The following consolidated financial statements of
Foothills Resources, Inc. and Subsidiaries contained under Item 8 of this
Form 10-K are incorporated herein by reference:
 
    
    Consolidated Balance Sheets as of December 31, 2008 and December 31, 2007
    
    Consolidated Statements of Operations for the years ended December 31,
2008, 2007 and 2006
    
    Consolidated Statements of Cash Flows for the years ended December 31,
2008, 2007 and 2006
    
    Consolidated Statements of Stockholders Equity (Deficit) for the years
ended December 31, 2008, 2007 and 2006
 (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 76 of this Annual Report on Form 10-K.
 
 EXHIBIT INDEX
 Exhibit No.
    
    Description2.1
    
    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. (1)3.1
    
    Articles of Incorporation of Foothills Resources, Inc. (2)3.2
    
    Certificate of Amendment of the Articles of Incorporation of Foothills Resources, Inc. (3)3.3
    
    Articles of Amendment to the Articles of Incorporation of Foothills Resources, Inc. (4)3.4
    
    Bylaws of Foothills Resources, Inc. (5)3.5
    
    Amended and Restated Articles of Incorporation of Foothills Resources, Inc. (6)3.6
    
    Amended and Restated Bylaws of Foothills Resources, Inc. (7)4.1
    
    Specimen Stock Certificate of Foothills Resources, Inc. (8)4.2
    
    Form of Warrant issued to the Investors in the Private Placement Offering, April 6, 2006. (9)4.3
    
    Warrant issued to Goldman, Sachs & Co. in connection with the Credit Agreement, dated as of
September 8, 2006. (10)4.4
    
    Warrant issued to Goldman, Sachs & Co. in the offering, dated as of September 8, 2006. (11)4.5
    
    Form of Warrant issued to the Investors in the Private Placement Offering, September 8, 2006.
(12)4.6
    
    Warrant issued to Regiment Capital Special Situations Fund III, L.P. in connection with the
Credit Agreement, dated December 13, 2007. (13)10.1
    
    Employment Agreement, dated April 6, 2006, by and between Foothills Resources, Inc. and Dennis
B. Tower. (14)10.2
    
    Employment Agreement, dated April 6, 2006, by and between Foothills Resources, Inc. and John
L. Moran. (15)
 76




---



##### 



Exhibit No.
    
    Description10.3
    
    Employment Agreement, dated April 6, 2006, by and between Foothills Resources, Inc. and W.
Kirk Bosché. (16)10.4
    
    Employment Offer Letter and Agreement, dated April 21, 2006, by and between Foothills
Resources, Inc. and James Drennan. (17)10.5
    
    Form of Indemnity Agreement by and between Foothills Resources, Inc. and the Directors and
Officers of Foothills Resources, Inc. (18)10.6
    
    Farmout and Participation Agreement, dated as of January 3, 2006, by and between INNEX
California, Inc. and Brasada Resources, LLC. (19)10.6
    
    Registration Rights Agreement, dated as of September 8, 2006, by and between Foothills
Resources, Inc. and TARH E&P Holdings, L.P. (20)10.7
    
    Conveyance of Overriding Royalty Interest, dated as of September 8, 2006, from Foothills
Texas, Inc. to MTGLQ Investors, L.P. (21)10.8
    
    Employment Agreement, dated October 4, 2006, by and between Foothills Resources, Inc. and
Michael Moustakis. (22)10.9
    
    Credit Agreement, dated as of December 13, 2007, by and among Foothills Resources, Inc.,
certain subsidiaries of Foothills Resources, Inc., various lenders and Wells Fargo Foothill,
LLC. (23)10.10
    
    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. (24)10.11
    
    Forbearance Agreement, dated as of August 13, 2008, among Foothills and each of its
subsidiaries as borrowers, various lenders and Wells Fargo Foothill, LLC as agent. (25)10.12
    
    Third Amendment to Credit Agreement and Amended and Restated Forbearance Agreement, dated as
of September 15, 2008, among Foothills and each of its subsidiaries as borrowers, various
lenders and Wells Fargo Foothill, LLC as agent. (26)10.13
    
    Limited Waiver to Credit Agreement and Amendment to Third Amendment to Credit Agreement and
Amended and Restated Forbearance Agreement, dated as of December 2, 2008. (27)10.14
    
    Amended and Restated Employment Agreement, dated as of December 10, 2008, by and among
Foothills Resources, Inc. and Dennis B. Tower (28)10.15
    
    Amended and Restated Employment Agreement, dated as of December 10, 2008, by and among
Foothills Resources, Inc. and John L. Moran (29)10.16
    
    Amended and Restated Employment Agreement, dated as of December 10, 2008, by and among
Foothills Resources, Inc. and W. Kirk Bosché (30)10.17
    
    DIP Credit Agreement, dated as of February 23, 2009, among Foothills Resources, Inc., each of
its subsidiaries, various lenders, and Regiment Capital Special Situations Fund III, L.P. (31)10.18
    
    Change in Control / Severance / Retention Agreement, dated as of October 1, 2008, by and among
Foothills Resources, Inc. and James H. Drennan 10.19
    
    Change in Control / Severance / Retention Agreement, dated as of October 1, 2008, by and among
Foothills Resources, Inc. and Michael L. Moustakis 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. (32)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. 
 77




---



##### 



Exhibit No.
    
    Description32.1
    
    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.1.
    
    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).2.
    
    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.
    
    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).4.
    
    Incorporated by reference to Exhibit 3.3 to the Form 10-KSB filed with the Securities and
Exchange Commission on March 28, 2008 (File No. 001-31547).5.
    
    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).6.
    
    Incorporated by reference to Exhibit 3.5 to the Form 10-Q filed with the Securities and
Exchange Commission on November 14, 2008 (File No. 001-31547).7.
    
    Incorporated by reference to Exhibit 3.6 to the Form 10-Q filed with the Securities and
Exchange Commission on November 14, 2008 (File No. 001-31547).8.
    
    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).9.
    
    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).10.
    
    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).11.
    
    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).12.
    
    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).13.
    
    Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 17, 2007 (File No. 001-31547).14.
    
    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).15.
    
    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).16.
    
    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).17.
    
    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). 78




---



##### 



18.
    
    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).19.
    
    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).20.
    
    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).21.
    
    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).22.
    
    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).23.
    
    Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 17, 2007 (File No. 001-31547).24.
    
    Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 17, 2007 (File No. 001-31547).25.
    
    Incorporated by reference to Exhibit 10.21 to the Form 10-Q filed with the Securities and
Exchange Commission on August 14, 2008 (File No. 001-31547).26.
    
    Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on October 21, 2008 (File No. 001-31546).27.
    
    Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 8, 2008 (File No. 001-31546).28.
    
    Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 15, 2008 (File No. 001-31546).29.
    
    Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 15, 2008 (File No. 001-31546).30.
    
    Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 15, 2008 (File No. 001-31546).31.
    
    Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 27, 2009 (File No. 001-31546).32.
    
    Incorporated by reference to the signature page of this Annual Report on Form 10-K. 79




---



##### 



Dated: May 11, 2009
    FOOTHILLS RESOURCES, INC./s/ Dennis B. TowerDennis B. TowerChief Executive Officer POWER OF ATTORNEY
   Name
    
    Position
    
    Date/s/ Dennis B. Tower
    
    Chief Executive Officer,
Director
    
    May 11, 2009Dennis B. Tower
    
    (Principal Executive
Officer)/s/ John L. Moran
    
    President, Director
    
    May 11, 2009John L. Moran/s/ W. Kirk Bosché
    
    Chief Financial Officer
    
    May 11, 2009W. Kirk Bosché
    
    (Principal Financial Officer)/s/ John A. Brock
    
    Director
    
    May 11, 2009John A. Brock/s/ Ralph J. Goehring
    
    Director
    
    May 11, 2009Ralph J. Goehring/s/ Frank P. Knuettel
    
    Director
    
    May 11, 2009Frank P. Knuettel/s/ David A. Melman
    
    Director
    
    May 11, 2009David A. Melman/s/ Christopher P. Moyes
    
    Director
    
    May 11, 2009Christopher P. Moyes
 80