AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON



### May 17, 2006



SECURITIES AND EXCHANGE
COMMISSIONWASHINGTON, D.C.  20549



### FORM 10-KSB

(Mark One)

[  X ]          ANNUAL REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934For the fiscal year ended:February
28, 2006



[   ]           TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934For the transition period
from_________________ to _________________________



Commission file number:333-91191



### INTERMOUNTAIN REFINING CO., INC.

(Name of small business issuer in its
charter)



|NEW MEXICO                                                     | 74-2329327                             
|-------------------------------------------------------------- | ---------------------------------------
|(State or other jurisdiction of incorporation
or organization) | (I.R.S. Employer Identification
Number)



1921 Bloomfield
BoulevardFarmington, New Mexico 
87401Telephone: (505)
326-2668(Address, including zip code, and
telephone number, including area code, of issuer's principal executive
offices)

Securities registered under Section 12(b) of the Exchange
Act: NoneSecurities registered under
Section 12(g) of the Exchange Act: None

Check whether the issuer is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act[    ]

Note - Checking the box above will not relieve any Registrant
required to file reports pursuant to Section 13 or 15(d) of the Exchange Act
from their obligations under those Sections.

Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes
X  No .

-Continued-

10-KSB 1 <Page>

Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB. [
]	Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act. Yes____ No
_X_



State issuer's revenues for its most recent fiscal year:
$1,232,010

State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to the price at which
the common equity was sold, or average bid and asked price of such common
equity, as of a specified date within the past 60 days. (See definition of
affiliate in Rule 12b-2 of the Exchange Act)  N/A as of April 30, 2006. There
presently is no market maker for the Registrant's common stock. As no public
trading market exists for the stock , bid and ask prices are not
available.Note: If determining whether a
person is an affiliate will involve an unreasonable effort and expense, the
issuer may calculate the aggregate market value of the common equity held by
non-affiliates on the basis of reasonable assumptions, if the assumptions are
stated.

(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING
DURING THE PAST FIVE YEARS)

Check whether the issuer has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes_____ No
_____

(APPLICABLE ONLY TO CORPORATE
REGISTRANTS)



State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: 1,155,609 shares
of common stock, no par value, were outstanding on April 30,
2006.

DOCUMENTS INCORPORATED BY
REFERENCE

If the following documents are incorporated by reference,
briefly describe them and identify the part of the Form 10-KSB (e.g. Part I,
Part II, etc.) into which the document is incorporated: (1) any annual report to
security holders; (2) any proxy or information statement; and (3) any prospectus
filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933 ("Securities
Act"). The list documents should be clearly described for identification
purposes (e.g. annual report to security holders for fiscal year ended December
24, 1990).

Certain exhibits required to be filed in Part IV of
this Form 10-KSB have been incorporated by reference to Intermountain's
registration statement on Form S-1 dated April 9, 2001. See exhibit index on
page 35 of this report.

Transitional Small Business Disclosure Format (check one)
Yes____ No _X_

10-KSB 2 <Page>

### Cross Reference Sheet



The Registrant has included all information required in Parts
I, II and III of Form 10-KSB in its Integrated Annual Report to Shareholders as
of February 28, 2006 as filed herein as part of this report. The following table
provides a cross reference to the specific pages and sections of the Integrated
Annual Report to Shareholders where the information required in Form 10-KSB may
be found:





|Item in Form 10-KSB                                                                          | Section in Integrated Annual Report to
Shareholders                                   | Page
|-------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ----
|Part I                                                                                       |                                                                                       |     
|Item 1. Description of Business                                                              | Intermountain's Business Activities                                                   | 3   
|Item 2. Description of Property                                                              | Description of Properties                                                             | 5   
|Item 3. Legal Proceedings                                                                    | Legal Proceedings                                                                     | 6   
|Item 4. Submission of Matters to a Vote of Security
Holders                                  | Submission of Matters to a Vote of Security
Holders                                   | 6   
|Part II                                                                                      |                                                                                       |     
|Item 5. Market for Common Equity and Related Stockholder
Matters                             | Market for Common Equity and Related Shareholder
Matters                              | 6   
|Item 6. Management's Discussion and Analysis or Plan of
Operation                            | Management's Discussion and Analysis of Financial Condition
and Results of Operations | 7   
|Item 7. Financial Statements                                                                 | Financial Statements of Intermountain                                                 | 7   
|Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure | Changes in and Disagreements with Accountants                                         | 7   
|Item 8A. Controls and Procedures                                                             | Controls and Procedures                                                               | 16  
|Part III                                                                                     |                                                                                       |     
|Item 9. Directors, Executive Officers, Promoters and Control
Persons;                        | Directors and Executive Officers                                                      | 13  
|Compliance with Section 16(a) of the Exchange
Act                                            | Compliance with Section 16(a) of the Exchange
Act                                     | 15  
|Code of Ethics                                                                               | Code of Ethics                                                                        | 15  
|Item 10. Executive Compensation                                                              | Compensation of Directors and Executive
Officers                                      | 14  
|Item 11. Security Ownership of Certain Beneficial Owners and
Management                      | Security Ownership of Certain Beneficial Owners and
Management                        | 15  
|Item 12. Certain Relationships and Related
Transactions                                      | Certain Relationships and Related Party
Transactions                                  | 15  
|Item 13. Exhibits                                                                            | See Page 35 of this Form 10-KSB                                                       | N/A 
|Reports on Form 8-K                                                                          | None                                                                                  | N/A 
|Item 16. Principal Accountant Fees and Services                                              | Principal Accountant Fees and Services                                                | 16  

10-KSB 3 <Page>

### Intermountain Refining Co., Inc.

### Integrated Annual Report to Shareholders

### February 28, 2006













































The information contained within this report is
intended to provide all information required to comply with the Securities
Exchange Act of 1934 disclosure requirements of Form 10-KSB except for required
exhibits and disclosure about reports filed on Form 8-K for which disclosure has
been included in our Form 10-KSB as filed with the Securities and Exchange
Commission on May 17, 2006. You may obtain a copy of our Form 10-KSB as filed by
submitting a written request to Intermountain Refining Co., Inc., PO Box 35,
Farmington, NM 87499 or you can access our public filings on the internet at
"www.sec.gov" by searching the Edgar Database on "Intermountain
Refining".

10-KSB
4                                                                             
IARS- 1<Page>

### Table Of Contents





|                                                                                     | Page
|------------------------------------------------------------------------------------ | ----
|Intermountain's Business Activities                                                  | 3   
|Natural Gas Production                                                               | 3   
|Crude Oil Production                                                                 | 3   
|Leasing of Asphalt Products Manufacturing and Storage
Facilities                     | 4   
|Other Business Activities                                                            | 4   
|Employees                                                                            | 4   
|Research and Development Activities                                                  | 4   
|Government Regulation, Environmental Laws and
Taxes                                  | 4   
|Competition                                                                          | 4   
|Seasonality                                                                          | 5   
|Description Of Properties                                                            | 5   
|Legal Proceedings                                                                    | 6   
|Submission of Matters to a Vote of Security
Holders                                  | 6   
|Market for Common Equity and Related Shareholder
Matters                             | 6   
|Market for Intermountain Common Stock                                                | 6   
|Shares Eligible for Future Sale                                                      | 6   
|Dividends                                                                            | 6   
|Financial Statements Of Intermountain                                                | 7   
|Changes In And Disagreements With Accountants                                        | 7   
|Managements Discussion And Analysis Of Financial Condition
And Results Of Operations | 7   
|Liquidity and Capital Resources                                                      | 7   
|Cash Requirements as of February 28, 2006                                            | 7   
|Results of Operations                                                                | 8   
|Changes in Accounting Principles                                                     | 12  
|Critical Accounting Estimates                                                        | 12  
|Inflation, Deflation and Changing Prices                                             | 13  
|Directors And Executive Officers                                                     | 13  
|Compensation Of Directors And Executive
Officers                                     | 14  
|Security Ownership Of Certain Beneficial Owners And
Management                       | 15  
|Security Ownership of Certain Owners                                                 | 15  
|Security Ownership of Management                                                     | 15  
|Code of Ethics                                                                       | 15  
|Compliance with Section 16(a) of the Exchange
Act                                    | 15  
|Certain Relationships And Related Party
Transactions                                 | 15  
|Controls and Procedures                                                              | 16  
|Principal Accountant Fees and Services                                               | 16  
|Index To Financial Statements                                                        | 17  

10-KSB
5                                                                             
IARS- 2<Page>



### Intermountain's Business Activities

Intermountain was incorporated under the laws of the state of
New Mexico in January 1984 and conducts its business in the following
areas:

- Production of oil and natural gas
- Leasing of asphalt products manufacturing and storage
facilities
- Other business activities including leasing unused space in
Intermountain's office building

### Natural Gas Production

We own working interests in and operate 19 natural gas
producing wells located in Southwestern Kansas. Natural gas and helium produced
is sold, under exclusive contract, to Oneok Field Services. Day to day
operation and maintenance of the wells is performed by an individual under
contract with Intermountain.  We have no current plans to drill additional wells
on the Kansas leases, but we are actively engaged in reviewing potential
acquisitions of oil and gas producing properties in other areas.

The exclusive contract with Oneok Field Services contains the
following material provisions:

- The original term of the agreement was for one year beginning
on December 1, 1994 and continued on a month-to-month basis until February 1,
2000 when the term was extended for five years until January 31, 2005. As
neither party has terminated the agreement, the term of the agreement will
continue on a year-to-year basis unless terminated by either party on sixty days
notice prior to the end of any extended term. Oneok has the option to terminate
the agreement at any time on thirty days notice if Oneok determines that the
purchase of gas under the contract is uneconomic.
- The monthly price paid to Intermountain for natural gas
produced and delivered to Oneok is based on the published first of month index
price for natural gas delivered to Panhandle Eastern Pipeline Co. in Texas and
Oklahoma, less $.15 per million Btu, less a minimum gathering fee of $.2029 per
million Btu and less 0.8% charge for fuel, loss and, unaccounted for gas. The
gathering fee is adjusted annually on January 1 based on the change in the gross
domestic product implicit price deflator for the prior 12 months.
- With the exception of small quantities of agricultural use
gas sold to several local landowners, we are committed to deliver our entire
deliverable capacity from all of our wells for purchase by Oneok at such times
and in such quantities as Oneok may request.
- Payments to Intermountain for gas purchased are due from
Oneok on the 30th day of the month following the month of delivery.
We do not require any collateral or other security for amounts receivable from
Oneok.
- We are responsible for the payment of all taxes, including
production, severance, excise, and property taxes, associated with the
production of natural gas. Oneok reports and pays monthly production and
severance taxes to the state of Kansas on our behalf and withholds such amounts
from payments made to us.

We depend on Oneok
for substantially all of our natural gas sales, which represents a significant
portion of our total revenues.

On August 1, 2004, we acquired an estimated 12.28% working
interest (9.98% net revenue interest) in 15 natural gas wells located on
approximately 5,420 gross acres in San Juan County New Mexico. The wells are
operated by an unrelated third party. During the year ended February 28, 2006,
we participated in the drilling of one in-fill well on the lease acreage.

### Crude Oil Production

Effective as of November 1, 2005 we sold our 90% working
interest (72% net revenue interest) in the oil producing properties located in
Kimball County, Nebraska. The property consisted of approximately 640 gross
acres with two producing wells, two water flood injection wells, one fresh water
well, equipment and contracts. The properties were operated by an unrelated
third party.  This property did not provide a significant source of revenues for
Intermountain. Intermountain does not own any other significant crude oil
producing properties.

### Leasing of Asphalt Products Manufacturing and Storage
Facilities

On January 1, 2002, Intermountain and Paramount Petroleum
Corporation entered into an agreement whereby Paramount leases a portion of our
asphalt facilities located in Fredonia, Arizona. Material provisions of the
agreement with Paramount include the following:

10-KSB
6                                                                             
IARS- 3<Page>



- Paramount is responsible for the operation and maintenance of
the asphalt storage and manufacturing facility and is obligated to reimburse
Intermountain for any direct costs that we may incur with respect to Paramount's
operation of the facility during the term of the agreement.
- The primary term of the agreement was for two years beginning
on January 1, 2002 and expired on December 31, 2003. Since the expiration of the
agreement's original term, it has been automatically extended on a year to year
basis. The agreement may be cancelled by either party upon 90 days advance
notification prior to the end of any extended term. As the agreement was not
terminated prior to December 31, 2005, the term of the agreement has been
automatically extended to December 31, 2006.
- Paramount pays $3,200 per month for rent of Intermountain's
asphalt products storage and manufacturing equipment.
- In addition to basic equipment rent, Paramount pays a fee of
$5.50 per ton for all asphalt products shipped from the facility. In the event
that total shipments of asphalt products exceeds 10,000 tons during a calendar
year, Paramount will pay a supplemental fee of $4.50 per ton applicable to all
volumes shipped during the year.

### Other Business Activities

We lease unused office space in our Farmington, New Mexico
office building to unrelated third parties and actively manage the building.
Revenues from office leasing varies between $13 and $25 per square foot annually
depending on the type of space rented and additional services provided to
tenants such as secretarial, phone answering, cleaning, and office machine use.
Leasing of office space should not be viewed as a material source of revenues
for Intermountain.

### Employees

We presently employ three people, including officers, who are
salaried and employed on a full time basis in our administrative offices in
Farmington, New Mexico. All full time employees are eligible to participate
in Intermountain's SIMPLE IRA Plan and a group medical insurance program. None
of our employees are represented by a union and management believes its employee
relations to be satisfactory.

### Research and Development Activities

We have not spent any material amount on research or
development activities since our inception.

### Government Regulations, Environmental Laws and Taxes

Our business is subject to certain national, state and local
laws and regulations relating to the production and transportation of oil,
natural gas and the processing of hydrocarbons, as well as environmental and
safety matters. Many of these laws and regulations have become more stringent in
recent years, imposing greater liability on a larger number of potentially
responsible parties. We believe we have complied in all material respects with
these laws and regulations. Because the requirements imposed by such laws and
regulations are frequently changed, we are unable to predict the ultimate cost
of compliance with these requirements or their effect on our
operations.

The operation of gas fields and the processing of hydrocarbons
inherently involve environmental risks. These risks can be minimized, but not
eliminated, through the use of various engineering and other technological
methods. We intend to employ such methods to industry standards.

Severance taxes on oil and natural gas production are
collected and paid by the first purchaser of the production.

### Competition

The petroleum and natural gas industries are highly
competitive. We encounter competition from other oil and gas and petroleum
companies in all of our operations, including the acquisition of producing
properties, obtaining services, including oil field services, and the sale of
natural gas. Our competitors include integrated petroleum and natural gas
companies and numerous independent oil and gas companies, and individuals. Many
of these competitors are large and well established with substantially larger
operating staffs and greater capital resources and who, in many instances, have
been engaged in the energy business for a much longer time than Intermountain.
Such competitors may be able to develop better information and provide better
analysis of available information, to pay more for raw materials and productive
oil and natural gas properties and exploratory prospects and to define,
evaluate, bid for and purchase a greater number of properties and prospects than
our resources permit.

10-KSB
7                                                                             
IARS- 4<Page>



The market for the asphalt products produced at our asphalt
storage and manufacturing facility in Fredonia, Arizona is generally located in
northwestern Arizona and southwestern Utah. Paramount competes for market share
with various suppliers throughout this region. The long term success of our
equipment lease to Paramount is greatly dependent on Paramount's ability to
compete with the other suppliers in the region.

### Seasonality

Generally, our natural gas wells are produced at a rate
intended to maintain gathering system pressures within an operating range
established by the gathering system operator. Agricultural irrigation users who
are connected to the gathering system tend to have a greater demand for natural
gas during the summer months which in turn lowers gathering system pressures
allowing greater well production. During the winter months, local use is minimal
and the gathering system is operated at higher pressures, which lowers our
production capability. The amount of local rainfall can affect the demand for
natural gas by local agricultural irrigation users, which in turn can affect our
rate of production.

The use of asphalt products for highway construction, repair
and maintenance is usually restricted during winter months where cold weather,
rain and snow are factors. We expect that the majority of fees earned from the
shipment of asphalt products will occur during the months of May through October
and that the asphalt manufacturing facility will normally be idle during the
months of December through March.

### Description of Properties

All properties used in the conduct of our businesses are owned
in fee except for the mineral leases associated with our Kansas, New Mexico (and
formerly Nebraska) oil and gas properties, which are held by production,. 
There are no outstanding mortgages on any of our properties.

We own an average 98.4% working interest (average 79.7% net
revenue interest) in 19 producing natural gas wells on 10,601 gross lease acres
in Scott and Finney Counties in southwest Kansas.  As of February 28, 2006,
the proven producing reserves are estimated to be 2,105 million cubic feet net
to our interest.  For the year ended February 28, 2006, we produced 158
million cubic feet of natural gas net to our interest.

On August 31, 2004, we acquired a 12.48% working interest
(9.98% net revenue interest) in 15 natural gas producing wells on 5,420 gross
acres in San Juan County, New Mexico. During the year ended February 28, 2006,
we participated in the drilling of 1 in-fill well located on the lease acreage.
As of February 28, 2006, the proven producing reserves are estimated to be 342
million cubic feet of natural gas net to our interest. During the year ended
February 28, 2006, we produced 28 million cubic feet of natural gas net to our
interest.

Effective as of November 1, 2005, we sold our entire interest
in the Nebraska properties. The properties consisted of a 90% working interest
(72% net revenue interest) in 2 producing oil wells on 640 gross lease acres in
Kimball County, Nebraska. For the year ended February 28, 2006, we produced 548
barrels of oil net to our interest.

No reserve estimates on any of our oil and gas properties have
been filed with any Federal authorities or agencies.

Additional information relative to our oil and natural gas
reserves and activities is included in Note M of our February 28, 2006 financial
statements included on page 29 of this report. Estimates of reserves are based
on internal data prepared by us and should not be construed as exact quantities.
Estimates of reserves are subject to future changes based on numerous factors,
including, but not limited to, changes in future market prices, changes in
transportation and gathering system operating conditions and arrangements,
changes in operating and production costs, changes in production characteristics
of individual wells, and changes in regulatory requirements. Many of the factors
affecting changes in reserve estimates are unpredictable and beyond our
control.Our asphalt
storage and manufacturing facility is situated on 20 acres of fee-owned land in
Fredonia, Arizona.  A portion of our asphalt storage and manufacturing
equipment is presently leased to Paramount and portions of the asphalt products
manufacturing equipment located at the facility are owned by Paramount. Portions
of the facility that are not under lease to Paramount and not expected to be
used in the future are presently being dismantled and sold for scrap. We have
previously provided an impairment loss on the entire carrying value of the
equipment being dismantled. We do not expect that proceeds from the sale of the
scrap equipment to be a significant source of revenues.

We own a 7,000 square foot office building in Farmington, New
Mexico.  Approximately one half of the office building is used for our
corporate offices.  The remainder of the space is leased, or available for
lease, to non-related tenants.

10-KSB
8                                                                             
IARS- 5<Page>



Intermountain owns two Caterpillar Model 3606 diesel powered
electric generators each capable of producing up to 1.5 megawatts. The generator
facility is located at Intermountain's facility in Fredonia, Arizona. The
generators were taken out of service in January 1999 because Intermountain was
no longer able to generate electricity at competitive prices. During the year
ended February 28, 2006, Intermountain entered into a memorandum of
understanding to sell the electric generation facility (including land,
building, equipment and fuel inventory) to a regional electric power distributor
for approximately $274,000. The memorandum of understanding requires that the
equipment be operational with closing contingent on completion of a 24-48 hour
test run under full load conditions. A test run was attempted on May 1, 2006 but
was not completed due to a cooling system malfunction. Another test run will be
attempted upon completion of necessary repairs. During the year ended February
28,2006, Intermountain incurred $57,505 in improvement costs related to the
generator fuel and cooling systems. The electric generation facility presently
has a combined carrying value of $212,643, net of impairment of $440,935. The
impairment in value reflects the amount by which the carrying value of the
equipment (including land, building, fuel inventory and recent improvements)
exceeds the agreed upon selling price of the facility less an estimated $61,000
in additional improvement costs that we expect to incur in completing the sale.
The actual amount realized from the sale of the equipment may be
different.

### Legal Proceedings

We are not aware of any pending or threatened legal
proceedings to which Intermountain is a party. We are not aware of any pending
or threatened legal proceedings to which any director, officer, affiliate of
Intermountain, or any owner of more than 5% of Intermountain's common stock, is
an adverse party to, or has a material interest adverse to,
Intermountain.

### Submission of Matters to a Vote of Security Holders

There have been no matters submitted to a vote of security
holders during the past year through the solicitation of proxies or
otherwise.

### Market for Common Equity and Related Shareholder Matters

### Market for Intermountain Common Stock

There is presently no public market for our common stock.
Accordingly, we are unable to provide any historical information regarding sales
prices for our common stock. No prediction can be made as to the effect, if any,
that the sale of shares, or the availability of shares for sale, will have on
the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of the common stock in the public market could adversely
affect prevailing market prices and our ability to raise equity capital in the
future.

### Shares Eligible for Future Sale

There are 1,155,609 shares of Intermountain common stock
outstanding held by approximately 425 shareholders. Of the 1,155,609 shares
outstanding, 442,643 shares are freely tradable in the public market without
restriction, and 712,966 shares are subject to restrictions on future sales as
set forth in Rule 144 of the Securities Act of 1933.

Of the 712,966 restricted shares, 704,056 shares are held by
affiliates of Intermountain. In general, persons who are affiliates of
Intermountain are entitled to sell, within any three month period, a number of
shares that does not exceed the greater of the following:

- One percent of the then outstanding shares of common stock,
or
- The average weekly reported trading volume of the common
stock during the four calendar weeks immediately preceding the date on which
notice of such sale is filed with the Securities and Exchange Commission,
provided that manner of sale and notice requirements and requirements as to the
availability of current public information concerning Intermountain are
satisfied.

Mr. William N. Hagler and Mr. Rick
L. Hurt may be considered affiliates of Intermountain. See "Security Ownership
of Certain Beneficial Owners and Management".

### Dividends

Intermountain has never paid any dividends on its common stock
and while there are no restrictions on the payment of dividends, Intermountain
does not anticipate paying any dividends in the foreseeable future.

10-KSB
9                                                                             
IARS- 6<Page>



### Financial Statements of Intermountain

The audited financial statements of Intermountain as of
February 28, 2006 and for each of the two years in the period ended February 28,
2006 are included beginning on page 17 of this report. Supplemental financial
information relative to Intermountain's natural gas reserves and activities is
included in Notes L and M to Intermountain's audited financial statements as of
February 28, 2006 beginning on page 28 of this report.

### Changes in and Disagreements with Accountants

There have been no disagreements between Intermountain and its
accountants regarding financial disclosure issues.

### Management's Discussion and Analysis of Financial Condition and Results of
Operations

The following discussion of our financial condition as of
February 28, 2006 and results of operations for the years ended February 28,
2005 and February 28, 2006, should be read in conjunction with our financial
statements, the notes related thereto, and the other financial data included
elsewhere in this report.

Some of the statements contained in this report relate to
future expectations, contain projections of results of operations or financial
condition or include other forward-looking information. When used in this
report, the words "estimate", "project", "anticipate", "intend", "believe",
"hope", "may" and similar expressions, as well as "will", "shall" and other
indications of future tense, are intended to identify forward-looking
statements. Those statements are subject to known and unknown risks,
uncertainties and other factors that could cause the actual results to differ
materially from those contemplated by the statements.  You are cautioned
not to place undue reliance on the forward-looking statements.

### Liquidity and Capital Resources

The following table presents selected financial data regarding
cash and working capital for each of the past two fiscal years:



|                                         | Fiscal Year Ended
|---------------------------------------- | -----------------
|                                         | February 28, 2005
|Cash and cash equivalents (unrestricted) | $     803,175    
|                                         |                  
|Working capital                          | $     815,542    
|                                         |                  

During the year ended February 28, 2006, we realized $83,000
of cash flow from operating activities. The positive cash flow was primarily
from profits realized from natural gas production and leasing of our asphalt
products manufacturing and storage facility offset by $276,000 cash used for
asbestos abatement at our asphalt products manufacturing and storage facility.
Significant non-operating sources and uses of cash during the year ended
February 28, 2006 included a $14,000 cash down payment from the sale of our
Nebraska crude oil properties and $37,000 proceeds from the surrender of a life
insurance policy offset by $58,000 used for improvements to the electric
generation equipment and $22,000 used for natural gas development costs in New
Mexico.

During the year ended February 28, 2005, we realized $340,000
of cash flow from operating activities. The positive cash flow was primarily the
result of profits realized from natural gas production and leasing of our
asphalt products manufacturing and storage facility. There were no other
significant operating sources or uses of cash during the year. Significant
non-operating uses of cash during the year ended February 28, 2005 included
$411,000 for the acquisition of the natural gas producing properties in New
Mexico.

### Cash requirements as of February 28,
2006

Estimated cash requirements for the next twelve months
include:

- $24,000 per month for normal general and administrative
costs, including costs to operate our Farmington office building
- $1,000 per month estimated costs associated with the
ownership and maintenance of Intermountain's asphalt products manufacturing and
storage facility

10-KSB
10                                                                             
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In its efforts to develop
additional sources of revenues, Intermountain may incur some project development
costs. We are unable to predict the level of costs that may be incurred for such
additional projects during the next year.

Expected sources of cash during the next twelve months consist
of cash flows from operating activities estimated as follows:

- $35,000 per month (net of production costs) from estimated
natural gas operations based on results of operations during the year ended
February 28, 2006 and projected natural gas prices over the next 12
months
- $2,000 per month from Farmington office space
rental
- $1,700 per month dividend and interest income on investments
and cash balances
- $3,200 per month from the rental of our asphalt storage and
manufacturing facility to Paramount, plus an estimated average $12,500 per month
in throughput fees based on annual asphalt product shipments of 15,000 tons
during the coming paving season
- $212,000 from the sale of our electric generation facility
(net of additional improvement costs) subject to successful completion of a
24-48 hour test run expected to be completed during 2006

Estimates of future sources and uses of cash
presented herein are based on our assumptions and expectations that our
operations will continue at current levels without material interruption and
that collection of accounts will occur under agreed terms. Actual results may be
materially different.

It is presently our intent to seek other opportunities to
improve cash flows and operating resources including, but not limited to, the
following:

- the acquisition of one or more producing oil and natural gas
properties
- the participation in, or operating of, petroleum processing
related projects owned by others
- the participation in an industry related merger or
acquisition

There are presently no formal
plans or agreements in place involving any of these generally defined
opportunities and there is no assurance that we will enter into any formal
agreements in the near future that would have a significant impact on
Intermountain's financial condition.

### Results of Operations

The following table summarizes the results of Intermountain's
operations for each of the past two fiscal years. All percentage amounts were
calculated using the underlying data.



|                        | Fiscal Year Ended
|----------------------- | -----------------
|                        | February 28, 2005
|Revenues                | $    922,254     
|Costs and Expenses      | 670,547          
|Net income before taxes | 251,707          
|Income taxes            | 489              
|Net income              | $   251,218      

#### 

#### Revenues

The following table presents a summary of our revenues for the
periods indicated. All percentage amounts were calculated using the underlying
data.



|                                  | February 28, 2005 | % Change | February 28, 2006
|--------------------------------- | ----------------- | -------- | -----------------
|Oil and gas production            | $     672,430     | 46%      | $      983,637   
|Asphalt equipment rental and fees | 189,254           | 16%      | 219,078          
|Real estate rental                | 24,570            | (4)%     | 23,545           
|Other revenues                    | 36,000            | (84)%    | 5,750            
|Total Revenues                    | $     922,254     | 34%      | $  1,232,010     

Changes in individual components of revenues are discussed
below:

10-KSB
11                                                                             
IARS- 8<Page>



##### Oil and natural gas revenues

The following table contains oil and gas production volume,
net to our interest, and average sales prices received for the periods
indicated:





|                                | For the year ended
|------------------------------- | ------------------
|                                | February 28,2005  
|Natural gas produced, net (Mcf) | 176,743           
|Average selling price ($/Mcf)   | $3.64             
|                                |                   
|Crude oil produced, net (Bbls)  | 788               
|Average selling price ($/Bbl)   | $36.57            

The increase in oil and natural gas revenues for the year
ended February 28, 2006 as compared to the year ended February 28, 2005
consisted of a $170,000 (30%) increase in Kansas natural gas revenues and a
$143,000 (217%) increase in New Mexico natural gas revenues offset by a $2,000
(6%) decrease in Nebraska crude oil revenues. The increase in Kansas natural gas
revenues consisted of a $1.27/Mcf (37%) increase in selling price offset by a
$9,000 Mcf (5%) decrease in production. The increase in New Mexico natural gas
revenues consisted of a $0.85/Mcf (13%) increase in selling price and an 18,000
Mcf (180%) increase in production. The New Mexico natural gas properties were
purchased in August 2004 and there were only 5 months of production included in
results of operations for the year ended February 28, 2005. The decrease in
Nebraska crude oil revenues consisted of a 240 Bbl (30%) decrease in production
offset by a $12.80/Bbl (35%) increase in selling price. The Nebraska crude oil
properties were sold on November 1, 2005. Due to the complexity of the economic
factors affecting energy prices, we are unable to predict the direction or
magnitude of future price changes. It is expected that our natural gas
production in Kansas and New Mexico will decline slightly over the next twelve
months consistent with observed decline rates.

The increase in oil and natural gas revenues for the year
ended February 28, 2005 as compared to the year ended February 29, 2004
consisted of $66,000 from the addition of the New Mexico gas properties in
August 2004, and a $14,000 (96%) increase in Nebraska crude oil sales, offset by
a $35,000 (6%) decrease in Kansas natural gas sales. The decrease in Kansas
natural gas revenues consisted of a $22,000 decrease associated with the prior
year one time resolution of a previously disputed payment along with a 16,000
Mcf (9%) reduction in natural gas produced offset by a $0.24/Mcf (7%) increase
in natural gas sales prices. The increase in Nebraska crude oil revenues
consisted of a 249 Bbl (46%) increase in crude oil sold along with a $9.21/Bbl
(34%) increase in crude oil sales prices. Revenues associated with the New
Mexico natural gas properties consisted of production from August 2004 through
December 2004 of 9,900 Mcf with an average sales price of $6.65/Mcf.

##### Leasing of asphalt products manufacturing and storage
facilities

The agreement with Paramount provides for Intermountain to
receive $3,200 per month in basic rent for Intermountain's asphalt storage and
manufacturing facility. In addition, Intermountain receives a basic $5.50 per
ton fee for all asphalt products shipped from the facility plus a supplemental
fee of $4.50 per ton, applied retroactively to all tons shipped during the year,
in the event that annual shipments from the facility exceed 10,000
tons.

The increase in asphalt equipment rental fees during the year
ended February 28, 2006 as compared to the year ended February 28, 2005 was
attributed to a slight increase in product shipments from the facility. Basis
equipment rental revenues remained the same during the two periods. Fees
received for products shipped increased by $30,000 (20%) during the year ended
February 28, 2006 as compared to the year ended February 28, 2005. The current
extended term of the agreement with Paramount will expire on December 31, 2006.
Paramount has not expressed any intention to cancel or renegotiate the agreement
at the end of the current term. However, there is no assurance that the current
agreement will be continued beyond its current term. Based on communications
with Paramount, it is anticipated that revenues associated with this activity
will decline slightly over the next year due to a projected reduction in
shipments of paving grade asphalt from the facility during the upcoming paving
season.

The increase in asphalt equipment rental fees during the year
ended February 28, 2005 as compared to the year ended February 29, 2004 was
attributed to a slight increase in product shipments from the facility. Basic
equipment rental revenues remained the same during the two periods. Fees
received for products shipped increased by $17,000 (13%) during the year ended
February 28, 2005 as compared to the year ended February 29, 2004.

##### Real estate rental

Real estate rental revenues declined by an average $85 per
month for the year ended February 28, 2006 as compared to the year ended
February 28, 2005 due to a slight decrease in average occupancy. As of February
28, 2006, there were two vacant office spaces available for rent in our
Farmington office building. Rental income is not expected to change
significantly over the coming year.

10-KSB
12                                                                             
IARS- 9<Page>



Real estate rental revenues declined by an average $78 per
month for the year ended February 28, 2005 as compared to the year ended
February 29, 2004 due to a slight decrease in occupancy.

##### Other revenues

The decrease in other income for the year ended February 28,
2005 as compared to the year ended February 28, 2005 was due to a decrease in
the monthly fee charged to Red Hills Manufacturing, Inc. Prior to April 1, 2005,
we provided management and accounting services to Red Hills for a fixed fee of
$3,000 per month. Effective April 1, 2005, the monthly fee was reduced to $250
to reflect a change in the manner in which the services were being provided.
Other revenues are not expected to be significant during the coming
year.

There was no change in other revenues during the year ended
February 28, 2005 as compared to the year ended February 29, 2004.

#### Costs and Expenses

The following table presents a summary of our costs and
expenses for the last two fiscal years:



|                                                      | Fiscal Year Ended
|----------------------------------------------------- | -----------------
|                                                      | February 28, 2005
|Cost of sales                                         | $    333,818     
|General and administrative costs                      | 277,961          
|Depletion, depreciation and amortization              | 58,124           
|Asbestos abatement costs                              | -                
|Salvage of refinery equipment                         | -                
|Loss on impairment of electric generation
equipment   | -                
|Loss on sale of oil producing properties              | -                
|Accretion of discount on asset retirement
obligations | 3,417            
|Loss on settlement of asset retirement
obligations    | 7,977            
|Interest and investment (income) expense, net         | (10,750)         
|Total costs and expenses                              | $  670,547       
|                                                      |                  

Changes in individual components of costs and expenses are
discussed below.

##### Cost of sales

Cost of sales includes costs incurred in the production of oil
and natural gas, and costs of maintaining the asphalt facility.

The increase in cost of sales during the year ended February
28, 2006 compared to the year ended February 28, 2005 consisted of a $218,000
(74%) increase in oil and natural gas production costs offset by a $29,000 (72%)
decrease in asphalt facility maintenance costs (excluding asbestos abatement
costs discussed later in this report). The increase in oil and natural gas
production costs consisted of a $170,000 (72%) increase in Kansas natural gas
production costs and a $67,000 (143%) increase in New Mexico natural gas
production costs offset by a $9,000 (40%) decrease in Nebraska crude oil
production costs. The significant increase in Kansas natural gas production
costs was primarily attributed to a $152,000 (181%) increase in well equipment
repairs mainly associated with the repair (or attempted repair) of three casing
leaks experienced during the period. One such repair attempt was unsuccessful
and the well is scheduled to be plugged and abandoned in the near future. The
New Mexico natural gas properties were acquired in August 2004 and included 6
months of operating costs during the year ended February 28, 2005 compared to 12
months for the year ended February 28, 2006. The decrease in Nebraska crude oil
production costs was primarily the result of the sale of the properties on
November 1, 2005. Well pump, production tubing, surface equipment, and well
casing failures occur randomly and the timing and cost of repairs cannot be
accurately predicted. In addition, future repair costs may be material and
become a critical factor in assessing the economic viability of individual
wells. The decrease in operating costs associated with the asphalt products
manufacturing and storage facility was primarily attributed to a $29,000 (83%)
decrease in environmental permitting and compliance costs (excluding asbestos
abatement costs discussed later in this report). The decrease in environmental
costs was primarily associated with the closure of the process water collection
and evaporation systems, the majority of which were incurred during the year
ended February 28, 2005. Significant activities associated with the process
water collection and evaporation system closure have been substantially
completed and any future costs associated with this activity are not expected to
be significant.

10-KSB
13                                                                             
IARS- 10<Page>



The increase in cost of sales during the year ended February
28, 2005 compared to the year ended February 29, 2004 consisted of a $78,000
(36%) increase in oil and natural gas production costs along with a $22,000
(117%) increase in asphalt facility maintenance costs. The increase in oil and
natural gas production costs consisted of a $26,000 (13%) increase in Kansas
production costs, a $5,000 (27%) increase in Nebraska production costs, and the
addition of $32,000 of production costs from the newly acquired New Mexico gas
properties. Significant changes in Kansas production costs included a $14,000
(110%) increase in property taxes and a $14,000 (20%) increase in equipment
repair costs. The increase in Nebraska production costs was substantially
attributed to equipment repair costs. The increase in asphalt facility
maintenance costs was primarily attributed to an increase in environmental
permitting and compliance costs associated with soil testing and closure of our
old process water collection and evaporation systems.

##### General and administrative expenses

General and administrative expenses include the cost of our
officers and administrative employees, costs incurred to operate and maintain
our Farmington office building, and all items of general overhead required to
manage and administer our corporate affairs.

The increase in general and administrative expenses during the
year ended February 28, 2006 compared to the year ended February 28, 2005
primarily consisted of a $7,000 increase in group insurance costs with a net
$3,000 increase in all other general and administrative cost categories. Normal
ongoing general and administrative costs are expected to remain relatively
unchanged over the next twelve months.

The increase in general and administrative expenses during the
year ended February 28, 2005 compared to the year ended February 29, 2004
consisted mainly of a $5,000 increase in professional accounting and auditing
services and a small net increase in all other general and administrative cost
classifications.

##### Depletion, depreciation and
amortization

The decrease in depletion and depreciation for the year ended
February 28, 2006 compared to the year ended February 28, 2005 consisted of a
$25,000 (98%) decrease in depreciation on asphalt facility assets offset by an
$18,000 (56%) increase in depletion on oil and natural gas production.  The
asphalt facility assets were nearly fully depreciated as of February 28, 2005.
The increase in depletion on oil and natural gas properties consisted of a
$20,000 (181%) increase in New Mexico depletion offset by a $1,000 (5%) decrease
in Kansas depletion and a $1,000 (30%) decrease in Nebraska depletion.

The decrease in depletion and depreciation for the year ended
February 28, 2005 compared to the year ended February 29, 2004 consisted of a
$1,000 (4%) increase in depletion on oil and natural gas production offset by a
$4,000 (13%) decrease in depreciation on asphalt facility assets. The increase
in depletion on oil and natural gas production consisted of an $11,000 (38%)
decrease in Kansas depletion offset by a $1,000 (47%) increase in Nebraska
depletion along with the addition of $11,000 depletion from the newly acquired
New Mexico properties. The decrease in Kansas depletion was attributed to a
reduction in gas production along with a reduction in the depletion rate
associated with an increase in our Kansas reserve estimates during the prior
year.

##### Asbestos Abatement Costs and Salvage of Refinery
Equipment:

In April, 2005, we began the process of dismantling the
portions of our refining equipment at our Fredonia facility that were no longer
used for ongoing operations and were not expected to be used in the future. As
part of the dismantling process, the presence of asbestos containing materials
was identified in portions of the equipment being dismantled. Management engaged
a consultant to evaluate the extent of asbestos present on the site and to
prepare a plan for the abatement and removal of the material. During the year
ended February 28, 2006, we incurred $276,000 in consulting and abatement costs
associated with the removal of the material. Management believes that abatement
and disposal of asbestos containing materials at the facility had been
substantially completed as of February 28, 2006 and that any additional
abatement costs will not be significant. During the year ended February 28,
2006, we recognized $29,000 from the salvage of metals and used equipment
removed from the facility. It is anticipated that we will recognize some
additional salvage amounts over the coming months as the dismantling project is
completed.

##### Loss on impairment of equipment

During the year ended February 28, 2006, we recognized an
additional $120,000 impairment on our electric generation equipment available
for sale. The amount of the impairment was equal to the excess of the carrying
value of the equipment over the estimated proceeds from the future sale of the
equipment less estimated additional improvement costs that we expect to incur in
completing the sale. As discussed earlier in this report, during the year ended
February 28, 2006, we entered into a memorandum of understanding to sell the
electric generation equipment. There were no significant changes in the
valuation of our other assets that, in the opinion of management, would require
the recognition of any additional impairment reserves as of February 28,
2006.

10-KSB
14                                                                             
IARS- 11<Page>



There were no significant changes in the valuation of assets
during the year ended February 28, 2005 that, in the opinion of management,
required the recognition of additional impairment reserves at that
time.

##### Accretion of discount and loss on settlement of asset
retirement obligations:

Accretion of discount on asset retirement obligations consists
of changes in the present value of future asset retirement obligations with the
passage of time. Gains or losses on the settlement of asset retirement
obligations arise from the difference between actual asset retirement costs
incurred and the present value, at the time of retirement, of the previously
estimated retirement cost.

There were no significant changes in the accretion of discount
on asset retirement obligations during the year ended February 28, 2006 compared
to the year ended February 28, 2005. There were no wells plugged and abandoned
during the year ended February 28, 2006, accordingly, there were no gains or
losses on settlement of asset retirement obligations during the year ended
February 28, 2006.

The loss on settlement of asset retirement obligations during
the year ended February 28, 2005, consisted of an $8,200 loss from plugging one
Kansas gas well offset by a $200 gain on plugging two Nebraska wells. The Kansas
well failed prematurely due to an irreparable casing failure that occurred in
November 2003. The plugging cost on the Kansas well exceeded the value of the
previously estimated retirement cost due to the premature failure of the well
and abnormal plugging costs experienced due to the complex nature of the casing
failure. The two wells plugged in Nebraska were not producing when the property
was purchased in March 2003 and plugging proceeded, as scheduled, during the
year ended February 28, 2005.

##### Interest and investment (income) expense,
net

Interest and investment income includes earnings on cash
balances and net earnings on investments, less interest expense
incurred.

Net interest and investment income during the year ended
February 28,2006 consisted of $13,000 interest earned on cash balances and
$7,200 of dividends and royalties on investments, less $6,700 in depletion on
investments in oil and natural gas royalty trusts. Interest and investment
income is expected to remain relatively unchanged over the next twelve months.
We did not incur any interest expense during the year.

Net interest and investment income during the year ended
February 28, 2005 of $11,000 consisted mainly of $7,300 interest earned on cash
balances and $3,300 dividends and royalties earned on investments in publicly
traded equity securities and royalty trusts. During the year ended February 28,
2005, we sold all of our investments in mutual funds and realized a loss of
$900. The proceeds from the sale of the mutual funds were reinvested in publicly
traded oil and gas royalty trusts. We did not incur any interest expense during
the year.

### Changes in Accounting Principles

During the year ended February 28, 2006, the Financial
Accounting Standards Board did not issue any new statements that required any
changes in our accounting principles.

### Critical Accounting Estimates

Certain accounting estimates are important to the presentation
of our financial condition and results of operations and require management's
subjective or complex judgments. Such estimates are subject to change based on
future conditions and events that may have a material effect on our financial
condition and results of operations.

#### Oil and Natural Gas Reserve Estimates

Estimating oil and natural gas reserves is a subjective
process that is dependent on the quality of available data and on interpretation
and judgment concerning such data. Reserve estimates are subject to change over
time as additional information becomes available and as a result of changes
in market prices and production costs. Our estimates of reserves can be
adversely affected by future changes including material decreases in market
prices, increases in operating costs, and higher than expected declines in
production quantities.

As capitalized costs and estimated future retirement costs
associated with our oil and gas properties are depleted on the
unit-of-production basis, decreases in estimated oil and gas reserves would
increase depletion expense resulting in a decrease in oil and gas operating
income.

10-KSB
15                                                                             
IARS- 12<Page>



We have recorded estimates of future asset retirement
obligations associated with the eventual plugging and abandonment of our oil and
natural gas wells. The fair value of future plugging and abandonment costs is
estimated by escalating current plugging and abandonment costs (at an assumed
inflation rate over the expected economic life of an individual well) discounted
at our credit-adjusted risk-free interest rate. The fair value of the
future plugging and abandonment costs is capitalized and depreciated using the
unit-of-production method. The discount on the asset retirement obligation is
accreted over time until the obligation is settled or the asset is
sold. The expected economic life of an individual well is determined from
the estimate of reserve quantities at the time the well was acquired. Future
increases in well plugging and abandonment costs in excess of assumed inflation
rates and premature or earlier than expected well retirement could result in the
recognition of a loss on the settlement of future well plugging and abandonment
obligations.

#### Impairment of Long-Lived Assets

Events or changes in circumstances periodically require that
long-lived assets (including oil and natural gas properties) be evaluated to
determine if the carrying amount of the asset may not be recoverable out of
estimated future cash flows from the asset. Such periodic evaluations are
subjective and require the use of estimates of future cash flows that are
subject to change. We have recognized impairments in value on portions of our
crude oil refining facility that are no longer being used and are currently
being dismantled, and on our electric generation equipment that is presently for
sale.

#### Accounting for Income Taxes

Deferred tax assets and liabilities arise from temporary
differences from the differing treatment of items for tax and accounting
purposes. While we have estimated that we have net deferred tax assets arising
from, among other items, the carry forward of prior capital and net operating
losses, we have provided a valuation allowance equal to the amount of the
estimated net deferred tax assets because we are uncertain that future results
of operations will be adequate to recover such deferred tax assets.

### Inflation, Deflation and Changing Prices

The results of operations and capital expenditures will
continue to be affected by inflation, deflation and changing prices.  A
decline in the price of natural gas could have an adverse effect on
Intermountain's operations.  Management is unable to determine the full
impact of inflation, deflation and changing prices on the results of operations
or working capital.

### Directors and Executive Officers



|Name and Address                                                  | Age | Position                                      | Held Since
|----------------------------------------------------------------- | --- | --------------------------------------------- | ----------
|William N. Hagler4421 Bella
Vista Cr.Farmington, New Mexico 87401 | 73  | President and Director                        | 1984      
|                                                                  |     |                                               |           
|Rick L. Hurt5701 Tee
Dr.Farmington, New Mexico 87402              | 53  | Controller, Secretary, Treasurer and Director | 1985      

Background information concerning the Officers and
Directors is as follows:

William N. Hagler has been the President and a Director
of Intermountain since 1984. Mr. Hagler received a B.S. degree in Industrial
Engineering from North Carolina State University in 1955.  From 1955 to
1968, he was employed by Esso Standard Oil, Cities Service Oil Co. and Riffe
Petroleum Co. in various phases of the petroleum refining and marketing
industry.  In July 1968, he became assistant to the president and later
vice president of Plateau, Inc., Farmington, New Mexico, a regional refining and
marketing firm.  His responsibilities have included refinery management,
marketing, corporate development, economics and planning, crude oil supply,
negotiation and administration of processing arrangements, labor relations,
coordination of refinery acquisition and expansion programs, and relations with
state and federal regulatory bodies.  In 1979, Mr. Hagler organized Unico,
Inc., the former parent company of Intermountain, and served as its President
and as a Director from its inception until June 1998 when he resigned both
positions. In April 1993, Mr. Hagler accepted an appointment as a Director of
Saba Petroleum and from October 1998 until December 1998 also served as its
Management Committee Chairman. He resigned from all Saba Petroleum positions in
March 1999. During 1999, Mr. Hagler accepted an appointment as Chairman of the
Board of Directors of Petrominerals Corporation. Mr. Hagler resigned his
position with Petrominerals during 2002. Mr. Hagler is also a member of the
Farmington, New Mexico Public Utilities Commission.

10-KSB
16                                                                             
IARS- 13<Page>



Rick L. Hurt has been the Secretary, Treasurer and a
Director of Intermountain since 1985. Mr. Hurt received a BBA degree in
Accounting from the University of New Mexico in 1979.  From 1979 to 1982,
he was employed as a staff accountant and later as a senior accountant by the
accounting firm of Fox & Company in its Albuquerque, New Mexico
offices.  From 1982 until March 1985, he was employed as chief accountant
for the law firm of Davis and Davis in Austin, Texas.  Mr. Hurt is
certified as a public accountant in the states of New Mexico and Texas;
although, he has not maintained his licenses to practice public accounting in
those states.  Mr. Hurt joined Unico, Inc., the former parent company of
Intermountain, as Assistant Controller in March 1985, and became its Controller,
Secretary, Treasurer, and a Director in May 1985. Mr. Hurt resigned from these
positions in June 1998.

Both Mr. Hagler and Mr. Hurt may be deemed a parent or
promoter of Intermountain as those terms are defined in the rules and
regulations promulgated under the Securities Act of 1933.

No family relationship exists between any officer or director
of Intermountain and no officer or director of Intermountain has been subject,
during the preceding 5 years, to any of the events set forth in paragraph (d) of
Item 401 of Regulation S-B.

### Compensation of Directors and Executive Officers

The following table will inform you about the compensation
earned by all of our executive officers for services rendered during the last
three fiscal years:



|Name and Principal
Positions                       | Year         | Salary                   | Bonus       | Other Annual Compensation | Long-Term Compensation Awards - Restricted
Stock Awards | All Other Compensation             
|-------------------------------------------------- | ------------ | ------------------------ | ----------- | ------------------------- | ------------------------------------------------------- | -----------------------------------
|                                                   |              | ($)                      | ($)         | ($)                       | (#)                                                     | ($)                                
|William N. Hagler                                  | 2006         | $101,164                 | $  0        | $  0                      | 0                                                       | $3,035     (1)                     
|Chief Executive Officer and Director               | 20052004     | $101,164$101,164         | $  0$
0     | $  0$
0                   | 00                                                      | $2,500
(1)$3,035     (1)           
|                                                   |              |                          |             |                           |                                                         |                                    
|Rick L. Hurt                                       | 2006         | $ 54,889                 | $  0        | $  0                      | 0                                                       | $1,647    (1)                      
|Secretary, Treasurer, and Director                 | 20052004     | $ 54,889$
54,889         | $  0$
0     | $  0$
0                   | 00                                                      | $1,647    (1)$1,647
(1)            
|                                                   |              |                          |             |                           |                                                         |                                    
|All officers and directors as a group ( 2
persons) | 200620052004 | $156,053$156,053$156,053 | $  0$
0$  0 | $  0$
0$  0               | 000                                                     | $4,682    (1)$4,147
(1)$4,682   (1)

(1) Consists of SIMPLE IRA employer matching contributions
amounting to the lesser of employee elective deferrals or 3% of salary.

Our employees, including officers, may receive such bonuses
and salary increases as the Board of Directors, in its sole discretion, may
award from time to time. We have not increased officers salaries since April
1997, at which time, a 2.5% cost of living adjustment was awarded.

We provide health insurance benefits to the officers and all
other full time employees.

We maintain a SIMPLE IRA plan for our officers and all of our
full time employees. Participation in the plan is voluntary and employee
contributions are limited by regulations established annually by the Internal
Revenue Service. We are required to match employee contributions up to the
lesser of 3% of salary or the amount of employee contributions.

No director has been compensated for attending meetings of the
Board of Directors. However, by resolution of the Board of Directors, a fixed
sum and expenses of attendance, if any, may be allowed for attendance at each
regular and special meeting of the Board of Directors.

We do not currently maintain director and officer liability
insurance.

We have no employment contracts with any of our employees. All
employees can terminate employment at will.

10-KSB
17                                                                             
IARS- 14<Page>



### Security Ownership of Certain Beneficial Owners and Management

### Security Ownership of Certain Owners

The following table lists the only persons known to us who
beneficially own five percent (5%) or more of the issued and outstanding
Intermountain common stock, its only voting security:



|Title of Class | Name and address of Beneficial
owner | Amount and nature of Beneficial
ownership | Percent of Class
|-------------- | ------------------------------------ | ----------------------------------------- | ----------------
|Common stock,  | William N. Hagler                    | 693,808 shares of                         | 60.04%          
|no par value   | 4421 Bella Vista Cr.                 | record and beneficially                   |                 
|               | Farmington, NM 87401                 |                                           |                 

### Security Ownership of Management

The following table lists the ownership of Intermountain
common stock by the management:





|Title of Class | Name and address of Beneficial
owner | Amount and nature of Beneficial
ownership | Percent of Class
|-------------- | ------------------------------------ | ----------------------------------------- | ----------------
|Common stock,  | William N. Hagler                    | 693,808 shares of                         | 60.04%          
|no par value   | 4421 Bella Vista Cr.                 | record and beneficially                   |                 
|               | Farmington, NM 87401                 |                                           |                 
|               |                                      |                                           |                 
|Common stock,  | Rick L. Hurt                         | 6,904 shares of                           | 0.60%           
|no par value   | 5701 Tee Dr.                         | record and beneficially                   |                 
|               | Farmington, NM 87402                 |                                           |                 
|               |                                      |                                           |                 
|Common stock,  | All officers and directors           | 700,712 shares of                         | 60.64%          
|no par value   | (2 people) as a group                | record and beneficially                   |                 
|               |                                      |                                           |                 

### Code of Ethics

On March 15, 2006, our Board of Directors adopted a written
Code of Ethics designed to deter wrongdoing and promote honest and ethical
conduct, full, fair and accurate disclosure, compliance with laws, prompt
internal reporting and accountability to adherence to the Code of Ethics. This
Code of Ethics has been filed with the Securities and Exchange Commission as an
Exhibit to this Form 10-KSB for the year ended February 28, 2006. Individuals
may obtain a written copy of the Code of Ethics by submitting a written request
to Intermountain's administrative offices.

### Compliance with Section 16(a) of the Exchange Act

In accordance with Section 16(a) of the Securities Exchange
Act of 1934, any person who, at any time during the last fiscal year, was an
officer, director, or beneficial owner of more than 10% of any securities of an
issuer that have been registered pursuant to Section 12 of the Exchange Act, is
required to file periodic reports with the Securities and Exchange Commission
and provide copies of the reports to the registered issuer. In accordance with
item 405 of Regulation S-B, we are required to report information regarding
untimely or delinquent filings by such individuals. We are not aware of any
untimely or delinquent filing of periodic reports of individuals during the year
ended February 28, 2006.

### Certain Relationships and Related Party Transactions

During the last two fiscal years, there have been no
transactions, or series of transactions, between Intermountain and other related
parties that are of a nature that are required to be disclosed in this report.
However, information relative to this topic may be found in Note H to
Intermountain's financial statements on page 26 of this report.

10-KSB
18                                                                             
IARS- 15<Page>



### Controls and Procedures

### Evaluation of Disclosure Controls and
Procedures:

Disclosure controls and procedures are designed and
implemented to insure that all material information relating to a company is
made known to its chief operating officer, chief financial officer, and such
other persons who are responsible for preparing and filing periodic reports with
the Securities and Exchange Commission. William N. Hagler and Rick L. Hurt,
representing all of the officers and directors of Intermountain, have evaluated
our disclosure controls and procedures and concluded that such controls were
effective as of February 28, 2006.

### Changes in Internal Controls:

There have been no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of Management's last evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.

### Principal Accountant Fees and Services

Information regarding services and the related fees billed by
our principal accountants during the periods indicated is as follows:



|                                                                                                                                                                                                       | For the years ended
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------
|                                                                                                                                                                                                       | February 28,       
|                                                                                                                                                                                                       | 2005               
|Audit fees: Includes audit and review services applicable to
Intermountain’s annual financial statements, Forms 10-KSB and 10-QSB, and
other filings made with the Securities and Exchange Commission. | $   23,780         
|Audit related fees                                                                                                                                                                                     | 0                  
|Tax fees                                                                                                                                                                                               | 0                  
|All other fees                                                                                                                                                                                         | 0                  
|Total fees billed by principal accountants                                                                                                                                                             | $   23,780         

We, due to our small size, do not have an audit committee. All
functions and procedures that would traditionally be performed by an audit
committee are performed by our board of directors.  Our board of directors
pre-approves all engagements for services performed by our principal
accountants.  Generally, we do not engage our principal accountants for services
other than those related to auditing and reviewing of financial statements
included in statutory filings with the Securities and Exchange
Commission.

10-KSB
19                                                                             
IARS- 16<Page>



### Index to Financial Statements



|                                                                           | Page
|-------------------------------------------------------------------------- | ----
|Report of Independent Registered
Public Accounting Firm, February 28, 2006 | 17  
|                                                                           |     
|Balance Sheet as of February 28,
2006                                      | 18  
|                                                                           |     
|Statements of Income and
Comprehensive Income for the years ended          |     
|February 28, 2005
and February 28, 2006                                    | 19  
|                                                                           |     
|Statements of Cash Flows for the
years ended                               |     
|February 28, 2005
and February 28, 2006                                    | 20  
|                                                                           |     
|Statements of Changes in
Stockholders' Equity                              |     
|for the
years ended February 28, 2005 and February 28, 2006                | 21  
|                                                                           |     
|Notes to financial
statements                                              | 22  
|                                                                           |     

Report of Independent Registered Public Accounting
FirmStockholders and Board of
DirectorsIntermountain Refining Co., Inc.

We have audited the accompanying balance sheet of
Intermountain Refining Co., Inc. as of February 28, 2006, and the related
statements of income and comprehensive income, changes in stockholders' equity,
and cash flows for the years ended February 28, 2005 and February 28, 2006.
These financial statements are the responsibility of Intermountain's
management.  Our responsibility is to express an opinion on these financial
statements based on our audit.We conducted our
audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States).  Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.   An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe that
our audit provides a reasonable basis for our opinion.In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial position of
Intermountain Refining Co., Inc. as of February 28, 2006, and the results of
operations and cash flows for the years ended February 28, 2005 and February 28,
2006, in conformity with accounting principles generally accepted in the United
States of America.Richey, May & Co., LLPEnglewood, ColoradoMay 4,
2006

10-KSB
20                                                                             
IARS- 17<Page>



|Intermountain Refining Co., Inc.                                           |  |            
|-------------------------------------------------------------------------- |  | -----------
|Balance Sheet                                                              |  |            
|February 28, 2006                                                          |  |            
|                                                                           |  |            
|Assets                                                                     |  |            
|Current Assets                                                             |  |            
|Cash and cash equivalents - Note
A                                         |  | $   851,102
|Accounts receivable - Note B                                               |  | 166,498    
|Notes receivable – Notes F and
L                                           |  | 24,319     
|Accrued interest receivable                                                |  | 434        
|Prepaid expenses                                                           |  | 1,077      
|Total Current Assets                                                       |  | 1,043,430  
|Property, Plant and
Equipment, net                                         |  |            
|Land, buildings and
improvements                                           |  | 355,092    
|Equipment                                                                  |  | 45,990     
|Asphalt equipment – Note
A                                                 |  | 581,919    
|Oil and gas properties, (successful
efforts method) - Notes L, M and N     |  | 1,432,308  
|                                                                           |  | 2,415,309  
|Less accumulated depletion and
depreciation                                |  | (1,767,712)
|                                                                           |  | 647,597    
|Other Assets                                                               |  |            
|Electric generation equipment available for sale–
Note A                   |  | 212,643    
|Available-for-sale investments - Note
E                                    |  | 125,177    
|Other assets - Note C                                                      |  | 275        
|                                                                           |  | 338,095    
|Total Assets                                                               |  | $ 2,029,122
|Liabilities and Stockholders' Equity                                       |  |            
|Current Liabilities                                                        |  |            
|Accounts payable                                                           |  | $    43,558
|Taxes other than income
taxes                                              |  | 2,682      
|Income taxes payable - Note
G                                              |  | 226        
|Total Current
Liabilities                                                  |  | 46,466     
|Deferred Taxes -
Note G                                                    |  | 19,738     
|Asset Retirement Obligations - Notes A and
N                               |  | 32,343     
|Commitments and
Contingencies - Note I                                     |  | -          
|Stockholders' Equity                                                       |  |            
|Common stock, no par value, authorized
10,000,000 shares,                  |  |            
|issued and outstanding 1,155,609 shares                                    |  | 1,455,314  
|Preferred stock, $0.01 par value, authorized 5,000,000
shares,             |  |            
|issued and outstanding 0 shares                                            |  | -          
|Retained earnings                                                          |  | 438,604    
|Accumulated other comprehensive income - Note
E                            |  | 36,657     
|                                                                           |  | 1,930,575  
|Total Liabilities and Stockholders'
Equity                                 |  | $ 2,029,122
|                                                                           |  |            
|The accompanying notes are an integral part of these
financial statements. |  |            

10-KSB
21                                                                             
IARS- 18<Page>





|Intermountain Refining Co., Inc.                                                                                                                      |                     |              
|----------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | -------------
|Statements of Income and Comprehensive Income                                                                                                         |                     |              
|                                                                                                                                                      | For the years ended
|                                                                                                                                                      | February  28,       | February  28,
|                                                                                                                                                      | 2005                | 2006         
|Revenues                                                                                                                                              |                     |              
|Oil and natural gas production revenues                                                                                                               | $   672,430         | $   983,637  
|Asphalt equipment rental and throughput
fees - Note D                                                                                                 | 189,254             | 219,078      
|Real estate rental income                                                                                                                             | 24,570              | 23,545       
|Other revenues - Note H                                                                                                                               | 36,000              | 5,750        
|                                                                                                                                                      | 922,254             | 1,232,010    
|Costs and Expenses                                                                                                                                    |                     |              
|Cost of sales, exclusive of depletion,
depreciation and amortization shown below                                                                      | 333,818             | 522,284      
|General and administrative                                                                                                                            | 277,961             | 287,910      
|Depletion, depreciation and
amortization                                                                                                              | 58,124              | 50,513       
|Asbestos abatement costs - Note
I                                                                                                                     | -                   | 276,212      
|Salvage of refinery equipment - Note I                                                                                                                | -                   | (29,505)     
|Loss on impairment of electric generation equipment
– Note A                                                                                          | -                   | 120,430      
|Loss on sales of oil and gas producing properties
– Note L                                                                                            | -                   | 7,888        
|Accretion of discount on asset retirement obligations -
Note N                                                                                        | 3,417               | 2,506        
|Loss on settlement of asset retirement obligations -
Note N                                                                                           | 7,977               | -            
|Interest and investment expense/(income),
net                                                                                                         | (10,750)            | (13,051)     
|                                                                                                                                                      | 670,547             | 1,225,187    
|Income From Operations Before Income
Taxes                                                                                                            | 251,707             | 6,823        
|Provision (benefit) for income taxes -
Note G                                                                                                         |                     |              
|Current                                                                                                                                               | 489                 | 212          
|Deferred                                                                                                                                              | -                   | -            
|                                                                                                                                                      | 489                 | 212          
|                                                                                                                                                      |                     |              
|Net Income                                                                                                                                            | 251,218             | 6,611        
|                                                                                                                                                      |                     |              
|Other Comprehensive Income (Loss), net of
tax:                                                                                                        |                     |              
|Unrealized holding gains on investments available for sale
(net of deferred income tax expense of  $10,614 in 2005 and $6,350 in 2006)-
Notes E and G | 19,713              | 11,794       
|Reclassification adjustment for realized loss on sale of
investments available for sale net of deferred tax of $316 in 2005- Notes E and
G            | 585                 | -            
|Comprehensive Income                                                                                                                                  | $    271,516        | $    18,405  
|                                                                                                                                                      | =========           | =========    
|Weighted Average Number of Shares
Outstanding                                                                                                         | 1,155,609           | 1,155,609    
|Basic and Fully Diluted Earnings Per
Share                                                                                                            |                     |              
|Net income                                                                                                                                            | $      
0.22        | $      
0.01 
|                                                                                                                                                      | ========            | ========     
|                                                                                                                                                      |                     |              
|                                                                                                                                                      |                     |              
|                                                                                                                                                      |                     |              
|The accompanying notes are an integral part of these
financial statements.                                                                            |                     |              

10-KSB
22                                                                             
IARS- 19<Page>





|Intermountain Refining Co.,
Inc.Statements of Cash Flows                                                                                                                                                                                                   
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                           
|Increase (Decrease) in Cash and Cash
Equivalents                                                                                                                                                                                                           
|Cash Flows From Operating Activities                                                                                                                                                                                                                       
|Net income                                                                                                                                                                                                                                                 
|Adjustments to reconcile net income to
net cash provided by operating activities:                                                                                                                                                                          
|Depreciation, depletion and
amortization                                                                                                                                                                                                                   
|Accretion of discount on asset retirement
obligations                                                                                                                                                                                                      
|Depletion on investments in oil and gas
royalty trusts                                                                                                                                                                                                     
|Loss on settlement of asset retirement
obligations                                                                                                                                                                                                         
|Realized loss on disposal of available for sale
investments                                                                                                                                                                                                
|Loss on impairment of electric generation
equipment                                                                                                                                                                                                        
|Loss on sale of oil and gas producing
properties                                                                                                                                                                                                           
|Changes in operating assets and
liabilities:                                                                                                                                                                                                               
|(Increase) decrease in
accounts receivable                                                                                                                                                                                                                 
|Increase in accrued interest receivable                                                                                                                                                                                                                    
|(Increase) decrease in prepaid expenses                                                                                                                                                                                                                    
|Increase (decrease) in
accounts payable and accrued expenses                                                                                                                                                                                               
|Increase (decrease) in
income taxes accrued                                                                                                                                                                                                                
|Net Cash Flow Provided by Operating
Activities                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                           
|Cash Flows From Investing Activities                                                                                                                                                                                                                       
|Purchases of available for sale
investments                                                                                                                                                                                                                
|Proceeds from disposal of available for sale
investments                                                                                                                                                                                                   
|Purchase of improvements to electric generation
equipment                                                                                                                                                                                                  
|Increase in cash value of life insurance
polices                                                                                                                                                                                                           
|Proceeds from surrender of life insurance
policy                                                                                                                                                                                                           
|Oil and natural gas development costs                                                                                                                                                                                                                      
|Purchase of oil and gas producing
properties                                                                                                                                                                                                               
|Proceeds from the sale of oil and gas producing
properties                                                                                                                                                                                                 
|Settlement of asset retirement
obligations                                                                                                                                                                                                                 
|Net Cash Flow Used by Investing Activities                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                           
|Increase (decrease) in Cash and Cash
Equivalents                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                           
|Cash and Cash Equivalents at Beginning of
Year                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                           
|Cash and Cash Equivalents at End of Year                                                                                                                                                                                                                   
|Supplemental Cash Flow
Disclosures                                                                                                                                                                                                                         
|Intermountain paid interest of  $0 in 2005 and $0 in
2006.                                                                                                                                                                                                 
|Intermountain paid income taxes of  $208 in 2005 and $430 in
2006 and received a refund of income taxes of $14 in 2006.                                                                                                                                    
|                                                                                                                                                                                                                                                           
|Supplemental Schedule of Noncash Investing
Activities:                                                                                                                                                                                                     
|During 2005, Intermountain's available for sale investments
increased in value by $20,298, net of deferred taxes of  $10,930.                                                                                                                              
|During 2006, Intermountain's available for sale investments
increased in value by $11,794, net of deferred taxes of $6,350.                                                                                                                                
|During 2005, Intermountain recognized estimated asset
retirement obligations of $6,600 and increased its investment in oil and gas
producing properties by the same amount in conjunction with its purchase of gas
producing properties in New Mexico.     
|During 2006, Intermountain recognized estimated asset
retirement obligations of $175 and increased its investment in oil and gas
producing properties by the same amount in conjunction with the drilling of one
development well in New Mexico.           
|During 2006, Intermountain sold its Nebraska oil producing
properties with a net book value of $55,364 in exchange for $14,181 in cash, a
note receivable in the amount of $24,319, and release of estimated future asset
retirement obligations of $8,976.
|During 2006, Intermountain reclassified inventory valued at
$2,390 and land and building with a net book value of $3,178, net of accumulated
depreciation of $26,149, to electric generation equipment available for
sale.                                 
|During 2005, Intermountain wrote off, as abandoned, fully
depreciated equipment with an original cost of $118,940.                                                                                                                                         
|The accompanying notes are an integral part of these
financial statements.                                                                                                                                                                                 

10-KSB
23                                                                             
IARS- 20<Page>



|Intermountain Refining Co., Inc.                                          
|--------------------------------------------------------------------------
|Statements of Changes in Stockholders'
Equity                             
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|Balance, February 29, 2004                                                
|                                                                          
|Holding gain on available for sale                                        
|investments - Notes E and G                                               
|                                                                          
|Net income                                                                
|                                                                          
|Balance, February 28, 2005                                                
|                                                                          
|Holding gain on available for sale                                        
|investments - Notes E and G                                               
|                                                                          
|Net income                                                                
|                                                                          
|Balance, February 28, 2006                                                
|                                                                          
|                                                                          
|The accompanying notes are an integral part of these
financial statements.

10-KSB
24                                                                             
IARS- 21<Page>

Intermountain Refining Co., Inc.

Notes to Financial Statements - February 28, 2006



### Note A - Summary of Significant Accounting Policies

Reclassifications:Oil and natural gas revenues and
Costs of sales presented in the Statement of Income and Comprehensive Income for
the year ended February 28, 2005 have been restated from the prior year
presentation to reflect the reclassification of production taxes and gathering
costs that were previously included as reductions of gross revenues. The amounts
were reclassified to allow for comparability with the current year presentation.
Restatements have also been made to reflect the reclassifications in prior year
oil and natural gas related amounts presented in Notes L and M to these
financial statements.

Business Activity:  Intermountain owns a 98.4%
working interest (81.5% net revenue interest) in 19 natural gas producing wells
located in Southwestern Kansas and is the operator of the properties.  On
August 1, 2004, Intermountain acquired an approximate 12.48% working interest
(9.98% net revenue interest) in 15 natural gas producing wells (operated by
others) in San Juan County, New Mexico. In January 2006, 1 natural gas
development well was completed on the New Mexico property. As of November 1,
2005, Intermountain sold its entire 90% working interest (72% net revenue
interest) in oil producing properties located in Kimball County, Nebraska.

Intermountain owns an asphalt products manufacturing and
storage facility located in Fredonia Arizona that has been leased to Paramount
Petroleum Corporation. Intermountain receives fixed monthly lease payments and
variable throughput fees for products shipped from the facility. Portions of the
facility that are not being used and not expected to be used in the future are
being dismantled.

Intermountain owns an office building in Farmington, New
Mexico that it uses for its corporate offices and leases unused space to others.

Intermountain additionally owns two diesel powered electric
generators, and related equipment, located at its refinery facility in Fredonia,
Arizona. The electric generation equipment is not in operation and is currently
pending a sale under a memorandum of understanding with a regional electric
power distributor.

Cash and Cash Equivalents:  For purposes of reporting
cash flows, cash and cash equivalents include cash on hand, cash in depository
institutions, and interest bearing over-night cash investments. 
Intermountain maintains its cash balances in a national financial
institution.  The balances maintained are in excess of the maximum
insurance provided by the Federal Deposit Insurance Corporation. Intermountain
does not believe that it has any significant credit risk for amounts in excess
of the federally insured amounts.

Property, Plant and Equipment:  Property, plant
and equipment is stated at cost. Depreciation of property and equipment is
provided on the straight-line method over the following useful lives:



|Buildings                                   | 15-20
|------------------------------------------- | -----
|Equipment                                   | 3-20 
|Asphalt manufacturing and storage
equipment | 5-20 
|                                            |      

Maintenance, repairs and renewals, which neither materially
add to the value of the property nor appreciably prolong its life, are charged
to expense as incurred. Gains or losses on disposition of property are included
in results of operations.

Long-lived assets to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate that the related
carrying amount may not be recoverable. A review for impairment includes
comparing the current carrying amount of an asset to the estimated future cash
flows expected to result from the use of the asset and its eventual disposition.
If such future estimated cash flows are not sufficient to recover the carrying
cost, then an impairment loss is recognized. When required, impairment losses on
assets to be held are recognized based on the excess of the asset's carrying
amount over the fair value of the asset.

Asset Retirement Obligations: Asset retirement
obligations, such as future plugging and abandonment of oil and gas wells, are
recognized based on the present value of the future retirement costs as of the
date an asset is acquired and capitalized as part of the cost of the asset. The
capitalized cost is amortized to expense and the discount on the future
obligation is amortized to accretion expense over the life of the asset. Actual
costs associated with asset retirement activities are charged against the asset
retirement obligation. Gains or losses on the ultimate settlement of asset
retirement obligations are charged to results of operations in the year of
retirement.

10-KSB
25                                                                             
IARS- 22<Page>

Intermountain Refining Co., Inc.

Notes to Financial Statements - Continued

Oil and Gas Properties:The successful efforts method
of accounting for the acquisition, exploration, development and production of
oil and gas properties is utilized. Costs of acquiring undeveloped oil and gas
leases are capitalized. All development costs of proved properties are
capitalized as incurred and all exploration costs are expensed. The capitalized
costs of oil and gas wells and related equipment are amortized by the
units-of-production method based on the estimated proved oil and gas reserves.

Electric Generation Equipment Held For Sale:
Intermountain owns two Caterpillar Model 3606 diesel powered electric generators
each capable of producing up to 1.5 megawatts. The generator facility is located
at Intermountain's facility in Fredonia Arizona. The generators were taken out
of service in January 1999 because Intermountain was no longer able to generate
electricity at competitive prices. During the year ended February 28, 2006,
Intermountain entered into a memorandum of understanding to sell the electric
generation facility (including land, building, equipment and fuel inventory) to
a regional electric power distributor for approximately $274,000. The memorandum
of understanding requires that the equipment be operational with closing
contingent on completion of a 24-48 hour test run under full load conditions. A
test run was attempted on May 1, 2006 but was not completed due to a cooling
system malfunction. Another test run will be attempted upon completion of
necessary repairs. During the year ended February 28,2006, Intermountain
incurred $57,505 in improvement costs related to the generator fuel and cooling
systems. The electric generation facility presently has a combined carrying
value of $212,643, net of impairment of $440,935. The impairment in value
reflects the amount by which the carrying value of the equipment (including
land, building, fuel inventory and recent improvements) exceeds the agreed upon
selling price of the facility less an estimated $61,000 in additional
improvement costs that we expect to incur in completing the sale. The actual
amount realized from the sale of the equipment may be different.

Revenue Recognition:Oil and natural gas production
revenues are recognized upon delivery. Real estate rental income, asphalt
equipment rental fees, and other revenues are recognized on a monthly basis as
services are provided. Asphalt product throughput fees are recognized on a
monthly basis as asphalt products are shipped. The additional throughput fees
are recognized if and when annual calendar shipments exceed 10,000
tons.

Income Taxes:Deferred income tax expense and benefits
are provided on temporary differences arising from the timing of recognition of
income and expenses for financial reporting purposes and recognition for income
tax purposes. Items that give rise to deferred taxes include: differences
between straight line depreciation used for financial reporting purposes and
statutory depreciation used for tax purposes; financial statement recognition of
impairment losses on assets which are not deductible for income tax purposes
until such losses are actually realized; cost depletion used for financial
reporting purposes and statutory depletion used for tax purposes; differences
between book and tax treatment of asset retirement obligations; and, financial
statement recognition of operating and capital losses which are carried forward
to future years for income tax purposes. Deferred tax assets are limited to
amounts considered to be realizable in future periods.

Earnings Per Share:Income (loss) per share is based on
the weighted average number of common shares outstanding during each
period.

Estimates:  The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that effect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates.

Fair Value of Financial Instruments:  The carrying
amount of cash and cash equivalents, accounts receivable, notes receivable,
accounts payable, and accrued expenses approximate fair value because of the
short maturity of these amounts. None of Intermountain's financial instruments
are held for trading purposes.

Available for Sale Investments:Available for sale
investments include investments in publicly traded equity securities and oil and
gas royalty trusts, and brokerage money market accounts. The carrying amounts of
Intermountain's available for sale investments are reflected at fair value.
Unrealized holding gains and losses in the market value of the investments are
reported as other comprehensive income (loss) and included in changes in equity.

Concentration of Credit Risk:Intermountain generates
substantially all of its natural gas revenues from one customer, Oneok Field
Services Company. Intermountain generates all of its asphalt manufacturing and
storage revenues from one customer, Paramount Petroleum Corporation.
Intermountain has not experienced any credit losses with respect to its natural
gas or asphalt manufacturing and storage receivables. Accordingly, no provision
for doubtful accounts on such receivables has been recorded by Intermountain.
Collateral is not required on oil and natural gas receivables or asphalt
manufacturing and storage receivables.

10-KSB
26                                                                             
IARS- 23<Page>

Intermountain Refining Co., Inc.

Notes to Financial Statements - Continued

Other Comprehensive Gains and Losses: Other
comprehensive income includes unrealized gains and losses on changes in the
value of available for sale investments and is recorded as changes in equity.
Reclassification adjustments for realized gains and losses are reflected in
earnings on the statements of income.

### Note B - Accounts Receivable

Accounts receivable consists of amounts due from customers for
sales of oil and natural gas, equipment rental, office space rental, and
services rendered.  Credit sales are generally made on terms of net 30 days
in accordance with normal industry practice.  Intermountain performs
periodic credit evaluations of its customers' financial condition and generally
does not require collateral.  The past due status of a receivable is
determined based on the timeliness of payments as based upon the agreed-upon
credit terms. Management does not believe that an allowance for bad debts on
accounts receivable is necessary.

### Note C - Other Assets

Other assets consist of the following as of February 28, 2006:



|Cash value of life insurance contracts | $        -
|-------------------------------------- | ----------
|Utility  deposits                      | 275       
|                                       | $     275 

During the year ended February 28, 2006, Intermountain
surrendered its only remaining life insurance contract for $37,089.

### Note D - Asphalt Product Storage
Services

Effective January 1, 2002, Intermountain leased its asphalt
storage and processing equipment to Paramount Petroleum Corporation for $3,200
per month plus a throughput fee of $5.50 per ton for asphalt products shipped
from the facility during the term of the agreement. In addition, if annual
product shipments from the facility exceed 10,000 tons, Paramount will pay an
additional throughput fee of $4.50 per ton, applicable to all tons shipped
during the year. The initial term of the agreement expired on January 1, 2003
but has been automatically extended on a year to year basis under the extension
terms of the agreement. For the year ended February 28, 2005, Intermountain
recognized equipment rental revenues of $38,400 and throughput fees of $150,854.
For the year ended February 28, 2006, Intermountain recognized equipment rental
revenues of $38,400 and throughput fees of $180,678.

### Note E - Available-For-Sale
Investments

Available-for-sale investments consist of the following at
February 28, 2006:



|Description                                   | Cost        | Unrealized gain/(loss) | Estimated Fair Value
|--------------------------------------------- | ----------- | ---------------------- | --------------------
|Investment in natural gas royalty trusts *    | $   42,680  | $  40,336              | $ 83,016            
|Investment in common stock equities           | 14,781      | 16,059                 | 30,840              
|Brokerage money market accounts               | 11,321      | 0                      | 11,321              
|Total investments available for sale          | $    68,782 | $    56,395            | $ 125,177           
|                                              |             |                        |                     
|*Cost net of accumulated depletion of $6,653. |             |                        |                     

Investments in royalty trusts and common stock equities are
stated at their estimated fair value as of the balance sheet date presented.
Unrealized holding gains and losses in market value of investment securities are
classified as comprehensive gain and loss and included as an increase or
reduction of stockholders' equity. Unrealized holding gains in market value of
investment securities were $30,327 for the year ended February 28, 2005 and
$18,144 for the year ended February 28, 2006. During the year ended February 28,
2005, Intermountain sold its investments in mutual funds and recognized a loss
on the sale of $901. The sale resulted in a reclassification adjustment to
unrealized loss in market value of $585, net of deferred tax benefit of $316.

Gains and losses on the sale of investment securities (when
incurred) are determined using the first in-first out method. Given that the
investments are in royalty trusts and common stock equities, no contractual
maturities exist that would require separate disclosure. The fair market values
of the investments are subject to ongoing fluctuation. The amount ultimately
realized upon disposition will be different from the amounts reported in these
financial statements.

10-KSB
27                                                                             
IARS- 24<Page>

Intermountain Refining Co., Inc.

Notes to Financial Statements - Continued

### Note F - Notes Receivable

Notes receivable consisted of the following as of February 28,
2006:



|7% Note receivable dated February 27, 2006 payable in 12
equal monthly installments beginning March 20, 2006, secured by oil well
equipment located in Kimball County, Nebraska | $   24,319
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------

### Note G - Income Taxes

Income tax expense (benefit) differs from income tax at the
statutory rate as follows:



|                                         | February 28, | February 28,
|---------------------------------------- | ------------ | ------------
|                                         | 2005         | 2006        
|Income at statutory rate                 | 35%          | 35%         
|State income taxes                       | -   %        | (2) %       
|Expenses not deductible for tax purposes | -   %        | 10%         
|Change in valuation allowance            | (33)%        | (43)%       
|Other (net)                              | (2)%         | -  %        
|Income tax expense (benefit)             | -  %         | -  %        

Income tax expense (benefit) for the periods indicated
consists of the following:



|                              | For the years ended
|----------------------------- | -------------------
|                              | February 28,       
|                              | 2005               
|Current                       |                    
|Federal                       | $      -           
|State                         | 489                
|Deferred                      |                    
|Federal                       | 71,993             
|State                         | 11,769             
|Change in
valuation allowance | (83,762)           
|Total income taxes            | $        489       

As of February 28, 2006, Intermountain has net operating loss
carryforwards for Federal and state income tax purposes as shown in the
following table.  Operating losses can be carried forward generally for 20
years for Federal tax purposes and from 5 to 10 years for state tax purposes.
Intermountain has capital loss carryforwards for Federal and state income tax
purposes as shown in the following table. Capital losses can be carried forward
for 5 years for both Federal and state income tax purposes and can only be used
to offset capital gains. A valuation allowance has been provided on all of the
net operating loss and capital loss carryforwards as realization of the tax
benefit is uncertain.



|Year Generated | Net Operating Loss
Carryforward | Year Expires | Capital Loss Carryforward | Year Expires
|-------------- | ------------------------------- | ------------ | ------------------------- | ------------
|2002           | $   144,737                     | 2022         | $      328,296            | 2007        
|2003           | 83,006                          | 2023         | 21,139                    | 2008        
|2005           | -                               | -            | 901                       | 2010        
|Total          | $   227,743                     |              | $    350,336              |             
|               |                                 |              |                           |             

10-KSB
28                                                                             
IARS- 25<Page>

Intermountain Refining Co., Inc.

Notes to Financial Statements - Continued

Deferred tax assets/(liabilities) as of February 28, 2006
consist of the following:



|Net deferred tax asset arising from book and tax basis
differences in depreciable assets                                     | $  56,537        
|---------------------------------------------------------------------------------------------------------------------------- | -----------------
|Deferred tax asset arising from statutory depletion
carryforwards                                                            | 79,851           
|Deferred tax asset arising from book accrual of asset
retirement obligations                                                 | 8,772            
|Deferred tax asset arising from net operating loss
carryforwards                                                             | 79,710           
|Deferred tax asset arising from capital loss
carryforwards                                                                   | 122,618          
|Deferred tax liability arising from deferral of gain on
receipt of stock from demutualization of a life insurance company    | (5,173)          
|Valuation allowance provided for net deferred tax
assets                                                                     | (342,315)        
|Deferred taxes receivable/(payable)                                                                                          | $        -       
|                                                                                                                             |                  
|                                                                                                                             |                  
|Deferred tax liability from unrealized holding gain on
available for sale investments recorded as other comprehensive
income | $       
(19,738)

### Note H - Related Party Transactions

Following are descriptions of transactions involving
Intermountain and other related parties that occurred during the past two fiscal
years. In the opinion of management, the terms of the transactions discussed are
believed to be at least as favorable to Intermountain as those that could have
been secured in arm's length transactions.

Red Hills Manufacturing, Inc. is a small wood products
manufacturing company located in Fredonia, Arizona of which Mr. Hagler
(President, Director and shareholder) and Mr. Hurt (Treasurer, Secretary,
Director and shareholder), among others, are officers, directors, shareholders,
and employees. Prior to April 1, 2005, Intermountain performed certain
management and accounting services for Red Hills for a fixed fee of $3,000 per
month. Effective as of April 1, 2005, Intermountain agreed to allow Red Hills to
directly employ Mr. Hagler, Mr. Hurt and one other employee, on a part time
basis, and compensate them directly to perform such management and accounting
services. Red Hills agreed to continue to pay Intermountain $250 per month to
compensate for incidental use of office resources. Amounts received from Red
Hills were $36,000 for the year ended February 28, 2005 and $5,750 for the year
ended February 28, 2006.

### Note I - Commitments and Contingencies

Environmental Matters:  Intermountain has been
involved in the manufacture, storage, and sale of petroleum products since 1984,
which exposes Intermountain to potential claims for environmental remediation
costs, if any, of sites operated by Intermountain. Except as discussed below,
Intermountain is not aware of any claims pending for such sites.

In April, 2005, Intermountain began the process of dismantling
the portions of its refining equipment at its Fredonia facility that are no
longer used for ongoing operations and are not expected to be used in the
future. As part of the dismantling process, Intermountain identified the
presence of asbestos containing materials in portions of the equipment being
dismantled. Intermountain engaged a consultant to evaluate the extent of
asbestos present on the site and to prepare a plan for the abatement and removal
of the material. During the year ended February 28, 2006, Intermountain incurred
$276,212 in consulting and abatement costs associated with the removal of the
material. Intermountain believes that that abatement and disposal of the
asbestos containing materials has been completed as of February 28, 2006 and
that any additional abatement cost will not be material.

During the year ended February 28, 2006, Intermountain
recognized $29,505 from the salvage of metals and used equipment removed from
the facility. It is anticipated that Intermountain will recognize some
additional salvage amounts over the coming months as the dismantling project is
completed.

### Note J - Simple IRA Plan

Intermountain maintains a SIMPLE IRA plan for the benefit of
all of its full time employees.  The plan provides for the elective
deferral of employee wages, subject to annual limits established by the Internal
Revenue Service, and provides a mandatory employer matching contribution. 
Mandatory matching contributions are the lesser of 3% of employee compensation
or the amount of elective deferrals.  Intermountain may elect to reduce the
matching percentage to 1% for two out of five consecutive calendar years. 
Intermountain made matching contributions of $4,850 in 2005 and $5,385 in 2006.

10-KSB
29                                                                             
IARS- 26<Page>

Intermountain Refining Co., Inc.

Notes to Financial Statements - Continued

### Note K - Financial Information Relating to Industry
Segments

Intermountain's major industry segments are oil and natural
gas production and the leasing of asphalt product manufacturing and storage
facilities. Intermountain also rents office space in its Farmington, New Mexico
office building and, in addition to the overall management of Intermountain,
management occasionally performs management and consulting services for others.
All costs and expenses associated with the overall management of Intermountain
and other miscellaneous activities are included under "Other" in the following
segment information. Selected financial information relating to these segments,
is as follows:



|                                                                                                            | Years Ended   
|----------------------------------------------------------------------------------------------------------- | --------------
|                                                                                                            | February 28,  
|                                                                                                            | 2005          
|Revenues                                                                                                    |               
|Asphalt product manufacturing and storage
facilities                                                        | $    189,254  
|Oil and natural gas
production                                                                              | 672,430       
|Other                                                                                                       | 60,570        
|                                                                                                            | $   922,254   
|Operating Profit (Loss)                                                                                     |               
|Asphalt product manufacturing and storage facilities
*                                                      | $  122,402    
|Oil and natural gas
production                                                                              | 336,584       
|Electric generation                                                                                         | -             
|Other                                                                                                       | (207,279)     
|                                                                                                            | $   251,707   
|* Includes asbestos abatement costs of $276,212 and proceeds
from equipment salvage of $29,505 during 2006. |               
|                                                                                                            |               
|Identifiable Assets                                                                                         |               
|Asphalt product manufacturing and storage
facilities                                                        | $       17,328
|Oil and natural gas
production                                                                              | 759,987       
|Electric generation equipment available for
sale                                                            | 272,390       
|Other                                                                                                       | 967,670       
|                                                                                                            | $  2,017,375  
|Depreciation and Depletion                                                                                  |               
|Asphalt product manufacturing and storage
facilities                                                        | $      25,945 
|Oil and natural gas
production                                                                              | 31,541        
|Electric generation                                                                                         | -             
|Other                                                                                                       | 638           
|                                                                                                            | $   
58,124   

Capital Expenditures - During the year ended February
28, 2005, Intermountain capitalized a total of $418,029 for the purchase of
working interests in natural gas producing properties in New Mexico including
$6,600 for estimated future plugging and abandonment costs. During the year
ended February 28,2006, Intermountain capitalized $21,945 for the drilling of
one in-fill natural gas well in New Mexico, including $175 for estimated future
plugging and abandonment costs.

Major Customers - Intermountain sells substantially all
natural gas produced from the Kansas gas properties to one customer. Natural gas
sales to the customer, net to Intermountain's interest, were approximately
$542,000 for the year ended February 28, 2005, and $737,000 for the year ended
February 28, 2006. Intermountain leases its asphalt products manufacturing and
storage equipment to one customer. Equipment lease and fees revenues received
from the customer were approximately $189,000 for the year ended February 28,
2005 and $219,000 for the year ended February 28, 2006.

10-KSB
30                                                                             
IARS- 27<Page>

Intermountain Refining Co., Inc.

Notes to Financial Statements - Continued

### Note L - Oil and Gas Properties

Intermountain owns and operates certain proven and developed
natural gas reserves and related production equipment located in Southwestern
Kansas.  On August 1, 2004, Intermountain acquired working interests in certain
proven and developed natural gas reserves and related production equipment
located in Northwestern New Mexico. The New Mexico properties are operated by an
unrelated third party. Intermountain owned a working interest in, but did not
operate, certain proven and developed oil reserves in Southwestern Nebraska. The
properties in Nebraska were sold on November 1, 2005. While Intermountain may
participate in the drilling of additional development wells on its leased
properties, there are no current plans to drill or complete any additional wells
on the Kansas or New Mexico leases or elsewhere.





|Capitalized Costs:  Capitalized costs relating
to oil and gas producing activities are as follows at February 28,
2006:                                                
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Proved oil and gas
properties                                                                                                                                          
|Unproved oil and gas
properties                                                                                                                                        
|Less accumulated depletion                                                                                                                                             
|Net capitalized costs                                                                                                                                                  
|                                                                                                                                                                       
|Results of Operations:Results of operations of oil
and gas producing activities, excluding overhead and interest allocations, for
the periods indicated are as follows:
|                                                                                                                                                                       
|                                                                                                                                                                       
|                                                                                                                                                                       
|Revenues                                                                                                                                                               
|Oil and natural gas
sales                                                                                                                                              
|Other                                                                                                                                                                  
|                                                                                                                                                                       
|Costs and Expenses                                                                                                                                                     
|Operating costs                                                                                                                                                        
|General and
administrative                                                                                                                                             
|Accretion of discount on future plugging and
abandonment costs                                                                                                         
|Loss on settlement of plugging and abandonment
costs                                                                                                                   
|Loss on sale of oil and natural gas producing
properties                                                                                                               
|Depletion, depreciation and
amortization                                                                                                                               
|                                                                                                                                                                       
|Income before taxes                                                                                                                                                    
|Deferred income tax expense                                                                                                                                            
|Net income                                                                                                                                                             

Effective as of November 1, 2005, Intermountain sold all of
its interest in the Kimball County, Nebraska oil producing properties to an
unrelated third party for $38,500. The carrying value of the property at the
time of sale was $55,364, net of accumulated depletion of $7,663. Satisfaction
of the selling price consisted of a cash down payment of $14,181, a short-term
promissory note of $24,319, and release from accrued asset retirement
obligations of $8,976.

In January 2006, Intermountain participated in the drilling of
an in-fill well on existing lease acreage in New Mexico. Intermountain's share
of capitalized development costs were $21,945, including $175 for the present
value of estimated future asset retirement obligations. Changes in gas reserves
associated with the new well, if any, have not yet been determined.

10-KSB
31                                                                             
IARS- 28<Page>

Intermountain Refining Co., Inc.

Notes to Financial Statements - Continued

### Note M - Oil and Gas Reserve Data and Supplemental Data
(Unaudited)

In accordance with Statement of Financial Accounting Standards
No. 69, the following unaudited information is presented with regard to
Intermountain's proved oil and gas reserves. Information for gas is presented in
million cubic feet (MMcf) except where otherwise indicated in thousand cubic
feet (Mcf). Information for oil is presented in barrels (Bbls).



|Production:  Intermountain's oil and natural gas
production, average sales price and production cost for the periods indicated
are as follows:                                                                                                                                          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                        
|Net gas production (Mcf)                                                                                                                                                                                                                                                                
|Average sales price ($/Mcf)                                                                                                                                                                                                                                                             
|Average production cost
($/Mcf)                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                        
|Net oil production (Bbls)                                                                                                                                                                                                                                                               
|Average sales price ($/Bbl)                                                                                                                                                                                                                                                             
|Average production cost ($/Bbl)                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                        
|Reserves:  Oil and natural gas reserves as of
February 28, 2006 are based on data developed internally by
Intermountain.                                                                                                                                                                
|                                                                                                                                                                                                                                                                                        
|Estimated net quantities of proved developed and proved
undeveloped oil and gas reserves are as follows at February 28,
2006:                                                                                                                                                           
|                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                        
|Proved developed                                                                                                                                                                                                                                                                        
|Proved undeveloped                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                        
|Statement of Changes in Quantities of Proved Developed
and Undeveloped Oil and Gas Reserves for the years indicated are as
follows:                                                                                                                                                     
|                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                        
|Proved reserves - beginning of
year                                                                                                                                                                                                                                                     
|Acquisition of reserves in place                                                                                                                                                                                                                                                        
|Sale of reserves in place                                                                                                                                                                                                                                                               
|Revisions to previous estimates (1)                                                                                                                                                                                                                                                     
|Production                                                                                                                                                                                                                                                                              
|Proved reserves - end of period                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                        
|(1) The decrease in previous estimates for the year
ended February 28, 2006 was due to the write down of reserves associated with a
Kansas well that suffered an irreparable casing failure. Drilling of a
replacement well on the leased acreage is not considered economically
viable.
|10-KSB 32                                                                             
IARS- 29<Page>
Intermountain Refining Co., Inc.
Notes to Financial Statements - Continued                                                                                                        
|                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                        
|The Standardized Measure of Discounted Future Net Cash
Flows relating to Proved Oil and Gas Reserves are as follows at February 28,
2006:                                                                                                                                               
|                                                                                                                                                                                                                                                                                        
|Future cash inflows                                                                                                                                                                                                                                                                     
|Future production costs                                                                                                                                                                                                                                                                 
|Future plugging and abandonment costs                                                                                                                                                                                                                                                   
|Future income tax expense                                                                                                                                                                                                                                                               
|Future net cash flow                                                                                                                                                                                                                                                                    
|Ten percent discount factor                                                                                                                                                                                                                                                             
|Standardized measure of discounted future
net cash flows                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                        
|Changes in the Standardized Measure of Discounted Future Net
Cash Flows From Proved Oil and Gas Reserve Quantities for the periods indicated
are as follows:                                                                                                                            
|                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                        
|Standardized measure - beginning of
year                                                                                                                                                                                                                                                
|Acquisition of reserves in place                                                                                                                                                                                                                                                        
|Sale of reserves in place                                                                                                                                                                                                                                                               
|Revisions to previous estimates                                                                                                                                                                                                                                                         
|Sales, net of production costs and income
taxes                                                                                                                                                                                                                                         
|Changes in present value due to price and production
cost changes                                                                                                                                                                                                                       
|(Including accretion of
discount)                                                                                                                                                                                                                                                       
|Standardized measure - end of
period                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                        
|Developed and Undeveloped Acreage:  The
following summarizes Intermountain's gross and net undeveloped and developed
acreage at February 28, 2006:                                                                                                                                      
|                                                                                                                                                                                                                                                                                        
|Developed Acreage                                                                                                                                                                                                                                                                       
|Kansas                                                                                                                                                                                                                                                                                  
|Nebraska                                                                                                                                                                                                                                                                                
|New Mexico                                                                                                                                                                                                                                                                              
|Undeveloped Acreage                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                        
|"Gross Acres" refers to the number of acres in which
Intermountain owns a working interest. "Net Acres" refers to the sum of the
fractional working interest owned by Intermountain in gross acres.                                                                                     
|                                                                                                                                                                                                                                                                                        
|Other:  Intermountain held interests in the
following wells at February 28, 2006:                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                        
|Producing gas wells                                                                                                                                                                                                                                                                     
|Producing oil wells                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                        

### Note N - Asset Retirement Obligations

Accounting for asset retirement obligations relates to legal
obligations associated with the retirement of long lived assets. Intermountain
has a legal obligation to incur plugging and abandonment costs associated with
its oil and gas operations in Kansas and New Mexico.

10-KSB 33                                                                             
IARS- 30<Page>

Intermountain Refining Co., Inc.

Notes to Financial Statements - Continued



Changes in Intermountain's asset retirement obligations for
the periods indicated are as follows:



|                                                        | For the years ended
|------------------------------------------------------- | -------------------
|                                                        | February 28,2005   
|Asset retirement obligation - beginning
of year         | $   36,384         
|Sale of oil and natural gas producing
properties        | -                  
|Acquisition of oil and natural gas producing
properties | 6,600              
|Settlement of asset retirement obligations              | (15,740)           
|Loss on settlement of asset retirement
obligations      | 7,977              
|Accretion of discount                                   | 3,417              
|Asset retirement obligation - end of
period             | $   38,638         

(End of Integrated Annual Report to
Shareholders)

10-KSB 34                                                                             
IARS- 31<Page>

### Exhibits and Reports on Form 8-K

### Reports on Form 8-K:

There were no reports on Form 8-K filed by Intermountain
during the quarter ended February 28, 2006.

### Exhibits:





|Exhibit | Description                                                                                 
|------- | --------------------------------------------------------------------------------------------
|3.1     | Amended and Restated Articles of Incorporation
(1)                                          
|3.2     | Bylaws (1)                                                                                  
|10.4    | Oneok / Kinder Morgan / KN Energy Gas Sales Agreement
(1)                                   
|10.5    | Paramount Petroleum Agreement - November 1999
(1)                                           
|14.1    | Code of Ethics                                                                              
|31.1    | Certification under Rule 13a-14(a)/15d-14(a) of Rick L.
Hurt, Secretary, Treasurer, Director
|31.2    | Certification under Rule 13a-14(a)/15d-14(a) of William N.
Hagler, President, Director      
|99.1    | Certification of  Chief Executive Officer under Sec.906 of
Sarbanes-Oxley Act of 2002       
|99.2    | Certification of  Chief Financial Officer under Sec.906 of
Sarbanes-Oxley Act of 2002       

(1) Incorporated herein by reference to Intermountain's
registration statement filed on Form S-1 dated April 9, 2001.

### Signatures

Pursuant to the requirements of the Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Farmington, State of New
Mexico, on May 17, 2006.

Intermountain Refining Co., Inc.

By:/s/ William N.
HaglerWilliam N. Hagler, President

Pursuant to the requirements of the Exchange Act, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.

/s/ William N.
Hagler_________________   Date: May 17,
2006William N. Hagler, Chairman of the Board
ofDirectors, and
President/s/ Rick
L. Hurt _____________________    Date: May 17,
2006Rick L. Hurt, Secretary, Treasurer, Director

10-KSB 35<Page>