**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**Form 10-KSB/A**

 

**Amendment No. 1 to Form10-KSB**

 

| x          | **ANNUAL REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|------------|----------------------------------------------------------------------------------------------------|
| ** ** | **For  the fiscal year ended December 31, 2005**                                              |
| ** ** | **Or**                                                                                             |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition periodfrom              to              **

 

**Commission File Number:000-29098**

 

**BPZ Energy, Inc.**

(Exact name of registrant as specified in its charter)

 

| **Colorado**                                    |   | **33-0502730**                           |
|-------------------------------------------------|--------|------------------------------------------|
| (State or other  jurisdiction of incorporation) |   | (I.R.S. Employer  Identification Number) |

 

**580 Westlake Park Blvd.,Suite 525Houston, Texas 77079**

(Address of principal executive office)

 

Registrant’s telephone number, including area code: **(281) 556-6200**

 

Securities registered pursuant toSection 12(b) of the Exchange Act: **None**

 

Securities registered pursuant toSection 12(g) of the Exchange Act: **CommonStock, Without Par Value**

 

Check whether the issuer is not required to filereports pursuant to Section 13 or 15(d) of the Exchange Act.  o

**Note** — Checking thebox above will not relieve any registrant required to file reports pursuant toSection 13 or 15(d) of the Exchange Act from their obligations under thoseSections.

Indicate by check mark whether the Registrant (1)filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.       Yes x  No o

Indicate by check mark if there is no disclosure ofdelinquent filers in response to Item 405 of Regulation S-B contained herein,and no disclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference inPart III of this Form 10-KSB or any amendment to thisForm 10-KSB.     o

Indicate by check mark whether the Registrant is aShell Company (as defined in Rule 12b-2 of the Exchange Act      Yes o  No x)

Registrant did not earn revenues for the fiscal yearended December 31, 2005.

The number of shares of Common Stock held bynon-affiliates as of March 20, 2006 was 26,374,534 shares, all of oneclass of common stock, no par value, having an aggregate market value ofapproximately $89,673,174 based upon the closing price of Registrant’s commonstock on such date of $3.40 per share as quoted on the Over-the-Counter PinkSheets (“OTC PK”).

As of March 20, 2006, there were 42,322,515 shares ofcommon stock outstanding.

 

**DOCUMENTS INCORPORATED BYREFERENCE**

 

[NONE]

TransitionalSmall Business Disclosure Format (check one):  Yes o  No x

 

----

**PLEASE NOTE THATTHE INFORMATION CONTAINED IN THIS AMENDMENT NO. 1, INCLUDING THE FINANCIALSTATEMENTS AND THE NOTES THERETO, DOES NOT REFLECT ALL EVENTS OCCURRING AFTERTHE DATE OF THE ORIGINAL FILING OF THE 2005 ANNUAL REPORT ON FORM 10-KSBON MARCH 31, 2006 (“ORIGINAL FILING”) THAT DO NOT RELATE TO THERESTATEMENTS INCLUDED HEREIN. FOR A DESCRIPTION OF THESE EVENTS, PLEASE READOUR EXCHANGE ACT REPORTS FILED SINCE MARCH 31, 2006, INCLUDING OUR CURRENTREPORTS ON FORM 8-K AND FORM 8-K/A AND OUR QUARTERLY REPORTSON FORM 10-Q FOR THE PERIODS ENDED MARCH 31, 2006 AND JUNE 30,2006.**

**TABLE OF CONTENTS**
| **Explanatory Note** | ** ** | ** **                                                                                      | ** ** | ** ** | ** ** |
|---------------------------|------------|-------------------------------------------------------------------------------------------------|------------|------------|------------|
|                      |       |                                                                                            |       |       |       |
| **PART I**           | ** ** | ** **                                                                                      | ** ** | ** ** | ** ** |
|                      |       |                                                                                            |       |       |       |
| Item 1.                   |       | Description of Business                                                                         |       |       |       |
| Item 2.                   |       | Description of Property                                                                         |       |       |       |
| Item  3.                  |       | Legal  Proceedings                                                                              |       |       |       |
| Item 4.                   |       | Submission of Matters to a Vote of Security Holders                                             |       |       |       |
|                      |       |                                                                                            |       |       |       |
| **PART II**          | ** ** | ** **                                                                                      | ** ** | ** ** | ** ** |
| Item 5.                   |       | Market for Common Equity and Related Stockholder  Matters                                       |       |       |       |
| Item 6.                   |       | Management’s Discussion and Analysis and Plan of  Operation                                |       |       |       |
| Item  7.                  |       | Financial  Statements                                                                           |       |       |       |
| Item 8.                   |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosures          |       |       |       |
| Item 8A.                  |       | Controls and Procedures                                                                         |       |       |       |
| Item  8B.                 |       | Other  Information                                                                              |       |       |       |
|                      |       |                                                                                            |       |       |       |
| **PART III**         | ** ** | ** **                                                                                      | ** ** | ** ** | ** ** |
| Item 9.                   |       | Directors and Executive Officers of the Registrant                                              |       |       |       |
| Item 10.                  |       | Executive Compensation                                                                          |       |       |       |
| Item 11.                  |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters |       |       |       |
| Item 12.                  |       | Certain Relationships and Related Transactions                                                  |       |       |       |
| Item 13.                  |       | Exhibits                                                                                        |       |       |       |
| Item 14.                  |       | Principal Accountant Fees and Services                                                          |       |       |       |
|                      |       |                                                                                            |       |       |       |
| **SIGNATURES**            | ** ** | ** **                                                                                      | ** ** | ** ** | ** ** |
|                      |       |                                                                                            |       |       |       |
| Certifications            |       |                                                                                            |       |       |       |

 

2

----

**Explanatory Note**

*Overview*

We are filing this amendment to BPZ Energy, Inc.’s (“BPZ”or the “Company”) Annual Report on Form 10-KSB for the year ended December 31,2005 (“Amendment No. 1”), to amend and restate the consolidated financialstatements and other financial information from inception on August 20, 2001 toDecember 31, 2005 and for each of the quarters in years 2005 and 2004 withrespect to the accounting and disclosure for the following:

·                  asto the merger with Navidec, Inc. (“Navidec”), the description of theaccounting and the valuation of certain Navidec options assumed by the Company;

·                  theaccounting for the post-merger operations of Navidec FinancialServices, Inc. (“NFS”); and

·                  theaccounting for expenses incurred on the Company’s behalf by its former parent,BPZ & Associates, Inc. (“Associates”) prior to the merger with Navidec.

The table below reflects the total annual impact onnet loss as a result of the restatements from the amounts reported in theCompany’s 2005 Annual Report on Form 10-KSB filed on March 31, 2006.

| Twelve Months  Ended  December 31, | ** ** | **2005 Form  10-KSB** | ** **  | **Accounting  for NFS** | ** ** | **Allocation of  Expenses  From Associates** | ** ** | **Reclassification  & Other  (Options, etc.)** | ** ** | **2005 Form  10-KSB/A** | ** ** |
|----------------------------------------------|------------|----------------------------|-------------|------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------|------------|
| 2004                                         |       | $                          | (10,652,671 | )                            | $          | (8,087,752                                             | )          | $                                                            | (103,184   | )                            | $          | 3,830,430 |   | $ | (15,013,177 | ) |
| 2005                                         |       | $                          | (8,563,848  | )                            | $          | 2,156,859                                              |       | $                                                            | —     |                         | $          | — |   | $ | (6,406,989 | ) |

 

*The Navidec Merger*

The Company’s description of the transaction has beenamended to clarify that the merger is considered, from an accountingperspective to be in substance, a capital transaction rather than a businesscombination. On July 8, 2004,Navidec and BPZ-Texas entered into a Merger Agreement (the “Merger Agreement”)providing for the acquisition of BPZ-Texas by Navidec in a transaction intendedto qualify as a tax free share exchange (the “Merger”). The Merger wasconsummated on September 10, 2004. The Company changed its namefrom Navidec, Inc. to BPZ Energy, Inc. on February 4, 2005.Although the Company’s name has been changed, the pre-merger company may bereferred to as Navidec in this filing to avoid confusion.

The Merger was structured from a legal standpoint asthe acquisition of BPZ-Texas by Navidec; however, the stockholder group ofBPZ-Texas obtained majority ownership and management control of the combinedcompany. It is equivalent to the issuance of common stock by BPZ-Texas for thenet assets of the Navidec, accompanied by a recapitalization. The accountingtreatment is identical to that resulting from a reverse merger of BPZ-Texaswith Navidec under SFAS 141, except that no goodwill or other intangible assethas been recorded.

The Company’s historical financial statements prior tothe acquisition become those of BPZ-Texas (accounting acquirer). Operationsprior to the Merger are those of BPZ-Texas and earnings per share for periodsprior to the Merger are restated to reflect the number of equivalent sharesreceived by BPZ-Texas, with the historical stockholders’ equity of BPZ-Texasprior to the Merger being retroactively restated (a recapitalization) toreflect the equivalent number of shares received in the Merger by BPZ-Texas andthe capital structure (the number and type of shares issued) of Navidec (thelegal acquirer). Accordingly, all financial statements and pro formacombined financial statements included herein or incorporated by referencereflect the acquisition by BPZ-Texas of the net assets of Navidec and therecapitalization of BPZ-Texas’ common stock based on the exchange ratioprovided in the Merger Agreement.

*Navidec Options*

The Company is restating its consolidated financialstatements to reflect a change in the valuation of the options assumed by theCompany in the Merger with Navidec to purchase 1,332,076 shares of Navideccommon stock. All shares underlying such options are issuable as common stockof the Company. The proceeds from the exercise of the assumed options must beremitted to NFS pursuant to the Merger Agreement. As such, the Company believesthat $0.00 should be the exercise price input in the Black-Scholes Model usedto value these instruments. In its prior restatement on Form 8-K/A filedJanuary 17, 2006, the Company used the stated exercise price (weighted average)per the respective option agreements. The fair value of these options was determinedto be $3.21 (compared to $1.48 in the Company’s prior restatement) based on theexercise price noted and the market price of the underlying common stock on thedate of grant, among other Black-Scholes inputs.

*Operations of NFS*

The Company is also restating its consolidatedfinancial statements to exclude the operations of NFS for all periodspresented. The Merger Agreement provided that all of the pre-merger businessoperations, assets and liabilities of Navidec would be transferred to awholly-owned subsidiary, NFS, followed by the transfer of ownership of NFS tothe pre-merger shareholders of record as of September 9, 2004, the 

3

----

date prior to consummation of the Merger. The Companypreviously concluded in its 2004 Form 10-KSB/A filed on January 17, 2006 thatit was the record owner of NFS shares, but that any ownership was at mosttemporary, and restated its consolidated financial statements to account forNFS on the equity method until such time as the final distribution of NFSshares to the pre-merger shareholders has been completed in all respects. However,the Company subsequently learned through discovery performed with respect to anaction the Company filed against NFS in District Court, Arapahoe County,Colorado (the “Court”) that share certificates of NFS were issued in the namesof the shareholders of the pre-merger Navidec effective September 9, 2004 andno NFS certificates were ever issued to the Company. In addition, a Findings ofFact and Conclusions of Law (the “Order”) issued by the Court stated that theCompany was not a shareholder of NFS at any time after September 9, 2004. Basedon these findings, the Company concluded that it should not account for thepost-Merger operations of NFS in its consolidated financial statements.

*Allocation ofCosts Incurred by Associates*

The Company is also restating its consolidatedfinancial statements as a result of a change in the methodology used toallocate costs from Associates, its former parent. The Company has identifiedcosts that were incurred by Associates in support of BPZ-Texas’ activities fromBPZ-Texas’ inception in August 2001 until the merger with Navidec on September10, 2004. Specific costs incurred by Associates on behalf of BPZ-Texas havebeen included in BPZ-Texas’ financial statements. Additionally, all ofAssociates’ costs on BPZ-Texas’ projects in excess of third partyreimbursements have been included in BPZ-Texas’ financial statements in aneffort to reflect all the costs of doing business. The Company believes itsallocation methodology is reasonable.

The aforementioned items are discussed in more detailin the Note 1 to the accompanying consolidated financial statements. Thefollowing Items of the Original Filing are amended by this Amendment No. 1:
| Part  I  |   |                                                                                                    |
|----------|--------|---------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                    |
|     |   | Item 1—Business                                                                                    |
|     |   |                                                                                                    |
| Part II: |   |                                                                                                    |
|     |   |                                                                                                    |
|     |   | Item 3—Legal Proceedings                                                                           |
|     |   | Item 5—Market for Common Equity and Related  Stockholder Matters                                   |
|     |   | Item 6—Management’s Discussion and Analysis of  Results of Operations and Financial Condition |
|     |   | Item 7—Financial Statements and Supplementary Data                                                 |
|     |   | Item 8A—Controls and Procedures                                                                    |
|     |   |                                                                                                    |
| Part IV: |   |                                                                                                    |
|     |   |                                                                                                    |
|     |   | Item 15—Exhibits and Financial Statements Schedule                                                 |

 

4

----

**PART I**

*BPZEnergy, Inc. cautions that this document contains forward-lookingstatements. All statements, other than statements of historical facts, includedin or incorporated by reference into this Form 10-KSB/A which addressactivities, events or developments which the Company expects, believes oranticipates will or may occur in the future are forward-looking statements. Thewords “believes,” “intends,” “expects,” “anticipates,” “projects,” “estimates,”“predicts” and similar expressions are also intended to identifyforward-looking statements. These statements are based on certain assumptionsand analyses made by the management of BPZ in light of its experience and itsperception of historical trends, current conditions and expected futuredevelopments as well as other factors it believes are appropriate in thecircumstances. BPZ cautions the reader that these forward-looking statementsare subject to risks and uncertainties, many of which are beyond BPZ’s controlthat could cause actual events or results to differ materially from thoseexpressed or implied by the statements. See “Risk Factors” included in Item 1 -Description of the Business of this Form 10-KSB/A.*

**Item 1.Description of Business**

**General**

BPZ Energy, Inc., a Colorado corporation, formerly namedNavidec, Inc., was incorporated in 1993 and is based in Houston, Texas. We arean exploratory stage company focused on the exploration and production of oiland natural gas and we intend to utilize part of our future natural gasproduction for the complementary development of gas-fired power generation.

On September 10, 2004, BPZ-Texas consummated a reversemerger with Navidec whereby BPZ-Texas became a wholly owned subsidiary ofNavidec. However, in the Merger, the stockholder group of BPZ-Texas obtainedmajority ownership and management control of the combined company. On February4, 2005, the legal parent company, Navidec, Inc., changed its name to BPZEnergy, Inc. Although the Company’s name has been changed, the pre-mergercompany may be referred to as Navidec in this filing to avoid confusion.

We maintain a registered branch office in Peru.Currently, we have exclusive rights and license agreements for oil and gasexploration and production covering a total of approximately 2.7 million acresin northwest Peru. Our license contracts cover 100% ownership of both BlockZ-1, which was signed in November 2001 and Block XIX, which was signed inDecember 2003. Our license contracts provide for an initial exploration periodof seven to ten years and require that we conduct specified activities on theproperties during this period. The total contract term can extend up to 30years for oil exploration, development and production and 40 years for gasexploration, development and production. In December 2003, we entered into aTechnical Evaluation Agreement for Area VI. This agreement gave us the right toconduct a technical evaluation of the area over a 24-month period and theexclusive right to enter into a license contract if the evaluation indicatedthe potential for successful operations. In December 2005, we initiatednegotiations to obtain a license contract for Area VI.

We also own a 10% non-operated working interest in aproducing oil and gas property located in the southwest region of Ecuador (the “SantaElena Property”). The license agreement covering the property extends throughMay 2016.

We are in the exploratory stage and to date ouractivities in Peru have been limited to analysis and evaluation of technicaldata on the properties and preparation of the development plans for theproperties. We have not drilled any wells or recognized any revenues fromoperations and we do not anticipate generating significant revenues from ourproperties prior to 2007.

**Navidec MergerTransaction**

On July 8, 2004, Navidec and BPZ-Texas enteredinto a Merger Agreement (the “Merger Agreement”) providing for the acquisitionof BPZ-Texas by Navidec in a transaction intended to qualify as a tax freeshare exchange. The Merger was consummated on September 10, 2004.

As a result of the Merger, the shareholders ofBPZ-Texas received the majority of the voting interests and control of theBoard of Directors and management of the combined entity. The Merger wastreated, for accounting purposes, as a capital transaction rather than abusiness combination. It is equivalent to the issuance of common stock byBPZ-Texas for the net assets of the Navidec, accompanied by a recapitalization.This accounting treatment is identical to that resulting from a reverse mergerunder SFAS 141, except that no goodwill or other intangible asset has beenrecorded. All financial statements presented herein represent the historicalfinancial statements of the accounting acquirer, BPZ-Texas. The details of theMerger are more fully discussed in Note 2 to the Consolidated FinancialStatements. The historical financial statements of the Company for periodsprior to the Merger are the historical financial statements of BPZ-Texas.

The Merger Agreement provided for the immediateissuance by Navidec of 9,000,000 shares of its common stock to the shareholdersof BPZ-Texas and the future issuance of an additional 18,000,000 shares on anearn-out basis if the Company 

5

----

achieves certain reserve and production goals. Thefirst 9,000,000 earn-out shares were contingent on achieving certain reservetargets, which were achieved in December 2004. The remaining 9,000,000earn-out shares are issuable once the Company is entitled to receive as itsproportionate share from gross production from any oil and gas wells owned oroperated by the Company not less than 2,000 barrels of oil per day or itsequivalent (approximately 12 million cubic feet of gas per day) prior toDecember 28, 2007. Upon completion of the Merger, the officers anddirectors of Navidec resigned, except for the former CEO of Navidec, John R.McKowen, who remained a director. Mr. McKowen, together with themanagement and the four directors of BPZ-Texas, became the executive officersand directors of the surviving entity.

As part of the Merger transaction, Navidec agreed toprovide through a private placement not less than $3 million or more than $6million in additional equity capital for the operations and working capitalneeds of BPZ-Texas. This private placement was closed as of September 30, 2004,with $6.0 million of total gross proceeds. Net proceeds of approximately$5.5 million became available for use in connection with the businessoperations of BPZ-Texas.

The Merger Agreement also provided that all of thepre-merger business operations, assets and liabilities of Navidec would betransferred to a wholly-owned subsidiary, NFS, followed by the transfer ofownership of NFS to the pre-merger shareholders of record as ofSeptember 9, 2004, the day prior to the consummation of the Merger.Accordingly, the pre-merger shareholders of BPZ-Texas were not entitled toreceive shares of NFS. All legal requirements for the transfer of ownership ofNFS have been completed except for registration of the NFS shares with theSecurities and Exchange Commission. The Company has no ownership in NFS and hasno control over the registration process of NFS. Subsequent to the Merger, NFShas operated independently of the Company. Each company maintains separateoffices, bank accounts and management and the lines of business and operationsof the two companies are completely independent. However, the SEC continued tocomment on the accounting presentation of the Company’s ownership of NFS.

In part because of difficulty obtaining necessaryinformation from NFS to clarify the ownership issue, the Company commenced anaction against NFS (the “Action”) on or about February 13, 2006, in DistrictCourt, Arapahoe County, Colorado (the “Court”), seeking dissolution of NFS, theappointment of a receiver, and access to NFS corporate records. On May 19,2006, the Company entered into a Settlement Agreement and Mutual Release (the “Agreement”)by and among the Company, NFS and John McKowen, the Chief Executive Officer ofNFS and former Chief Executive Officer and Director of the Company (collectively,the “Parties”). The Agreement settled all disputes amongst the Parties andprovided for (i) certain access by the Company to the financial records ofNFS, (ii) a complete mutual release between the Parties of any and allclaims relating to the Action, and (iii) the granting of certain rightsrelating to the exercise period, exercise and registration rights for optionsand warrants held by NFS and certain of its affiliates. On June 20, 2006, theCourt issued its Findings of Fact and Conclusions of Law (the “Order”) inconnection with the declaratory action sought by the Parties on the issue ofthe Company’s record ownership in NFS. The Order stated that the Company wasnot a shareholder of NFS at any time after September 9, 2004. See “Item 3.Legal Proceedings” for further discussion.

**AvailableInformation**

The Company files annual, quarterly and currentreports, proxy statements and other documents with the Securities and ExchangeCommission (“SEC”) under the Securities Act of 1934. The public may read andcopy any materials that we file with the SEC at the SEC’s Public ReferenceRoom at Headquarters Office, 100 F Street, NE, Room 1580, Washington,DC 20549. The public may obtain information on the operation of the PublicReference Room by calling the SEC at 1-800-SEC-0330. Also, the SECmaintains an Internet website that contains reports, proxy and informationstatements, and other information regarding issuers, including us, that fileelectronically with the SEC. The public can obtain any documents that we fileelectronically with the SEC at http://www.sec.gov. In addition, the Companymaintains a website (http://www.bpzenergy.com), on which we make available,free of charge, all of the Company’s above mentioned filings with the SEC,including Forms 3, 4 and 5 filed with respect to our equity securities underSection 16(a) of the Securities Act of 1934. These filings will beavailable as soon as reasonably practicable after we electronically file suchmaterial with, or furnish it to, the SEC.

**Competition**

There is intense competition in the oil and gasindustry with respect to the acquisition of producing properties, undevelopedacreage, and rights to explore for these properties. Many major and independentoil and gas companies actively pursue and bid for the mineral rights ofdesirable properties, and many companies have been actively engaged inacquiring oil and gas properties in Peru and Ecuador.

We believe that our early efforts and knowledge of ourtargeted areas have given us a competitive advantage in Peru, and to a lesserextent, in Ecuador. Although there are unleased tracts within our target area,we believe that these properties may be less attractive to other companiesbecause it will be difficult for them to obtain a significant amount of contiguousmineral acreage. This results in part from our significant holdings in thevicinity of these unleased tracts. However, increased demand for license rightsin surrounding areas may impact our ability to expand and grow in the future,particularly because many of our competitors have substantially greaterfinancial and other resources, better name recognition and longer operatinghistories. As a result, we may not be able to acquire additional oil and gasproperties in desirable locations.

There is also intense competition in the oil and gasindustry for access to contract drillers, geologists, and others needed todrill and complete wells. Current demand for drilling and contract services inour target area appears to be reasonably stable, and we believe our early entrywill allow us to build the relationships necessary for our success. We do notanticipate that competition in this area will dramatically affect our plan ofoperation. However, increased future demand for drillers and contractors maylimit our ability to expand in a timely manner and may negatively impact ourability to grow.

6

----

**Regulation**

***General***

Various aspects of our oil and natural gas operationsare currently or will be subject to various foreign laws and governmentalregulations. These regulations may be changed from time to time in response toeconomic or political conditions. Although we believe that our operations areand will be in substantial compliance with existing legislation andrequirements of governmental bodies, our ability to conduct continuedoperations is subject to satisfying applicable regulatory and permittingcontrols. Our principals have many collective decades of experience in dealingdirectly with the Peruvian government on energy projects and in some cases havebeen directly involved in the drafting and promulgation of petroleumlegislation. Therefore, we believe we are in a unique position to understandand comply with local rules and regulations. However, our current permits andauthorizations and our ability to obtain future permits and authorizations may,over time, be susceptible to increased scrutiny and greater complexity whichcould result in increased costs or delays in receiving appropriateauthorizations.

***Peru***

***Peruvianhydrocarbon legislation.***   Peru’s hydrocarbonlegislation, which includes the Organic Hydrocarbon Law No. 26221 and theregulations thereunder (the “Organic Hydrocarbon Law”), governs our operationsin Peru. This legislation covers the entire range of petroleum operations,defines the roles of Peruvian government agencies which regulate and interactwith the oil and gas industry, requires that investments in the petroleumsector be undertaken solely by private investors (either national or foreign),and provides for the promotion of the development of hydrocarbon activitiesbased on free competition and free access to all economic activities. This lawprovides that pipeline transportation and natural gas distribution must behandled via contracts. All other petroleum activities are to be freely operatedand are subject only to local and international safety and environmentstandards.

Under this legal system, Peru is the owner of thehydrocarbons located below the surface in its national territory. However, Peruhas given the ownership right to extracted hydrocarbons to Perupetro, a statecompany that is responsible for promoting and overseeing the investment ofhydrocarbon exploration and exploitation activities in Peru. Perupetro isempowered to enter into contracts for either the exploration and exploitationor the exploitation of petroleum and gas on behalf of Peru, which are describedfurther below. The Peruvian government also plays an active role in petroleumoperations through the involvement of the Ministry of Energy and Mines, thespecialized government department in charge of devising energy, mining andenvironmental protection policies, enacting the rules applicable to all thesesectors and supervising compliance with such policies and rules. Within theoffice of the Prime Minister resides the Supervising Office for Investments inEnergy (“OSINERG”), which is the body charged with economic and technicalsupervision. We are subject to the laws and regulations of all of theseentities and agencies.

Perupetro generally enters into license contracts forhydrocarbon exploration and exploitation. Peru’s laws also allow for othercontract models, such as service contracts, but the investor will be subject tocontract terms that are compatible with Peru’s interests. A company must be qualifiedby Perupetro to enter into hydrocarbon exploration and exploitation contractsin Peru. In order to qualify, the company must meet the standards under theRegulations Governing the Qualifications of Oil Companies. These qualificationsgenerally require the company to have the technical, legal, economic andfinancial capacity to comply with all obligations it will assume under thecontract based on the characteristics of the area requested, the possibleinvestments required and the environmental protection rules governing theperformance of its operations. When a contractor is a foreign investor, it isexpected to incorporate a subsidiary company or registered branch in accordancewith Peru’s corporate laws and appoint representatives who will interact withPerupetro.

Our Peruvian branch, BPZ Energy, Inc., Sucursal Peru,has been qualified by Perupetro with respect to our current contracts. However,Perupetro reviews the qualification for each specific contract to be signed bya company. Additionally, the qualification for foreign companies is granted infavor of the home office or corporation, which is jointly and severally liableat all times for the technical, legal, economic and financial capacity of thePeruvian branch.

When operating under a license contract, the licenseeis the owner of the hydrocarbons extracted from the contract area during theperformance of operations, and pays royalties which are collected by Perupetro.The licensee can dispose of the petroleum in any manner whatsoever, subject toa limitation in the case of natural emergencies where the law stipulates themanner of disposal.

Licensees are obligated to submit quarterly reports tothe Petroleum Bureau (Direccion General de Hidrocarburos). Licensees must alsosubmit a monthly economic report to the Central Bank of Peru. These reports aregenerally combined and delivered together with other operating reports requiredto be submitted to Perupetro.

Previously, all license contracts were granted by theMinistry of Energy and Mines. The change to Perupetro as the license contractgrantor subjects all license contracts to a new legal framework. Although therehas been over twelve years of precedent for these new licensing procedures,there may still be some uncertainty as to exactly how the licensing procedureswill function in the future.

7

----

Under exploitation service contracts, the ownership ofall of the extracted hydrocarbons is vested in Perupetro and the company willreceive compensation agreed to by the parties. However, Perupetro is grantedthe power to remunerate the investor either in cash or in kind, depending onthe level of investment and the volume of production. We have no servicecontracts, nor do we foresee operating under this form of contract.

The duration of the contracts is based on the natureof the hydrocarbons discovered. The license contract duration for crude oil isthirty years, while the license contract duration for natural gas andcondensates is forty years. The periods commence on an agreed date and aredetermined based on location of the contract area, season of the year in whichexploration commences, and other similar factors. License contracts typicallyinclude an exploration phase and an exploitation phase, unless the contract issolely an exploitation contract. Within the license contract term, seven yearsis allotted to exploration, with the possibility of three extensions of oneyear each. There is also a potential deferment period for a maximum of tenyears if certain factors recognized by law delay the economic viability of adiscovery, such as lack of transportation facilities or lack of a market. Theexploration phase is generally divided into several periods, with a maximum ofseven periods, and each period includes a minimum work program. The fulfillmentof work programs must be supported by an irrevocable bank guaranty, usually inthe amount of thirty to forty percent of the estimated value of the minimumwork program.

Perupetro also grants technical evaluation agreements.These agreements give the contractor the right to conduct technical evaluationsof the areas under such agreements and to enter into license contracts if theevaluations indicate the potential for profitable operations. The technicalevaluation agreement is generally for a period of twenty-four months, dependingupon the volume and nature of the work to be carried out.

We currently have two license contracts and onetechnical evaluation agreement. As of December 31, 2005, we believe we were incompliance with all of the material requirements of each of such contracts. Wehave executed certain letters of guaranty to guarantee our performance underthe license contracts and technical evaluation agreements, including a $1.3million bond posted in January 2005 and a $350,000 bond posted in August 2005to secure our current obligations under the license contracts for Block Z-1 andBlock XIX, respectively. These bonds were secured by the deposit of restrictedcash with the financial institution which issued the bond. Should we fail tofulfill our obligations under the license contracts, without technicaljustification or other good cause, Perupetro could seek recourse to the bond orterminate the license.

***Peruvian fiscalregime.***   Peru’s fiscal regime determines thelevels of the government’s entitlement from petroleum activities. This regimeis subject to change, which could negatively impact our business.

Contractors under license contracts are subject toroyalty payments, which are usually a fixed percentage of the actual productionsold. The taxing regulations stipulate a minimum royalty payment of fifteenpercent. However, a contractor is sometimes granted the right to pay less basedon the circumstances at the time of signing the license contract. Under aService Contract, Perupetro receives all of the petroleum produced on behalf ofPeru and the contractor is remunerated for the volume produced at a pricestipulated under the contract.

The Organic Hydrocarbon Law and the RegulationsGoverning the Tax Stability Guaranty and Other Tax Rules of the OrganicHydrocarbon Law provide that the tax regime in force on the date of signing acontract will remain unchanged during the term of the contract. Therefore, anychange to the tax regime, which results in either an increase or decrease inthe tax burden, will not affect the contractor.

During the exploration phase, contractors are exemptfrom import duties and other forms of taxation applicable to goods intended forexploration activities. Exemptions are withdrawn at the production phase butexceptions are made in certain instances, and the contractor is entitled toimport goods tax-free for an additional two-year period.

Taxable income is determined by deducting allowableoperating and administrative expenses, including royalty payments, and income taxis levied on the contractor based upon the current legal corporate tax rate ineffect at the date the contract was signed. Contractors engaged in theexploration and production of crude oil, natural gas and condensates mustdetermine their taxable income separately for each of these activities. Where acontractor carries out these activities in more than one area under differentindividual contracts, it may consolidate all costs and expenses incurred inoverall operations for purposes of determining the corporate income tax.

***Peruvian labor andsafety legislation.***   Our operations in Peruwill also be subject to the Unified Labor Law, which governs the labor force inthe petroleum sector. In addition, the Organic Hydrocarbon Law and relatedSafety Regulations for the Petroleum Industry also regulate the safety andhealth of workers involved in the development of hydrocarbon activities. Allentities engaged in the performance of activities related to the petroleumindustry must provide the General Hydrocarbons Bureau on a semi-annual basiswith the list of their personnel, indicating their nationality, specialty andposition. These entities must also permanently train their workers on theapplication of safety measures in the operations, and control of disasters andemergencies. Each entity must keep detailed records of all accidents that occurin its operations and report all accidents to the General Hydrocarbons Bureau.The regulations also contain provisions on accident prevention and personnelhealth and safety, which in turn include rules on living conditions, sanitaryfacilities, water quality at workplaces, medical assistance and first-aidservices. Provisions specifically related to the exploration phase, which isour current phase of operations, are also contained in the regulations andinclude safety measures in camps, medical assistance, food conditions, andhandling of explosives. Additional safety regulations may also apply as weexpand and develop our operations.

8

----

***Peruvian electricpower legislation.***   Our business planenvisions the generation of electricity and the sale of such electric power inPeru. The basic laws in Peru governing electric power, which will apply to ourfuture operations, are the Law of Electric Power Concessions and the Regulationsfor the Environmental Protection of Electric Power Activities, thecorresponding regulations for each, as well as additional related laws andregulations including all legislation regarding Electric Power Tariffs and allregulations and technical norms created by the National Commission of ElectricPower Tariffs.

***Peruvianenvironmental regulation.***   Our operations aresubject to numerous and frequently changing laws and regulations governing thedischarge of materials into the environment or otherwise relating toenvironmental protection. Peru has enacted specific environmental regulationsapplicable to the petroleum industry. The Code on the Environment and theNatural Resources establishes a framework within which all specific laws andregulations applicable to each sector of the economy are to be developed. Theselaws and regulations are designed to ensure the continual balance ofenvironmental and petroleum interests. The regulations stipulate certainenvironmental standards expected from contractors. They also specifyappropriate sanctions to be enforced by the Ministry of Mines and Energy if a contractorfails to maintain such standards. The Ministry of Mines and Energy is chargedwith the responsibility of issuing the applicable standards. OSINERG isresponsible for ensuring compliance with applicable environmental rulescovering hydrocarbon activities.

The Organic Hydrocarbon Law also addresses theenvironmental regulatory regime in Peru. The law originally prohibited anymining or extractive operations within certain areas designated for protection.It was, however, subsequently modified to enable investors to prospect forhydrocarbons within protected areas, provided there is compliance with severalobligations. We must comply with these obligations as we conduct our businesson an ongoing basis. The Environmental Regulations for Hydrocarbon Activitiesprovide that companies participating in the implementation of projects,performance of work and operation of facilities related to hydrocarbonactivities, are responsible for the emission, discharge and disposal of wastesinto the environment. Companies must annually file a report corresponding tothe previous year describing the company’s compliance with the environmentallegislation in force.

Companies involved in hydrocarbon activities must alsoprepare and file an Environmental Impact Study (“EIS”) with the GeneralHydrocarbons Bureau, which is part of the Ministry of Energy and Mines, inorder for the relevant activities to comply with the maximum permissibleemission limits set forth by the Ministry of Energy and Mines. An EIS must beprepared for each project to be carried out. All of these proposals must beapproved by the General Environmental Bureau, which is also part of theMinistry of Energy and Mines.

In addition, any party responsible for hydrocarbonactivities must file an “Oil Spill and Emergency Contingency Plan” with theGeneral Hydrocarbons Bureau. The plan must be updated at least once a year andmust contain information regarding the measures to be taken in the event ofspills, explosions, fires, accidents, evacuation, etc. It must also containinformation on the procedures, personnel and equipment required to be used andprocedures to be followed to establish uninterrupted communication between thepersonnel, the government representatives, the General Hydrocarbons Bureau andother State entities.

Any failure to comply with environmental protectionrules, the import of contaminated products, or failure to keep a monitoringregister or send reports to the General Hydrocarbons Bureau in a timelyfashion, could subject the company to fines. In addition, the GeneralHydrocarbons Bureau may consider imposing a prohibition or restriction of therelevant activity, an obligation to compensate the aggrieved parties and/or anobligation to immediately restore the area. The company responsible for anydefault can also be subject to a suspension of operations for a term of one,two or three months, or indefinitely. Furthermore, any contract signed with thePeruvian government, the implementation of which jeopardizes or endangers theprotection or conservation of protected natural areas, can be terminated.

We are subject to all Peruvian environmentalregulations now in existence and those existing in the future. The enactmentand enforcement of environmental laws and regulations in Peru is relativelynew. We are therefore uncertain how Peruvian authorities will enforce andsupervise environmental compliance and standards. Further, we cannot predictany future regulation or the cost associated with future compliance.

Although we believe that our operations are insubstantial compliance with existing environmental requirements, our ability toconduct continued operations is subject to satisfying applicable regulations.Our current permits and authorizations and ability to obtain future permits andauthorizations may be susceptible, on a going forward basis, to increasedscrutiny, greater complexity resulting in increased costs, or delays inreceiving appropriate authorizations. In particular, we may experience in thefuture delays in obtaining permits and authorizations in Peru necessary for ouroperations. We are required to obtain an environmental permit or approval fromthe government in Peru prior to conducting any seismic operations, drilling awell or constructing a pipeline in Peruvian territory, including the waters inoffshore Peru where we intend to conduct oil and gas operations.

***Compliance with Existing Regulations in Peru***

Although we believe that our operations are and willbe in substantial compliance with existing legislation and requirements ofPeruvian governmental bodies, our ability to conduct continued operations issubject to satisfying applicable regulatory and permitting controls. As notedabove, our principals have many collective decades of experience in dealingdirectly

9

----

with the Peruvian government on energy projects and insome past cases have been directly involved in the drafting and promulgation ofpetroleum legislation. Therefore, we believe we are in a good position tounderstand and comply with local rules and regulations.

***Compliance with Existing Regulations in Ecuador***

SMC Ecuador, Inc. has owned its 10% non-operatinginterest in the Santa Elena oil fields for the past nine years. As anon-operator, we are not directly subject to the laws and regulations ofEcuador covering the oil and gas industry and the environment. However, if webegin operating activities in Ecuador, we will be directly subject to such lawsand regulations.

**EnvironmentalCompliance and Risks**

As an owner or lessee and operator of oil and gasproperties throughout South America, we are subject to various national, stateand local laws and regulations relating to discharge of materials into, andprotection of, the environment. These laws and regulations may, among otherthings, impose liability on the contractor under an oil and gas licenseagreement for the cost of pollution clean-up resulting from operations, subjectthe contractor to liability for pollution damages, and require suspension orcessation of operations in affected areas.

We do not presently maintain environmental insurancecoverage, because, in management’s judgment, such coverage is notcost-effective at this time in view of our limited activities. However, we mayacquire such insurance coverage in the future based on our assessment of the risksof our operations and the costs of such coverage. No such coverage can insureus fully against all environmental risks. We are not aware of any environmentalclaims existing which would have a material impact upon our financial positionor results of operations.

We have made and will continue our efforts to complywith these requirements, which we believe are necessary to successful long-termoperations in the oil and gas industry. We have established guidelines forcontinuing compliance with environmental laws and regulations. In order tocarry out our plan of operation, we are required to conduct environmentalimpact studies and obtain environmental approvals for operations. We haveengaged outside consultants to perform these studies and assist us in obtainingnecessary approvals. Our estimated cost for these studies and assistance isapproximately $370,000, of which approximately $ 257,000 had been incurred asof December 31, 2005.

We do not believe that compliance with federal, stateor local provisions regulating the discharge of materials into the environment,or otherwise relating to the protection of the environment, will have amaterial adverse effect upon the capital expenditures, earnings or competitiveposition of the Company or its subsidiaries. However, there is no assurancethat changes in or additions to laws or regulations regarding the protection ofthe environment will not have such an impact.

**OperationalHazards and Insurance**

Our operations will be subject to the usual hazardsincident to the drilling and production of oil and gas, such as blowouts,cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires,pollution, releases of toxic gas and other environmental hazards and risks.These hazards can cause personal injury and loss of life, severe damage to anddestruction of property and equipment, pollution or environmental damage andsuspension of operations.

We will evaluate whether to obtain general liabilityinsurance and in what amounts based on whether we believe the terms and costsare reasonable for our operations. Such insurance will not cover everypotential risk associated with the drilling, production and processing of oiland gas. In particular, coverage is not obtainable for all types ofenvironmental hazards. The occurrence of a significant adverse event, the risksof which are not fully covered by insurance, could have a material adverseeffect on our financial condition and results of operations. Moreover, noassurance can be given that we will be able to obtain or maintain adequateinsurance at rates we consider reasonable.

**Research andDevelopment**

BPZ seeks to use advanced technologies in theevaluation of its oil and gas properties and new opportunities. BPZ generallydoes not develop such technologies internally, but its technical team workswith outside vendors to test and utilize these technologies to the fullestpractical extent, particularly in the application of geophysical andexploration software. In certain cases, the collaboration of BPZ has aided thedevelopment of these technologies. BPZ does not believe it has incurred anyquantifiable incremental costs in research and development activities.

**Employees**

As of December 31, 2005, we employed 16 full-timeemployees (of which 3 are executive officers) in our Houston, Texas office, and7 full-time employees (of which 1 is an executive officer) in the Lima, Peruoffice. BPZ believes that its relationship with its employees is satisfactory.None of our employees are represented by a union.

10

----

**RISK FACTORS**

**Risks Relating tothe Oil and Natural Gas Industry, Power Industry and Our Business**

***We have a limitedoperating history and have only engaged in start-up activities.***   AlthoughBPZ-Texas was formed in 2001, we are in the exploratory stage because we havenot had significant business operations since formation and have generated norevenues from the production of oil or gas from our properties. We are alsosubject to all of the risks inherent in attempting to expand a relatively newbusiness venture. Such risks include, but are not limited to, the possibleinability to profitably operate our existing properties or properties to beacquired in the future, our possible inability to fully fund the developmentrequirements of such properties and our possible inability to acquireadditional properties that will have a positive effect on our operations. Wecan provide no assurance that we will achieve a level of profitability thatwill provide a return on invested capital or that will result in an increase inthe market value of our securities. The experience of our management team hasprimarily been in the exploration and production industry and we have limitedexperience in the power generation business. We are initially relying onconsultants and outside engineering and technical firms to provide theexpertise to plan and execute the power generation aspects of our strategy andwe have not yet hired all necessary full-time employees to manage this line ofbusiness. Accordingly, we are subject to the risk that because of these factorsand other general business risks noted throughout these “Risk Factors” we maynot be able to profitably execute our power generation strategy.

***We own rights tooil and gas properties that have not yet been developed.***   Weown rights to oil and gas properties that have limited or no development. Thereare no guarantees that our properties will be developed profitably or that thepotential oil and gas resources on the property will produce as expected ifthey are developed.

***We requireadditional financing for the exploration and development of our foreign oil andgas properties and the construction of our proposed power generation facility,pipeline and gas processing facility.***   Withthe net proceeds from a $6 million private offering completed on September 30,2004, net proceeds from a $34.4 million private offering completed on July 19,2005, and net proceeds from a $5 million private offering completed on March10, 2006, we have begun to implement our plans to develop our existing oil andgas properties as discussed in “Management’s Discussion and Analysis and Planof Operation—Plan of Operation.” We anticipate the additional amounts requiredto fund our initial project will come primarily in the form of debt financing.In May 2005 the Company signed a Mandate Letter with International FinanceCorporation (“IFC”), a member of the World Bank Group based in Washington, D.C.The Mandate Letter specifies that the IFC will appraise BPZ Energy’s project inPeru to determine the feasibility and structure of a potential projectfinancing. The IFC’s appraisal of the project will and has included a review ofthe technical, economic, commercial, financial, environmental and legal aspectsof the project. The structure of any IFC financing will be defined during theappraisal process and any IFC investment will depend on the project and theCompany meeting IFC’s financing criteria, the overall financing plan beingacceptable to IFC, approval of the investment by management and the Board ofIFC, and the execution of all appropriate documentation, in form and substancesatisfactory to IFC. We do not yet have a firm commitment from the IFC tofinance the project and there can be no assurance that we will receivefinancing from them. See “Management’s Discussion and Analysis and Plan ofOperation—Liquidity and Capital Resources” for further discussion. If we areunable to timely obtain adequate funds to finance these expenditures, ourability to develop our oil and gas reserves may be limited or substantiallydelayed. Such limitations or delays could result in the potential loss of ouroil and gas properties if we were unable to meet our obligations under thelicense agreements. Inability to obtain funds also could cause us to delay,scale back or abandon our plans for construction of our power generationfacility, pipelines, and gas processing facility.

We anticipate that future amounts required to fund ourforeign activities will be funded from debt financing, sale of equityinterests, joint venture arrangements, the sale of oil and gas interests,and/or future cash flows from operations. The exact nature and terms of suchfunding sources is unknown at this time, and there can be no assurance that wewill obtain such funding or have adequate funding available to finance ourfuture operations.

***Our futureoperating revenue is dependent upon the performance of our properties.***   Ourfuture operating revenue depends upon our ability to profitably operate ourexisting properties by drilling and completing wells that produce commercialquantities of gas and our ability to expand our operations through thesuccessful implementation of our plans to explore and acquire additionalproperties. The successful development of oil and gas properties requires an assessmentof potential recoverable reserves, future oil and gas prices, operating costs,potential environmental and other liabilities and other factors. Suchassessments are necessarily inexact. There can be no assurance that once inoperation we can produce sufficient operating revenue to operate our existingproperties or acquire additional oil and gas producing properties and leases.We may not discover or successfully produce any recoverable reserves, or we maynot be able to make a profit from the reserves that we discover. In the eventthat we are unable to produce sufficient operating revenue to fund our futureoperations, we will be forced to seek additional, third-party funding, if suchfunding can be obtained. Such options would possibly include debt financing,sale of equity interests in the Company, joint venture arrangements, or thesale of oil and gas interests. If we are unable to secure such financing on atimely basis, we could be required to delay or scale back our operations. Ifsuch unavailability of funds continued for an extended period of time, thiscould result in the termination of our operations and the loss of an investor’sentire investment.

***Our businessinvolves many uncertainties and operating risks that may prevent us fromrealizing profits and can cause substantial losses.***   Ourexploration, development and production activities may be unsuccessful for manyreasons, including weather, the drilling of dry holes, cost overruns, equipmentshortages and mechanical difficulties. Moreover, the successful drilling of anatural gas or oil well does not ensure we will realize a profit on ourinvestment. A variety of factors, both geological and market-related, can causea well to become uneconomical or only marginally economical. Our businessinvolves a variety of operating risks, including:

11

----

·                           fires;

·                           explosions;

·                           blow-outsand surface cratering;

·                           uncontrollableflows of natural gas, oil and formation water;

·                           naturaldisasters, such as hurricanes and other adverse weather conditions;

·                           pipe,cement, subsea well or pipeline failures;

·                           casingcollapses;

·                           mechanicaldifficulties, such as lost or stuck oil field drilling and service tools;

·                           abnormallypressured formations;

·                           environmental hazards, suchas natural gas leaks, oil spills, pipeline ruptures and discharges of toxicgases.

If we experience any of these problems, any wellbores, platforms, gathering systems and processing facilities could beaffected, which could adversely affect any drilling operations we may commence.

We could also incur substantial losses as a result of:

·                           environmentalhazards, such as natural gas leaks, oil spills, pipeline ruptures anddischarges of toxic gases;

·                           injuryor loss of life;

·                           severedamage to and destruction of property, natural resources and equipment;

·                           pollutionand other environmental damage;

·                           clean-upresponsibilities;

·                           regulatoryinvestigation and penalties;

·                           suspensionof our operations; and

·                           repairs to resumeoperations.

If any of these risks occur, and our resulting lossesare significant, we may have to curtail or suspend any drilling or productionoperations we may eventually commence.

***We plan to conductoffshore exploration, exploitation and production operations off the coast ofnorthwest Peru, all of which are also subject to a variety of operating riskspeculiar to the marine environment.***   Suchrisks include capsizing, collisions and damage or loss from adverse weatherconditions or interference from commercial fishing activities. These conditionscan cause substantial damage to facilities and interrupt production. As aresult, we could incur substantial liabilities that could reduce or eliminatethe funds available for exploration, exploitation and acquisitions or result inloss of equipment and properties.

***Construction andoperation of power generation and gas processing facilities and pipelinesinvolve significant risks that cannot always be covered by insurance orcontractual protections.***   The construction ofpower generation and gas processing facilities and pipelines involve manyrisks, including:

·                           supplyinterruptions,

·                           workstoppages,

·                           labordisputes,

·                           socialunrest,

·                           inabilityto negotiate acceptable construction, supply or other contracts,

·                           inabilityto obtain required governmental permits and approvals,

·                           weatherinterferences,

·                           unforeseenengineering, environmental and geological problems, and

·                           unanticipated cost overruns.

The ongoing operation of these facilities involves allof the risks described above, in addition to risks relating to the breakdown orfailure of equipment or processes and performances below expected levels ofoutput or efficiency. We intend to obtain and maintain commercially reasonablelevels of insurance where such insurance is available and cost effective,obtain warranties from vendors and obligate contractors to meet certainperformance levels. However, the proceeds of any such insurance, warranties orperformance guarantees may not be adequate to cover lost revenues or increasedexpenses. Any of these risks could cause us to operate below expected capacitylevels, which in turn could result in lost revenues, increased expense andhigher maintenance costs.

12

----

***Our successdepends on the existence and growth of markets for natural gas and electricityin Peru and Ecuador.***   Peru has a relativelywell-developed and stable market for electricity, while the power market inEcuador is not as well-developed or stable. Both countries rely onhydro-electric generating capacity for a significant portion of their powerdemand. Hydro plants are much less expensive to operate than plants whichutilize natural gas, but are subject to variable output based on rainfall andreservoir levels. The majority of the non-hydro, or thermal, power capacity inboth countries consists of generating plants that utilize diesel or fuel oil,which are significantly more costly than natural gas at this time. Bothcountries have natural gas reserves and production (although to a lesser extentin Ecuador), but neither has a well-developed natural gas infrastructure. Ourimmediate business plan relies on the continued stability of the power marketin Peru (and Ecuador for the purpose of gas sales to third-party powerproducers in Ecuador) and our longer-term plans depend on the furtherdevelopment of the electricity market in Ecuador. We are subject to the risksthat relatively more favorable business conditions for hydro plants or othercompetitive issues may adversely affect the demand and prices for theelectricity that we expect to produce. We are also subject to the risksassociated with potential disruptions or changes to regulations of the naturalgas or power markets in these countries. We plan to enter into long-termcontracts to sell a significant part of our future power production. There is amarket for long-term purchases of power and natural gas, but there can be noassurance that we will be successful in obtaining such contracts on favorableterms. We will also be subject to the general commercial issues related tobeing in the power business, including the credit-worthiness of and collectionsfrom future customers and the ability to profitably operate our future powerplants.

***The geographicconcentration of our properties in northwest Peru and southwest Ecuadorsubjects us to an increased risk of loss of revenue or curtailment ofproduction from factors affecting that region specifically.***   Thegeographic concentration of our properties in northwest Peru and southwestEcuador and adjacent waters means that some or all of our properties could beaffected by the same event should that region experience:

·                           severe weather (such as theeffects of “El Nino”, which can cause excessive rainfall and flooding in Peruand Ecuador);

·                           delays or decreases inproduction, the availability of equipment, facilities or services;

·                           delays or decreases in theavailability of capacity to transport, gather or process production; or

·                           changes in the regulatoryenvironment.

Because all our properties could experience the sameconditions at the same time, these conditions could have a relatively greaterimpact on our results of operations than they might have on other operators whohave properties over a wider geographic area.

***Instability ofInternational Operations.***   Presently, all ofour oil and gas properties are located in South America, specifically Peru andEcuador. The success and profitability of our international operations may beadversely affected by risks associated with international activities, includingeconomic, labor and social conditions, political instability, tax laws(including host-country export, excise and income taxes and U.S. taxes onforeign operations) and fluctuations in the value of the U.S. dollar versus thelocal currencies in which oil and gas producing activities may be conducted.This instability in laws, expenses of operations and fluctuations in exchangerates may make our assumptions about the economic viability of our oil and gasproperties incorrect. If these assumptions are incorrect, we may not be able toearn sufficient revenue to cover our costs of operations.

***Our operations inPeru and Ecuador involve substantial costs and are subject to certain risksbecause the oil and gas industry in Peru and Ecuador is less developed than inthe United States.***   The oil and gasindustries in Peru and Ecuador are not as developed as the oil and gas industryin the United States. As a result, our drilling and development operations inmany instances will take longer to complete and may cost more than similaroperations in the United States. The availability of technical expertise,specific equipment and supplies may be more limited in Peru and Ecuador than inthe United States. Further, once oil and natural gas production is recovered,there are fewer ways to transport it to market for sale. Pipeline and truckingoperations are subject to uncertainty and lack of availability. Oil and naturalgas pipelines and truck transport travel through miles of territory and aresubject to the risk of diversion, destruction or delay. We expect that suchfactors will continue to subject our international operations to economic andoperating risks that companies with domestic operations do not experience.

***The unavailabilityor high cost of drilling rigs, equipment, supplies, personnel and oil fieldservices could adversely affect our ability to execute our exploration andexploitation plans on a timely basis and within our budget.***   Shortagesor the high cost of drilling rigs, equipment, supplies or personnel could delayor adversely affect our exploitation and exploration operations, which couldhave a material adverse effect on our business, financial condition or resultsof operations. If the unavailability or high cost of rigs, equipment, suppliesor personnel were particularly severe in Peru and Ecuador, we could bematerially and adversely affected because our operations and properties areconcentrated in those areas.

***We are subject tonumerous foreign laws and regulations of the oil and natural gas industry thatcan adversely affect the cost, manner or feasibility of doing business.***   Ouroperations are subject to extensive foreign laws and regulations relating tothe exploration for and the development, production and transportation of oiland natural gas as well as electrical power generation. Future laws orregulations, any adverse change in the interpretation of existing laws or ourfailure to comply with

13

----

existing legal requirements may harm our results ofoperations and financial condition. We may be required to make large andunanticipated capital expenditures to comply with governmental regulations,such as:

·                           work program guarantees andother financial responsibility requirements;

·                           taxation;

·                           royalty requirements;

·                           customer requirements;

·                           operational reporting; and

·                           safety requirements.

·              Under these laws and regulations,we could be liable for:

·                           personal injuries; and

·                           property and naturalresource damages; and

·                           governmental infringementsand sanctions.

***If we fail tocomply with the terms of certain contracts related to our foreign operations,we could lose our rights under each of those contracts.***   Theterms of each of our contracts with the government of Peru, including ourPeruvian license contracts and technical evaluation agreements, require that weperform certain activities, such as seismic interpretations and the drilling ofrequired wells in accordance with those contracts and agreements. Our failureto timely perform those activities as required could result in the loss of ourrights under a particular contract or the loss of the amounts we have posted asa guaranty for the performance of such activities, which would likely result ina significant loss to us.

***We are subject tocomplex environmental regulatory and permitting laws and regulations that canadversely affect the cost, manner and feasibility of our planned operations.***   Theexploration for, and the development, production and sale of, oil and gas inSouth America are subject to extensive environmental laws and regulations. Ourability to conduct continued operations is subject to satisfying applicableregulatory and permitting controls. For example, we are required to obtain anenvironmental permit or approval from the government in Peru prior toconducting seismic operations, drilling a well or constructing a pipeline inPeruvian territory, including the waters in offshore Peru, where we intend toconduct future oil and gas operations. Failure to comply with these laws andregulations also may result in the suspension or termination of our planneddrilling operations and subject us to administrative, civil and criminal penalties.

Our current permits and authorizations and our abilityto get future permits and authorizations may, over time, be susceptible toincreased scrutiny, resulting in increased costs, or delays in receivingappropriate authorizations. In particular, we may experience delays inobtaining permits and authorizations in Peru and Ecuador necessary for ouroperations. Compliance with these laws and regulations may increase our costsof operations, as well as further restrict our foreign operations. Moreover,these laws and regulations could change in ways that substantially increase ourcosts. These laws and regulations have changed in the past and have generallyimposed more stringent requirements that increase operating costs or requirecapital expenditures in order to remain in compliance. It is also possible thatunanticipated developments could cause us to make environmental expendituresthat are significantly higher from those we currently anticipate, therebyincreasing our overall costs. Failure to comply with new regulations couldcause us to suspend or terminate certain operations or subject us toadministrative, civil and criminal penalties. Any of these liabilities,penalties, suspensions, terminations or regulatory changes could materiallyadversely affect our financial condition and our ability to implement our planof operation.

***Compliance with,or breach of, laws relating to the discharge of materials into, and theprotection of the environment, can be costly and could limit our operations.***   Asan owner or lessee and operator of oil and gas properties in Peru and Ecuador,we are subject to various national, state and local laws and regulationsrelating to discharge of materials into, and protection of, the environment.These laws and regulations may, among other things, impose liability on theowner or lessee under an oil and gas lease for the cost of property damage, oilspills, discharge of hazardous materials, remediation and clean-up resultingfrom operations, subject the owner or lessee to liability for pollution damagesand other environmental damages, and require suspension or cessation ofoperations in affected areas.

We have established practices for continued compliancewith environmental laws and regulations. We believe the costs incurred by thesepolicies and procedures are necessary business costs in the oil and gasindustry. There is no assurance that changes in or additions to laws orregulations regarding the protection of the environment will not increase suchcompliance costs, or have a material adverse effect upon our capitalexpenditures, earnings or competitive position.

14

----

***Our oil and gasoperations involve substantial costs and are subject to various economic risks.***   Ouroil and gas operations are subject to the economic risks typically associatedwith exploration, development and production activities, including thenecessity of significant expenditures to locate and acquire producingproperties and to drill exploratory wells. The cost and length of timenecessary to produce any reserves may be such that it will not be economicallyviable. In conducting exploration and development activities, the presence ofunanticipated pressure or irregularities in formations, miscalculations oraccidents may cause our exploration, development and production activities tobe unsuccessful. We also face the risk that the oil and/or gas reserves may beless than anticipated, that we will not have sufficient funds to successfullydrill on the property, that we will not be able to market the oil and/or gasdue to a lack of a market and that fluctuations in the prices of oil and/or gaswill make development of those leases uneconomical. This could result in atotal loss of our investment. In addition, the cost and timing of drilling,completing and operating wells is often uncertain.

***Competition foroil and natural gas properties and prospects is intense; some of ourcompetitors have larger financial, technical and personnel resources that givethem an advantage in evaluating and obtaining properties and prospects.***   Weoperate in a highly competitive environment for reviewing prospects, acquiringproperties, marketing oil and natural gas and securing trained personnel andequipment. In addition, changes in Peruvian government regulation have enabledmultinational and regional companies to enter the Peruvian energy market.Competition in our business activities has increased and will increase further,as existing and new participants expand their activities as a result of theseregulatory changes. Many of our competitors possess and employ financialresources that allow them to obtain substantially greater technical andpersonnel resources than we have. We actively compete with other companies inour industry when acquiring new leases or oil and gas properties. For example,Perupetro may choose to call for bids, either through international competitivebiddings or through private bidding processes by invitation, if severalcompanies are interested in an area, and award the contract to the highestbidder. These additional resources can be particularly important in reviewingprospects and purchasing properties. Our competitors may be able to evaluate,bid for and purchase a greater number of properties and prospects than ourfinancial or personnel resources permit. Our competitors may also be able topay more for productive oil and natural gas properties and exploratoryprospects than we are able or willing to pay. On the acquisition opportunities madeavailable to us, we compete with other companies in our industry for propertiesoperated by third parties through a private bidding process, directnegotiations or some combination thereof. Our ability to acquire additionalprospects and to find and develop reserves in the future will depend on ourability to evaluate and select suitable properties and to consummatetransactions in a highly competitive environment. If we are unable to competesuccessfully in these areas in the future, our future revenues and growth maybe diminished or restricted. The availability of properties for acquisitiondepends largely on the divesting practices of other oil and natural gascompanies, commodity prices, general economic conditions and other factors wecannot control or influence.

***The loss of seniormanagement or key technical personnel could adversely affect us.***   Wehave engaged certain members of management who have substantial expertise inthe type of endeavors that we presently conduct. We do not maintain any life insuranceagainst the loss of any of these individuals. To the extent that their servicesbecome unavailable, we will be required to retain other qualified personnel.There can be no assurance that we will be able to recruit and hire qualifiedpersons upon acceptable terms.

Similarly, the oil and gas exploration industryrequires the use of personnel with substantial technical expertise. In theevent that the services of our current technical personnel become unavailable,we will need to hire qualified personnel to take their place. No assurance canbe given that we will be able to recruit and hire such persons on acceptableterms.

***Insurance does notcover all risks.***   Exploration for andproduction of oil and natural gas can be hazardous, involving unforeseenoccurrences such as blowouts, cratering, fires and loss of well control, whichcan result in damage to or destruction of wells or production facilities,formations, injury to persons, loss of life, or damage to property or theenvironment. Even if we are able to secure additional financing, we may nothave sufficient capital to establish any reserves for contingent liabilities orworkovers. We do not presently maintain insurance against losses or liabilitiesarising from our operations or for environmental coverage. However, we are inthe process of evaluating insurance coverage in amounts consistent with ourbusiness activities and to the extent required by our license contracts. Nosuch insurance coverage can insure for all operational or environmental risks.The occurrence of an event that is not insured or not fully insured couldresult in losses to us. For example, uninsured environmental damages, propertydamages or damages related to personal injuries could divert capital needed toimplement our plan of operation. If any such uninsured losses are significant,we may have to curtail or suspend our drilling operations until such time asreplacement capital is obtained, if ever.

***A substantial orextended decline in oil and natural gas prices may adversely affect ourbusiness, financial condition, cash flow, liquidity or results of operationsand our ability to meet our capital expenditure obligations and financialcommitments to implement our business plan.***   Withrespect to our oil and gas business, any revenues, cash flow, profitability andfuture rate of growth we achieve will be greatly dependent upon prevailingprices for oil and gas. Our ability to maintain or increase our borrowingcapacity and to obtain additional capital on attractive terms is also expectedto be dependent on oil and gas prices. Oil and natural gas are commodities,and, therefore, their prices are subject to wide fluctuations in response torelatively minor changes in supply and demand. Historically, oil and gas pricesand markets have been volatile and are likely to continue to be volatile in thefuture. Prices for oil and gas are subject to potentially wide fluctuations inresponse to relatively minor changes in

15

----

supply of and demand for oil and gas, marketuncertainty, and a variety of additional factors that are beyond our control.Those factors include:

·                           international politicalconditions (including wars and civil unrest);

·                           the domestic and foreignsupply of oil and gas;

·                           the level of consumerdemand;

·                           weather conditions;

·                           domestic and foreigngovernmental regulations and other actions;

·                           actions taken by theOrganization of Petroleum Exporting Countries (OPEC);

·                           the price and availabilityof alternative fuels; and

·                           overall economic conditions.

Lower oil and natural gas prices may not only decreaseour revenues on a per unit basis, but may also reduce the amount of oil andnatural gas we can produce economically, if any. A substantial or extendeddecline in oil and natural gas prices may materially affect our futurebusiness, financial condition, results of operations, liquidity and borrowingcapacity, and we may require a reduction in the carrying value of our oil andgas properties. While our revenues may increase if prevailing oil and gasprices increase significantly, exploration and production costs and acquisitioncosts for additional properties and reserves may also increase.

***We may not be ableto develop a proven reserve base.***   Our futuresuccess will depend upon our ability to find, acquire and develop oil and gasreserves that are economically recoverable. Any reserves we develop willdecline as they are produced, except to the extent that we conduct successfulrevitalization activities, or are able to acquire properties containing provenreserves, or both. To develop reserves and achieve production, we mustimplement our development and production programs, identify and producepreviously overlooked or by-passed zones and shut-in wells, acquire additionalproperties or undertake other replacement activities. Our current strategy isto develop a reserve base, production and cash flow through the development ofoil and gas fields to which we have development rights and selectiveacquisitions of other desirable oil and gas properties where we can utilize newand existing technology. We can give no assurance that our planned development,revitalization, and acquisition activities will result in significant reservesor that we will have success in discovering and producing reserves ateconomical exploration and development costs. We may not be able to locategeologically satisfactory property, particularly since we will be competing forsuch property with other oil and gas companies, most of which have much greaterfinancial resources than ourselves. Moreover, even if desirable properties areavailable to us, we may not have sufficient funds with which to acquireadditional leases.

**Risks Relating toOur Common Stock**

***Investor profits,if any, may be limited for the near future.***   Inthe past, we have never paid a dividend. We do not anticipate paying anydividends in the near future. Accordingly, investors in our common stock maynot derive any profits from their investment in us for the foreseeable future,other than through any price appreciation of our common stock that may occur.Further, any appreciation in the price of our common stock may be limited ornonexistent as long as we continue to have operating losses. We have not beenprofitable and have accumulated deficits during the exploratory stage totaling$22,312,478 through December 31, 2005. To date we have not had any revenue orearnings from operations, and we will continue, in all likelihood, to sustainoperating expenses without corresponding revenues until we are able tosuccessfully implement our plan of operation, if ever.

***Because our commonstock may be subject to the “penny stock” regulations, its liquidity may bereduced.***   Generally, penny stocks are equitysecurities (i) with a price of less than $5.00 per share; (ii) that are nottraded on a “recognized” national exchange or whose prices are not quoted onthe Nasdaq automated quotation system; or (iii) of issuers with net tangibleassets less than $2.0 million (if the issuer has been in continuous operationfor at least three years), or with average revenues of less than $6.0 millionfor the last three years. The penny stock rules require a broker/dealer todeliver, prior to a transaction in a penny stock, a standardized riskdisclosure document prescribed by the SEC and to provide the potentialpurchaser of penny stock with the following information:

·                           information about pennystocks;

·                           the nature and level of riskin the penny stock market;

·                           the bid and offer quotationsfor the stock; and

16

----

·                           other burdensome and detailedinformation.

Those delivery and disclosure requirements tend toreduce the level of interest of broker/dealers in dealing with penny stocks,which could have the effect of reducing the level of trading activity in thesecondary market for our common stock during the time that our common stock issubject to the penny stock regulations. Our common stock is not quoted on anational stock exchange or NASDAQ and would likely be considered a penny stocksubject to the penny stock regulations if the price of our common stock remainsbelow $5.00 and we are not subject to any other exemptions. This could reducethe liquidity of our common stock and make it more difficult for investors tosell our common stock.

***Additionalinfusions of capital may have a dilutive effect on existing shareholders.***   Tofinance our operations we may sell additional shares of our stock. Anyadditional equity financing that we receive may involve substantial dilution toour then-existing shareholders. Furthermore, we may issue stock to acquireproperties, assets, or businesses. In the event that any such shares areissued, the proportionate ownership and voting power of other shareholders willbe reduced.

***Shares eligiblefor future sale by our current shareholders may impair our ability to raisecapital through the sale of our stock.***   As ofDecember 31, 2005, we had 40,349,979 shares of common stock issued andoutstanding. In addition, we have 12,473,652 of other potentially dilutivesecurities, including an additional 9,000,000 common shares which may be issuedto the former shareholders of BPZ-Texas on an earn-out basis once we areentitled to receive as our proportionate share from gross production from anyoil and gas wells owned or operated by us not less than 2,000 barrels of oilper day or its equivalent (approximately 12 million cubic feet of gas per day)prior to December 28, 2007. The possibility that substantial amounts ofshares of our common stock may be sold in the public market may causeprevailing market prices for our common stock to decrease and thus could impairour ability to raise capital through the sale of our equity securities.

***We are controlledby our officers, directors and entities affiliated with them.***   Inthe aggregate, our management and directors own or control approximately 34.6 %of our common stock issued as of December 31, 2005. These shareholders, ifacting together, will be able to significantly influence all matters requiringapproval by our shareholders, including the election of directors and theapproval of mergers or other business combination transactions.

***The transfer ofNFS could result in liability to us because the shares transferred were notregistered with the SEC.****  *On September 9, 2004, the day prior to the effectivedate of the Merger, Navidec assigned all of its pre-merger business operations,assets and liabilities to NFS, and all issued and outstanding shares of NFSwere subsequently transferred to the Navidec pre-merger shareholders of recordas of September 9, 2004, for no cash consideration.  Pursuant to the terms of the MergerAgreement, the transfer and any necessary qualifications or registrations ofthe NFS shares under applicable securities laws was agreed to be handled byNFS, and we believed, based on information provided by NFS and its advisors,that NFS had undertaken the necessary actions to comply with applicableregistration requirements. However, because a registration of the NFS shareswas not effective at the time of the transfer of the NFS shares and has stillnot become effective, it may be determined that the distribution of the NFSshares was made without full compliance with registration or qualificationrequirements under applicable securities laws. As a result, although we took noactions in connection with the transfer, we might incur liability, as asuccessor to Navidec, by merger, with respect to any damages resulting fromsuch failure to register.  If, despitethe fact that we did not control the transfer of the NFS shares, regulatoryauthorities determine that we did not comply with applicable registrationrequirements with respect to the transfer, fines or other sanctions might beimposed on us.

**Item 2.Description of Properties**

**Offices**

Our corporate headquarters office is in Houston,Texas, where we lease approximately 7,770 square feet of office space under afive-year lease which expires on September 30, 2010. We also maintain anadministrative office in Lima, Peru of approximately 3,700 square feet under amonth-to-month lease.

**BPZ’sProperties in Peru**

We currently have rights to three properties innorthwest Peru. We have a 100% working interest in license contracts for BlockZ-1 and Block XIX. The license contracts afford an initial exploration periodof seven to ten years and, if exploration efforts are successful, provide atotal contract term of 40 years for gas development and production and 30 yearsfor oil development and production. We also have a Technical Evaluation Agreementcovering Area VI. This agreement gives us the right to conduct technicalevaluations of the area over a 24-month period and the exclusive right to enterinto a license contract if the evaluations indicate the potential forsuccessful operations. We recently initiated negotiations to obtain a licensecontract for Area VI. These three blocks cover a combined area of approximately2.7 million acres. In December 2005, we notified Perupetro that we did notintend to pursue a license contract on Area XVI, which had been covered by aTechnical Evaluation Agreement.

The followingtable is the Company’s undeveloped properties in Northwest Peru as of December31, 2005:
| **CONTRACT / AGREEMENT** | ** ** | **BASIN**     | ** ** | **AREA(c)** | ** ** | **BPZ’s Ownership** | ** ** |
|------------------------------------|------------|---------------|------------|-------------|------------|-------------------------------|------------|
| ** **                         | ** ** | ** **    | ** ** | **(acres)** | ** ** | **(%)**                       | ** ** |
| Block Z-1(a)                       |       | Tumbes        |       | 739,205     |       | 100                           | %          |
| Block XIX(a)                       |       | Tumbes/Talara |       | 472,860     |       | 100                           | %          |
| Area VI(b)                         |       | Lancones      |       | 1,443,561   |       | 100                           | %          |
| Total                              |       |          |       | 2,655,626   |       |                          |       |

----

(a)             License Contract

(b)            Technical EvaluationAgreement

(c)             Allacreage is considered undeveloped

17

----

**Description ofBlock Z-1 and License Contract**

Block Z-1, a coastal offshore area encompassing739,205 acres, is situated at the southern end of the Gulf of Guayaquil innorthwest Peru. Geologically, the block lies within the Tumbes basin. From thecoastline, water depths increase gradually. The average water depth of the areais approximately 200 feet and only 10% of the area has depths greater than 500feet. There are five structures which were drilled in the 1970’s and 1980’s byprevious operators, including Tenneco, Inc. and Belco Petroleum Corporation.These structures are known as the Albacora, Barracuda, Corvina, Delfin andPiedra Redonda fields. Wells drilled in each of these structures encounteredhydrocarbons, principally natural gas, while drilling at depths ranging from 6,000to 12,000 feet. However, at the time the wells were drilled, it was notconsidered economic to produce and sell natural gas from the fields.Accordingly, the wells were either suspended or abandoned.

BPZ originally acquired its initial interest in Block Z-1in a joint venture with Syntroleum Corporation, under an exploration andproduction license contract dated November 30, 2001, with an effective date ofJanuary 29, 2002. Under the original contract, BPZ owned a 5% non-operatingworking interest in the block. Syntroleum later transferred its 95% interest toNuevo Energy, Inc. Subsequent to the merger of Nuevo Energy, Inc. and PlainsExploration and Production Company, Nuevo Energy, Inc. transferred its interestin Block Z-1 to BPZ who then assumed a 100% working interest, as well as theremaining obligations under the contract. Perupetro approved the assumption ofNuevo’s interest by BPZ and the designation of BPZ as a qualified operatorunder the contract in November 2004. Such action was subject to officialratification and issuance of a Supreme Decree by the government of Peru, whichwas issued on February 3, 2005. Accordingly, an amended contract was signedwith Perupetro, which named BPZ as the owner of 100% of the participation underthe license contract.

The license contract provides for an initialexploration phase of seven years, which is divided into four periods, and canbe extended under certain circumstances up to an additional six years. Eachperiod has a commitment for exploration activities and requires a financialguarantee to secure the performance of the work commitment during such period.Block Z-1 is currently in the second exploration period which will last for 18months, ending in July 2006, unless an extension of up to six months to completethe work commitment is requested. During the second exploration period, we mustdrill at least one exploratory well or acquire 300 square kilometers of 3-Dseismic data. We posted a $1.3 million performance bond in January 2005 inconnection with the second exploration period. The third exploration period isscheduled to begin in July 2006 and expire in January 2008 and will require thedrilling of an additional exploratory well, or other equivalent workcommitments, and will require a performance bond of $1.0 million. The fourthand final exploration period is scheduled to begin in January 2008 and expirein January 2009. It will also require the drilling of an additional exploratorywell, or other equivalent work commitments, and will require a performance bondof $1.0 million. The performance bond amounts are not cumulative, and arereleased at the end of each exploration period if the work commitment for thatperiod has been satisfied. In addition, we are required to make technologytransfer payments related to training costs of Perupetro professional staffduring the exploration phase of $50,000 per year.

The exploitation, or development, period of thecontract will commence as soon as we declare a commercial discovery and receiveapproval for a field development plan. We must declare a commercial discoveryno later than at the end of the last exploration period, including anyextensions or deferments. Under the contract, oil exploration, development andproduction can continue for a total of 30 years from the effective date of thecontract, and gas exploration, development and production can continue for 40years. Royalties under the contract vary from 5% to 20% based on productionvolumes.

**Description ofBlock XIX and License Contract**

Block XIX covers approximately 472,860 acres, lyingentirely onshore and adjacent to Block Z-1 in northwest Peru. Geologically, theblock lies primarily within the Tumbes basin of Oligocene-Neogene age, but alsocovers part of the Talara Basin to the south.

In February 2003, we entered into a TechnicalEvaluation Agreement with Perupetro for Block XIX. In December 2003, we signeda license contract whereby we acquired a 100% interest in Block XIX. The termfor the exploration period is seven years and can be extended under certaincircumstances for an additional period of up to four years. If a commercialdiscovery is made during the exploration period, the contract will allow forthe development and production of oil for a period of 30 years from theeffective date of the contract and the development and production of gas for aperiod of 40 years. Royalties under the contract vary from 5% to 20% based onproduction volumes.

The seven year exploration phase is divided into fiveperiods of 18 months, 24 months, 15 months, 15 months and 12 months,respectively. We are currently in the second exploration period which isscheduled to end in August 2007, unless an extension of up to six months tocomplete the work commitment is requested. During the second exploration period,we are required to acquire and interpret 100 kilometers of new 2-D seismic dataand to conduct certain integrated geological, geophysical, and geochemical andreservoir engineering evaluation studies. In connection with the secondexploration period, we posted a $350,000 performance bond in August 2005. Thethird exploration period is scheduled to begin in August 2007 and will requirea performance bond of $585,000. The fourth exploration period is scheduled tobegin in November 2008 and will require a performance bond of $585,000. Thefifth and final exploration period is scheduled to begin in February 2009 andwill require a performance bond of $585,000. The performance bond amounts arenot cumulative, and are released at the end of each exploration period if thework commitment for that period has been satisfied. In addition, we arerequired to make technology transfer

18

----

payments related to training costs of Perupetroprofessional staff during the exploration phase of $5,000 per year. Theexploitation, or development, period of the contract will commence as soon asthe Company declares a commercial discovery and receives approval for a fielddevelopment plan. We must declare a commercial discovery no later than the endof the last exploration period, including any extensions or deferments.

**Description ofArea VI and Technical Evaluation Agreement**

Area VI is located onshore in northwest Peru withinthe Lancones Basin of Cretaceous—Upper Eocene Age and covers an area ofapproximately 1,443,561 acres. The Lancones Basin is primarily an exploratoryarea and has had limited drilling and seismic activity.

In December 2003, we entered into a TechnicalEvaluation Agreement for Area VI. The agreement enables us to perform technicalstudies based on existing information, applying new concepts, newinterpretations and new exploration models, with the objective of obtainingevidence of potential exploratory success under a license contract. Theagreement covers a period of 24 months. At the end of this period, we have the exclusiveright to obtain a license contract covering the area. In connection with thesigning of this Agreement, we posted a $20,000 performance bond. In addition,we are obligated to arrange for technology transfer to Perupetro professionalstaff. The costs associated with this training are expected to be less than$10,000. During the fourth quarter of 2005, we notified Perupetro that weintend to negotiate a license contract covering this area.

**Oil and GasResources**

During 2004, we retained Gaffney Cline &Associates, Inc. (“GCA”), an internationally recognized firm of independentreserve engineers, to evaluate the oil and gas resource potential of theCorvina and Piedra Redonda Fields located in the Block Z-1 license contractarea. GCA focused its evaluation on the wells which were drilled by previousoperators of Block Z-1, and the seismic and other geological and geophysicaldata available on the block.

In the Corvina Field, seven wells were drilled,including two wells drilled by Tenneco, Inc. in the mid-1970’s and five wellsdrilled by Belco Petroleum Corporation (“Belco”) in the late 1970’s and early1980’s. Two drilling and production platforms were set up by Belco during thisperiod and are still in place in the Corvina Field. The platforms need to berepaired and refurbished, but are structurally sound and we believe they aresuitable for our future operations. We have hired a contractor to undertake therefurbishment of one of the platforms and have initiated work on this project.All seven wells in the Corvina Field encountered indications of natural gas andapparent reservoir-quality formations, although only one of the wells, theCX11-16X, was completed and tested. At the time these wells were drilled, therewas no commercial market for natural gas in the region. The CX11-16X producednatural gas at rates as high as 16.6 million cubic feet of gas per day (“MMcf/d”)during two separate tests over a period of approximately 20 days each. The wellwas temporarily abandoned. We believe this well can be reestablished as aproducing well.

In the Piedra Redonda Field, two wells were drilled byBelco in the late 1970’s and early 1980’s. Indications of natural gas werepresent in both wells. One well was completed, while the other well encounteredabnormally high pressures and was abandoned for mechanical reasons prior toreaching its intended total depth. There is also a drilling and productionplatform in place in the Piedra Redonda Field. The completed well in the PiedraRedonda Field, the C18X, produced natural gas at rates as high as 8.3 MMcf/dover a period of approximately 20 days during an extended test in 1979 and wasalso temporarily abandoned. We believe this well can be reestablished as aproducing well.

GCA reviewed all available technical data, including alarge volume of 2-D seismic data, well logs, drilling and completion reports,well test information, and other geological and geophysical data and analysis.The Company intends to develop these resources as discussed in “Management’sDiscussion and Analysis and Plan of Operation.” The development of theseresources will require a significant financial investment which is presentlyestimated to be in excess of $112 million. We do not currently have thefinancial capacity or commitments for a development program of this magnitude.Accordingly, the Company has not disclosed amounts of proved reserves in itsSEC filings. At such time as we obtain sufficient financial commitments toproceed with the full development of Block Z-1 and all other conditionsnecessary to record proved reserves are met, we expect to record SEC provedreserves and disclose such reserves in future SEC filings as permitted by SECrules.

**BPZ’s Propertiesin Ecuador**

In June 2004, we acquired the common stock of SMCEcuador, Inc., a Delaware corporation, the owner of a 10% interest in anon-operated producing oil and gas property located in the Republic of Ecuador(the “Santa Elena Property”). The Santa Elena Property is located west of thecity of Guayaquil along the coast of Ecuador. The license contract provides forroyalty payments equal to 23% of production. There have been almost 3,000 wellsdrilled in the field since production began in the 1920’s. Currently, there areapproximately 1,250 active wells which produce approximately 2,000 barrels ofoil per day. The majority of the wells produce intermittently by gas lift,mechanical pump or swabbing techniques. Crude oil is gathered in holding tanksand pumped via pipeline to an oil refinery in the city of Libertad, Ecuador.

19

----

**Item 3. LegalProceedings**

*SEC Inquiry ofNavidec*

Navidec was advised in February 2004 that the SEC wasconducting an informal inquiry to determine whether Navidec had violatedfederal securities laws. The SEC made an informal request that Navidecvoluntarily produce certain documents, which were provided to the SEC in May2004. Based on the inquiries made and the information requested, we believe theSEC’s investigation relates, at least in part, to the restatement of Navidec’sreported earnings for the first and second quarters of 2003. This restatementwas reported in Navidec’s Form 10-Q for the third quarter of 2003 filed on December11, 2003.

In December 2004, we received notice that the SEC hadissued an Order Directing a Private Investigation and Designating Officers toTake Testimony, and would be conducting a formal investigation. We arecooperating fully with the SEC in this matter. As of December 31, 2005, a totalof approximately $50,000, primarily in legal fees, had been incurred inconnection with the SEC investigation. Pursuant to the Merger agreement, wehave been indemnified by NFS for the costs of the SEC investigation and NFS hasborne the costs incurred to date. We are not aware of the future actions, ifany, which the SEC intends to pursue in this matter, but no assurance can begiven that the investigation will be resolved without negative consequences tous.

*Transfer ofOwnership in NFS*

On July 8, 2004, Navidec and BPZ-Texas entered into aMerger Agreement which was consummated on September 10, 2004.  The Merger Agreement provided that all of thepre-merger business operations, assets and liabilities of Navidec would betransferred to a wholly-owned subsidiary, NFS, followed by the transfer of NFSto the pre-merger shareholders of record as of September 9, 2004, the day priorto the consummation of the Merger. See “*Businessand Properties—Navidec Merger Transaction*,” “*Risk Factors - The transfer of NFS could result inliability to us because the shares transferred were not registered with theSEC,*” and Note 2 to the Consolidated Financial Statements, includedin this filing, for detailed discussion regarding the Merger.

The Merger Agreement provided that the transfer of allof the pre-merger business operations, assets and liabilities of NFS waseffective as of September 9, 2004. Accordingly, we originally believed that wehad no continuing ownership of NFS and, therefore, did not account for thepost-merger operations of NFS in the presentation of our financial statements.After receipt of comments from the SEC in connection with its review of ourregistration statement on Form SB-2 originally filed on July 27, 2005 andfurther review of this issue, we concluded that we were the record, but notbeneficial, owner of NFS shares, and that any ownership interest was at mosttemporary. Therefore, we decided to restate our financial statements to moreaccurately reflect the impact of our temporary ownership of NFS on the equitymethod. However, the SEC continued to comment on the accounting presentation ofour ownership of NFS.

In part because of difficulty obtaining necessaryinformation from NFS to clarify the ownership issue, we commenced an actionagainst NFS (the “Action”) on or about February 13, 2006, in District Court,Arapahoe County, Colorado (the “Court”), seeking dissolution of NFS, theappointment of a receiver, and access to NFS corporate records. We commencedthe Action uncertain whether or when the required spin-off of NFS sharespursuant to the terms and conditions of the Merger had occurred under Coloradocorporate law. We asserted in the Action that we believed we were a recordshareholder of NFS as of the date of the request and had standing for therelief sought. NFS denied that we had standing to act as a shareholder andasserted that we had not been a shareholder of NFS since September 9, 2004.

On May 19, 2006, we entered into a SettlementAgreement and Mutual Release (the “Agreement”) by and among us, NFS and JohnMcKowen, the Chief Executive Officer of NFS and former Chief Executive Officerand Director of the Navidec (collectively, the “Parties”). The Agreementsettled all disputes amongst the Parties relating to the Action, seekingdissolution of NFS, the appointment of a receiver, and access to the NFScorporate records. The Agreement provided for (i) agreed access by us to thefinancial records of NFS, (ii) a complete mutual release between the Parties ofany and all claims relating to the Action, and (iii) the granting of certainrights extending the exercise period for options and warrants held by NFS andcertain of its affiliates, certain rights concerning cashless exercise of thosesecurities if they are not registered by January 30, 2007, and certainmodifications to the registration rights held by NFS and certain of itsaffiliates, permitting us to complete the registration of securities issued inthe $34.4 million private placement completed by us in July, 2005, beforeregistering our securities held by NFS and certain of its affiliates.

In addition, the Agreement provided that NFS wouldfile for declaratory relief or a declaratory action in the Court solely on theissue of whether we were a record owner of NFS shares at any time afterSeptember 9, 2004.  On June 20, 2006, theCourt issued its Findings of Fact and Conclusions of Law (the “Order”) inconnection with the declaratory action sought by the Parties on the issue ofour record ownership in NFS.  The Orderstated that we were not a shareholder of NFS at any time after September 9,2004.

**Item 4. Submissionof Matters to a Vote of Security Holders**

There were no matters submitted to a vote ofstockholders during the fourth quarter of the fiscal year covered by thisAnnual Report.

20

----

**PART II**

**Item 5. Market forCommon Equity and Related Stockholder Matters**

**Market Information**

Prior to June 5, 2002, our common stock was traded onthe Nasdaq National Market under the symbol “NVDC”. On that date, we commencedtrading on the Nasdaq Small Cap Market. On August 18, 2003 Navidec receivednotice from the Nasdaq Small Cap Market that it was not in compliance with therules regarding the minimum requirements for stockholders’ equity. As a result,it began trading on the OTC Bulletin Board under the same symbol on August 20,2003. In connection with the Merger, we changed our name to BPZ Energy, Inc.and began trading under the symbol “BPZI” on February 7, 2005, also on the OTCBulletin Board. On December 27, 2005, as a result of a delay in filing ourquarterly report on Form 10-Q for the quarterly period ended September 30,2005, we became ineligible for trading on the OTC Bulletin Board and begantrading over the counter on the Pink Sheets under the symbol “BPZI.”

The following table sets forth, for the periodsindicated, the high and low prices of a share of our common stock as reportedon the Nasdaq National Market, Nasdaq Small Cap Market, OTC Bulletin Board andthe OTC Pink Sheets for the applicable time periods. The quotations providedfor the OTC markets reflect interdealer prices without retail mark-up,mark-down or commissions, and may not represent actual transactions.

|                | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| **2005**       |       |     |       |    |       |
| Fourth quarter |       | $        | 5.05       |    | $          | 1.01 |   |
| Third quarter  |       | 6.00     |       | 4.00    |       |
| Second quarter |       | 6.50     |       | 3.70    |       |
| First quarter  |       | 6.90     |       | 3.20    |       |
| **2004**       |       |     |       |    |       |
| Fourth quarter |       | 5.60     |       | 2.90    |       |
| Third quarter  |       | 3.75     |       | 1.25    |       |
| Second quarter |       | 2.05     |       | 1.10    |       |
| First quarter  |       | 1.25     |       | 0.98    |       |
|                |            |          |            |         |            |  |  |

 

21

----

**Holders**

As of December 31, 2005, we had approximately 328shareholders of record, plus an estimated 2,650 beneficial owners of our commonstock.

**Dividend Policy onCommon Stock**

We have never paid cash dividends on our stock. Forthe foreseeable future, we intend to retain earnings, if any, to meet ourworking capital requirements and to finance future operations. Accordingly, wedo not plan to declare or distribute cash dividends to the holders of ourcommon stock in the foreseeable future.

**EquityCompensation Plan**

The BPZ Energy, Inc. 2005 Long-Term IncentiveCompensation Plan (the “LTIP” or “Plan”) permits our Board of Directors toaward eligible employees, directors and consultants with incentive-based andnon-incentive-based compensation. See Note 8 to the Consolidated FinancialStatements for further details about this Plan.

**Recent Sales ofUnregistered Securities**

On January 30, 2004, prior to the Merger, Navidec,Inc. closed a private placement of 564,500 units at $1 per unit, for totalgross proceeds of $564,500. Each unit consisted of one common share, one “A”Warrant exercisable at $2.00 per share and one “B” Warrant exercisable at $4.00per share.

In July 2004, in connection with a Director’sAgreement, we issued options to acquire up to 1,000,000 shares of the Company’scommon stock at an exercise price of $1.30 per share to the former ChiefExecutive Officer of Navidec, Inc., who was at the time a director of theCompany. See Note 8 to the Consolidated Financial Statements for furtherdetails about this stock option issuance.

On September 10, 2004, in connection with the Mergerof Navidec and BPZ-Texas, we issued 9,000,000 shares of common stock in a stockfor stock exchange to the shareholders of BPZ -Texas. This transaction is morefully described in “Description of Business — Navidec Merger Transaction”included herein. Also in connection with the Merger, we issued 662,149 sharesof common stock to NFS.

Pursuant to a Business Consulting Agreement enteredinto in connection with the Merger, we issued to NFS fully vested options topurchase 1,500,000 shares of common stock at an exercise price of $2.00 pershare. Such options expire on July 31, 2006. See Note 8 to theConsolidated Financial Statements for further details about this transaction.

On September 29, 2004, we issued 500,000 shares ofcommon stock to an individual in exchange for the retirement of $1,020,529 ofdebt.

As of September 30, 2004, we closed a privateplacement of common stock for cash that began on July 27, 2004. The offeringraised a total of $6,000,000 in gross proceeds through the sale of 3,000,000common shares at a price of $2.00 per share to a total of 78 accreditedinvestors. The proceeds of the offering were approximately $5,507,000 afterdeducting placement agent fees of $360,000 and other offering expenses of$133,000. The primary placement agent was Spencer Edwards Investments, Inc. ofDenver, Colorado, which placed 1,534,450 shares, or 51% of the offering. Also,Moloney Securities Co., Inc. of St. Louis, Missouri placed 395,000 shares, or13% of the offering and Neidiger, Tucker, Bruner, Inc. of Denver, Coloradoplaced 320,000 shares, or 11% of the offering. The remaining shares, totaling750,550 shares, were placed without an agent.

On July 1, 2005, we issued 9,000,000 shares of commonstock to the former shareholders of BPZ-Texas in connection with earn-outprovisions in the Merger Agreement. This transaction is more fully described in“Description of Business — Navidec Merger Transaction” included herein.

On July 1, 2005, we issued 250,000 shares of commonstock to acquire a 4% net working interest in the Santa Elena Property inEcuador from an individual who had received the interest in connection withfinancing provided to us for the original acquisition of the property in June2004.

On July 19, 2005, we completed a private placement of11,466,000 shares of common stock to pursuant to a Stock Purchase Agreementdated July 19, 2005. The common stock was priced at $3.00 per share, whichresulted in gross proceeds to us of approximately $34.4 million. Net proceedsfrom the private placement were $31.9 million. For its services as placementagent in connection with the transaction, Morgan Keegan & Company, Inc.received 7% of the gross proceeds from the offering and warrants to purchase100,000 shares of common stock at an exercise price of $3.00 per share. Suchwarrants expire on July 19, 2010.

On September 30, 2005, we issued 15,000 shares ofcommon stock to an individual for financial management and consulting servicesperformed.

On December 17, 2005, we issued 92,705 shares ofcommon stock in lieu of cash to which the investors would have otherwise beenentitled pursuant to delays in the effectiveness of our registration statementin connection with the private placement of common stock on July 19, 2005. See Note 8to the Consolidated Financial Statements for further details about thistransaction.

On December 31, 2005 we issued 20,000 shares of commonstock to an individual for legal consulting services performed.

The foregoing issuances of common stock were made inreliance upon the exemption from registration set forth in

22

----

Section 4(2) of the Securities Act of 1933for transactions not involving a public offering. No underwriters were engagedin connection with the foregoing issuances of securities. The sales were madewithout general solicitation or advertising. Each purchaser was an “accreditedinvestor” or a sophisticated investor with access to all relevant informationnecessary to evaluate the investment who represented to the Company that thesales were being acquired for investment.

**Item 6. Management’sDiscussion and Analysis and Plan of Operation**

***SEE RISK FACTORS IN ITEM 1 “DESCRIPTIONOF BUSINESS” OF THIS ANNUAL REPORT FORM 10-KSB***

**Results ofOperations**

We are in the early stage of evaluating our propertiesin Peru and do not currently have any production or revenues from theseproperties. Our operations to date have been limited to technical evaluation ofthe properties and the design of development plans to exploit the oil and gasresources on those properties.

Our operating and administrative expenses to date haveconsisted principally of general and administrative costs and geological,geophysical and engineering costs. General and administrative costs haveincreased significantly from $1,856,111 during 2004 to $4,422,747 during 2005as a result of our increased activity levels, additional personnel and costsassociated with being a public company. We incurred $998,131 of geological,geophysical and engineering costs in 2005 primarily related to our Block Z-1gas-to-power project, compared to $360,965 in 2004.

Also, during 2005, we incurred $1,382,479, instock-based compensation as a result of amortizing the deferred compensationexpense related to (i) a grant of 150,000 shares of restricted commonstock to our independent directors; (ii) a grant of 970,000 shares ofrestricted common stock to three of our officers; and (iii) 500,000 stockoptions issued to the former CEO of Navidec. During 2004, we recordedstock-based compensation expense of $7,059,081 primarily as a result of sharesissued for services to employees and consultants of BPZ-Texas prior to theMerger.

We received net cash distributions from our Ecuadorproperty of $605,278 during 2005, compared to net cash distributions of$190,621 during 2004, which included only six months from the acquisition ofthe property in June 2004. Our net interest in the property also increased from6% to 10% in June 2005. Since our investment consists of an interest in aproducing oil and gas property, we are amortizing the investment on astraight-line basis over the remaining term of the license agreement coveringthe property. Accordingly, we recorded $136,552 of amortization expense during2005, compared to $42,760 during the six months we owned the property during2004.

We incurred interest expense of $11,149 andamortization of deferred financing costs of $67,561 in 2005, principally fromnotes payable incurred to finance the acquisition of SMC in June 2004. Inthe prior year we incurred interest expense of $66,959 related to the notespayable incurred to finance the acquisition of SMC in June 2004 and otherborrowings, as well as amortization of deferred financing costs of $360,439primarily from notes payable incurred to finance the acquisition of SMC inJune 2004.

As a result of our increased cash balance from theprivate placement of common stock, we received interest income of $509,808during the year ended December 31, 2005. However, as a result of a delayin obtaining an effective Registration Statement we are liable to the investorsfor liquidated damages in an amount equal to 1.0% of the purchase price of theshares for each thirty day period until the Registration Statement is declaredeffective by the SEC. Accordingly, the Company recorded $515,967 ofregistration delay expense during the year ended December 31, 2005.

We realized a net loss of $6,406,989, or $(0.20) pershare, for the year ended December 31, 2005, compared to a net loss of$15,013,177, or $(0.99) per share for the same period in 2004.

**Plan of Operation**

Our current plan of operation is focused primarily onexploiting the resource opportunities in the offshore Block Z-1 innorthwest Peru, in which we own a 100% working interest. Our initial project isthe development of an integrated gas-to-power project which is more fully describedbelow. The capital budget for our plan totals approximately $112.5 million. Toachieve our

23

----

objectives, we must obtain significant financing fromexternal sources. We are attempting to secure financing for the project, but wedo not have firm commitments from external sources to allow us to undertake allof the operations envisioned in this plan. See “Liquidity, Capital Resourcesand Capital Expenditures,” below, for further discussion.

***Corvina Field***

Our first priority is drilling the initial gas wells inthe Corvina Field to develop reserves and establish gas deliverability atexpected levels. In December 2005, we signed a drilling contract withPetrex S.A., a subsidiary of Saipem SpA of Italy. Under the contract, PetrexS.A. will provide a platform rig capable of drilling to 16,000 feet and upgradethe rig to meet our specifications. We agreed to pay a $5.5 million fee tomobilize and upgrade the rig. In exchange, we will receive a competitive fixedday rate and exclusive rights to use the rig, at our option, during thetwo-year period commencing with delivery of the rig which is expected in June2006.

The Corvina Field has an existing platform which webelieve can be refurbished to make it suitable for drilling operations. We havehired a contractor to refurbish the platform and work on this project isongoing. Our initial plans call for the drilling of three new wells from theexisting platform. There is also a shut-in gas well which we intend torecomplete and utilize for gas production. We expect that successful results ofthese wells will permit us to disclose proved reserves, provided that we alsohave sufficient capital resources to be reasonably assured that such reservescan be developed by us. We are working to obtain the required environmental anddrilling permits and complete the platform refurbishment in order to commencedrilling operations in June 2006. Further development drilling from theexisting platform, encompassing three additional wells, is expected to befunded from project cash flows after the power plant is operational.

Our plan of operation envisions the installation of acompany-owned 160 megawatt (“MW”) gas-fired electric generation plant near thetown of Caleta Cruz, in northwest Peru. In August 2005 we awarded theturnkey contract for the engineering, procurement and construction (EPC) of thepower plant project to BTEC Turbines LP of Houston (“BTEC”). The contract wasawarded following a comprehensive six-month bidding process that included fieldvisits by all of the bidders. Under the EPC contract, the final terms of whichare being negotiated, BTEC is expected to supply two General Electric Frame 7simple-cycle gas-fired turbines. BTEC will also act as the main contractor forthe design, transportation, construction, startup and commissioning of thepower plant. Our plan is to own 100% of the power plant. Accordingly, ourrevenues from the natural gas delivered to the power plant will be derived fromthe sale of electricity.

We intend to construct a 10-mile offshore pipeline to transportnatural gas from the Corvina Field to the power plant site at Caleta Cruz. Thepower plant site has an existing substation and power transmission lines which,with certain upgrades, are expected to be capable of handling up to 300 MW ofpower. In order to support our proposed electric generation project, werecently commissioned an independent power market analysis for the region. ThePeruvian electricity market is deregulated and power is transported through aninterconnected national grid managed by the Committee for Economic Dispatchingof Electricity (known as “COES”). Based on this study, we believe that we willbe able to sell economic quantities of electricity from our initial 160 MWpower plant at Caleta Cruz. We believe there may be an opportunity in thefuture to generate and profitably sell significantly greater volumes of powerinto the Peruvian and Ecuadorian power markets.

Primarily as a result of delays in obtaining adrilling rig, the projected goal for first sales of power to the Peruvian powermarket is now late 2006 or early 2007. This timeline is subject to manyfactors, including securing necessary financing commitments, which are beyondour control. Based on the revised timeline, we intend to focus our capitalexpenditures on critical drilling activities. Procurement activities on otherphases of the project will be delayed or rescheduled accordingly. We believethat we have sufficient capital resources to fund our initial drilling program.See “Liquidity, Capital Resources and Capital Expenditures” below for furtherdiscussion.

In addition to the local power market targeted by ourproject in Peru, we intend to simultaneously develop a gas sales strategy innearby Ecuador to capitalize on what we believe to be significant upside gaspotential of the Corvina and Piedra Redonda Fields located in Block Z-1, aswell as the potentially significant natural gas resources in the adjacentonshore Block XIX. These properties are within 30 miles of the Ecuadorianborder and can be developed for export sales of either raw gas or powergeneration via connection to the transmission system of Ecuador. Our initialplan of operation calls for us to construct a 40-mile pipeline from CaletaCruz, the terminal point of our offshore pipeline from the Corvina Field, toArenillas, Ecuador. We intend to sell gas for the generation of electricity bythird party power producers in the local market in Ecuador. We have negotiatedthree preliminary agreements for sales of gas. We are planning to complete thispipeline for first sales of gas to Ecuador during the first half of 2007,though this schedule is subject to many factors outside our control and noassurance can be given that we can meet this schedule.

***Albacora Oil Field Redevelopment***

In addition to the Corvina Field project, we haveinitiated the redevelopment of the Albacora oil field located offshore in thenorthern part of Block Z-1. The field has three shut-in oil wells and adrilling and production platform in place which we believe can be refurbishedto make it suitable for drilling operations and is less than 100 miles awayfrom the Talara refinery. We believe this oil field has significant upsidepotential for successful redevelopment and additional exploration. Ourindependent

24

----

reserve engineers are currently conducting a review ofthe Albacora oil field’s crude oil resources and we have initiated efforts torefurbish the drilling and production platform.

***Other Projects***

In addition to the Corvina and Albacora projects, wehave other fields within Block Z-1 and Block XIX, which we intend to exploit inthe future. We have secured the environmental permits and other authorizationsto shoot seismic in Block Z-1 and Block XIX. We recently completed atechnical evaluation of Area VI and have initiated negotiations to obtain alicense contract for exploration activities in that area. Area VI is a largeonshore block in northwest Peru which encompasses the entire Lancones Basin.Based on the results of our technical evaluation of Area XVI, we have informed Perupetroof our decision not to pursue a license contract for that area. We intend toobtain additional funding for these projects from industry or capital marketsources, but we are not currently planning to make significant capitalexpenditures for seismic acquisition or other exploration and developmentactivities until we have secured such additional financing.

**CapitalExpenditures**

We are currently developing engineering plans anddesigns for the various components of our initial plan of operation in theCorvina Field. We have obtained cost estimates for most of the major equipmentcomponents and the shipping, construction, installation and associatedservices. However, the costs of these procurement and construction activitiescan be difficult to accurately predict and are subject to change andcontingencies. Based on our current estimates, we expect that our initialproject, including the cost of the natural gas pipeline to Arenillas, Ecuador,will require total capital expenditures on the order of $112.5 million,including import duties and contingencies. Our budget has increased as a resultof higher projected drilling costs and the selection of larger capacityturbines. This estimate of capital expenditures does not include value addedtax (referred to as “IGV” in Peru). IGV is generally imposed on goods andservices at a rate of 19%. Certain expenditures are exempt from IGV or eligiblefor immediate refund. IGV paid on capital expenditures is generally recoverablefrom our future revenue billings within Peru and is not considered part of thecapitalized costs of the equipment to which it relates. We may also be able todefer payment of certain of these expenditures or obtain separate financing forthe IGV.

**ProjectCapital Budget**

|                                      | ** ** | **($ millions)** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| Power plant and related  equipment   |       | 49.6                  |       |
| Pipelines and  processing facilities |       | 29.1                  |       |
| Platform and wells                   |       | 23.8                  |       |
| Contingencies                        |       | 10.0                  |       |
| Total estimated capital  budget      |       | 112.5                 |       |

 

**Liquidity andCapital Resources**

Our initial project for the Corvina Field in offshoreBlock Z-1 located in northwest Peru, totaling approximately $112.5million, includes the refurbishment of the CX-11 platform, rehabilitation of anexisting well and the drilling of three new wells, installation of a 10-mile gaspipeline from the platform to shore, construction of a 160 MW simple-cycleelectric generating plant, and the construction of a 40-mile gas pipeline tosupply gas to third party generators in Arenillas, Ecuador.

In connection with the Merger, we received net proceedsof approximately $5.5 million from a private placement of our commonstock. In July 2005, we completed a private placement of 11,466,000 sharesof common stock for net proceeds of approximately $31.9 million. MorganKeegan & Company, Inc. served as placement agent for theoffering. We also received $3.9 million from the exercise of warrantsduring 2005. As of December 31, 2005, our cash balance was approximately $29.5million.

In January 2005, we deposited $1.3 millionas restricted cash to secure our performance obligations under the secondexploration period of the Block Z-1 license contract. We intend to satisfythis obligation by drilling a well, which is currently expected to costapproximately $5.0 million and is included in the capital budget for theproject. During the year ended December 31, 2005, we incurred capitalexpenditures of approximately $4.4 million, primarily on refurbishment of theCorvina platform and power plant design costs. In addition, we have committedto pay $5.5 million in early 2006 to mobilize and upgrade a platform drillingrig for use in the Corvina Field and potentially for our other projects.

In May 2005, we signed a Mandate Letter with theInternational Finance Corporation (“IFC”), a member of the World Bank Group basedin Washington, D.C. The Mandate Letter specifies that the IFC will appraise ourproject in Peru to determine the feasibility and structure of potentialfinancing for the project. The IFC’s appraisal of the project will include areview of the technical, economic, commercial, financial, environmental andlegal aspects of the project. IFC’s financing, the structure of which would bedefined during the appraisal process, will depend on the project and theCompany meeting the IFC’s financing criteria, the overall financing plan beingacceptable to IFC, approval of the investment by management and the Board ofIFC, and the execution of all appropriate documentation, in form and substancesatisfactory to IFC. As part of the Mandate, we have agreed to pay fees of$285,000 and customary expenses during the appraisal period. The IFC iscontinuing its due diligence on the project.

25

----

In recognition of the revised drilling timeline, theIFC recently extended the Mandate period through August 2006 and isreviewing a proposed increase in the total amount of the financing based on theincreased capital budget for the project.

With our current cash balance and proceeds from theexpected IFC financing, we believe we will have sufficient capital resources toexecute the project as currently planned. However, the timing and execution ofour project is dependent on a variety of factors, including technical design offacilities, permitting, availability of equipment, time and costs required fordelivery and construction, performance by contractors and financing, many ofwhich are outside our control.

**Off-Balance SheetArrangements**

As of December 31, 2005, we had no transactions,agreements or other contractual arrangements with unconsolidated entities orfinancial partnerships, often referred to as special purpose entities, whichgenerally are established for the purpose of facilitating off-balance sheetarrangements.

**CriticalAccounting Policies and Recent Accounting Pronouncements**

The discussion and analysis of our financial conditionand results of operations is based on our consolidated financial statements,which have been prepared in accordance with U.S. generally accepted accountingprinciples (“GAAP”). Management uses estimates and assumptions in preparing theconsolidated financial statements in accordance with GAAP. Those estimates andassumptions affect the reported amounts of assets, liabilities, revenues andexpenses in the consolidated financial statements, and the disclosure ofcontingent assets and liabilities. We have identified the following as criticalaccounting policies directly related to our business and operations, and theunderstanding of our financial statements.

***Successful Efforts Method of Accounting***

We follow the successful efforts method of accountingfor our investments in oil and gas properties. Under this method, oil and gaslease acquisition costs and intangible drilling costs associated withexploration efforts that result in the discovery of proved reserves and costsassociated with development drilling, whether or not successful, arecapitalized when incurred. Certain costs of exploratory wells are capitalizedpending determinations that proved reserves have been found. If thedetermination is dependent upon the results of planned additional wells andrequired capital expenditures to produce the reserves found, the drilling costswill be capitalized as long as sufficient reserves have been found to justifycompletion of the exploratory well and additional wells are underway or firmlyplanned to complete the evaluation of the exploratory well. All costs relatedto unsuccessful exploratory wells are expensed when such wells are determinedto be non-productive or at the one year anniversary of completion of the wellif proved reserves have not been attributed and capital expenditures asdescribed in the preceding sentence are not required. We assess our capitalizedexploratory wells pending evaluation each quarter to determine whether costsshould remain capitalized or should be charged to earnings. Other explorationcosts, including geological and geophysical costs, are expensed as incurred. Wewill recognize gains or losses on the sale of properties, should they occur, ona field-by-field basis.

The application of the successful efforts method ofaccounting requires management’s judgment to determine the proper designationof wells as either developmental or exploratory, which will ultimatelydetermine the proper accounting treatment of the costs incurred. The resultsfrom a drilling operation can take considerable time to analyze, and thedetermination that commercial reserves have been discovered requires bothjudgment and application of industry experience. Wells may be completed thatare assumed to be productive and actually deliver oil and gas in quantitiesinsufficient to be economic, which may result in the abandonment of the wellsat a later date. The evaluations of oil and gas leasehold acquisition costsrequires management’s judgment to estimate the fair value of exploratory costsrelated to drilling activity in a given area.

The successful efforts method of accounting can have asignificant impact on the operational results reported when we enter a newexploratory area in hopes of finding oil and gas reserves. Seismic costs can besubstantial which will result in additional exploration expenses when incurred.The initial exploratory wells may be unsuccessful and the associated costs willthen be expensed as dry hole costs and any associated leasehold costs may beimpaired.

***Impairment of Long-Lived Assets***

We periodically evaluate the recoverability of thecarrying value of our long-lived assets and identifiable intangibles bymonitoring and evaluating changes in circumstances that may indicate that thecarrying amount of the asset may not be recoverable. Examples of events orchanges in circumstances that indicate that the recoverability of the carryingamount of an asset should be assessed include but are not limited to (a) asignificant decrease in the market value of an asset, (b) a significant changein the extent or matter in which an asset is used or a significant physicalchange in an asset, (c) a significant adverse change in legal factors orin the business climate that could affect the value of an asset or an adverseaction or assessment by a regulator, (d) an accumulation of costssignificantly in excess of the amount originally expected to acquire orconstruct an asset, and/or (e) a current period operating or cash flowloss combined with a history of operating or cash flow losses or a projectionor forecast that demonstrates continuing losses associated with an asset usedfor the purpose of producing revenue.

We consider historical performance and anticipatedfuture results in our evaluation of potential impairment. Accordingly, whenindicators of impairment are present, we evaluate the carrying value of theseassets in relation to the operating performance

26

----

of the business and future discounted andnon-discounted cash flows expected to result from the use of these assets.Impairment losses are recognized when the expected future cash flows from anasset are less than its carrying value.

***Future Dismantlement, Restoration, and AbandonmentCosts***

The accounting for future development and abandonmentcosts changed on January 1, 2003, with the issuance of Statement ofFinancial Accounting Standards (“SFAS”) No. 143 “Accounting for AssetRetirement Obligation” (“ARO”), which requires that the fair value of aliability for an asset retirement obligation to be recognized in the period inwhich it is incurred if a reasonable estimate of fair value can be made. Theassociated asset retirement costs are capitalized as part of the carryingamount of the long-lived asset. The accrual is based on estimates of thesecosts for each of our properties based upon the type of production structure,reservoir characteristics, depth of the reservoir, market demand for equipment,currently available procedures and consultations with construction andengineering consultants. Because these costs typically extend many years intothe future, estimating these costs is difficult and requires management to makeestimates and judgments that are subject to future revisions based on numerousfactors, including changing technology, the political and regulatoryenvironment and estimates as to the proper discount rate to use and timing ofabandonment.

Our plan of operations includes the drilling of wellsand the construction of an electric power generation plant. We will be requiredto plug and abandon those wells and restore the well sites and power generationsite upon abandonment if they are abandoned prior to the end of the contractperiod. However, due to the fact that we have not yet begun operations, we donot have sufficient information to determine the timing, nor calculate thepresent value, of the obligation. Therefore, no such provision is reflected inthe accompanying consolidated financial statements.

***Accounting Changes and Error Corrections***

In June 2005, the Financial Accounting Standards Boardissued Statement of Financial Accounting Standards No. 154, AccountingChanges and Error Corrections (“SFAS 154”), which replaced AccountingPrinciples Board Opinion No. 20, Accounting Changes (“APB 20”), andStatement of Financial Accounting Standards No. 3, Reporting Accounting Changesin Interim Financial Statements. SFAS 154 requires retrospective application toprior period financial statements of a voluntary change in accounting principleunless it is impracticable. In contrast, APB 20 previously required that mostvoluntary changes in accounting principle be recognized by including thecumulative effect of changing to the new accounting principle in net income inthe period of change. SFAS 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15,2005. Earlier application is permitted for accounting changes and correction oferrors made in fiscal years beginning after June 1, 2005. SFAS 154 doesnot change the transition provisions of any existing accounting pronouncements,including those that are in a transition phase as of its effective date. Wehave elected to adopt the provisions of SFAS 154 on January 1, 2006. We donot expect adoption to have a material effect on our results of operations orfinancial position.

***Principles of Consolidation***

Our consolidated financial statements include theaccounts of the Company and its wholly owned subsidiaries and branch offices. Allintercompany balances and transactions have been eliminated.

Our accounting policy regarding partnership or jointventure interests in oil and gas properties is to

27

----

consolidate such interests on a pro-rata basis inaccordance with accepted practice in the oil and gas industry. However, we havenot been able to receive timely information to allow us to proportionatelyconsolidate the minority non-operated working interest owned by ourconsolidated subsidiary, SMC Ecuador Inc. See Note 5 to the ConsolidatedFinancial Statements for further discussion regarding the investment in ourEcuador property. Accordingly, we account for this investment under the costmethod. As such, we record our share of cash received or paid attributable tothis investment as other income or expense.

***Foreign Exchange***

The U.S. Dollar is the functional currency for ouroperations in both Peru and Ecuador. Ecuador has adopted the U.S. Dollar as itsofficial currency. Peru, however, still uses its local currency, Nuevo Soles,in addition to the U.S. Dollar and therefore our financial results are subjectto favorable or unfavorable fluctuations in the exchange rate and inflation ofthat country. We have adopted SFAS No. 52, “Foreign Currency Translation,”which requires that the translation of the applicable foreign currency intoU.S. dollars be performed for balance sheet monetary accounts using currentexchange rates in effect at the balance sheet date, non-monetary accounts usinghistorical exchange rates in effect at the time the transaction occurs, and forrevenue and expense accounts using a weighted average exchange rate during theperiod reported. Accordingly, the gains or losses resulting from suchtranslation are included in other income and expense in the consolidatedstatements of operations. Due to the relatively low level of activity to-dateand the relatively steady exchange rate in Peru, translation differences, ifany, were immaterial.

28

----

**Item 7.  Financial Statements**

BPZ Energy, Inc. and SubsidiariesIndex to Consolidated Financial Statements
| Report of Independent Registered  Public Accounting Firm                                                                                                                        |   |    |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|--------|
|                                                                                                                                                                            |   |         |   |
| Consolidated  Balance Sheets (Restated) as of December 31, 2005 and 2004                                                                                                   |   |    |   |
|                                                                                                                                                                            |   |         |   |
| Consolidated Statements of Operations (Restated) for  the Years Ended December 31, 2005 and 2004 and for the Period from  August 20, 2001 (Inception) to December 31, 2005 |   |    |   |
|                                                                                                                                                                            |   |         |   |
| Consolidated Statements of Stockholders’ Equity  (Deficit) (Restated) for the Years Ended December 31, 2005 and 2004                                                  |   |    |   |
|                                                                                                                                                                            |   |         |   |
| Consolidated Statements of Cash Flows (Restated) for  the Years Ended December 30, 2005 and 2004 and for the Period from  August 20, 2001 (Inception) to December 31, 2005 |   |    |   |
|                                                                                                                                                                            |   |         |   |
| Notes to Consolidated Financial Statements (Restated)                                                                                                                           |   |    |   |

 

29

----

**Report ofIndependent Registered Public Accounting Firm**

To the Board of DirectorsBPZ Energy, Inc. and Subsidiaries(An Exploratory Stage Company)

We have audited the consolidated balance sheets of BPZEnergy, Inc. and Subsidiaries (An Exploratory Stage Company), as of December 31,2005 and 2004, and the related consolidated statements of operations,stockholders’ equity (deficit) and cash flows for each of the years then endedand for the period from August 20, 2001 (date of inception) throughDecember 31, 2005. These financial statements are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free frommaterial misstatement. The Company is not required to have, nor were we engagedto perform, an audit of its internal control over financial reporting. Ouraudits included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believe ouraudits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the consolidated financialposition of BPZ Energy, Inc. and Subsidiaries (An Exploratory Stage Company) asof December 31, 2005 and 2004, and the consolidated results of itsoperations and its cash flows for each of the years then ended and for theperiod from August 20, 2001 (date of inception) through December 31,2005, in conformity with accounting principles generally accepted in the UnitedStates of America.

As discussed in Note 1 under the caption“September 2006 Restatement”, the Company has restated its previously issuedconsolidated financial statements for the periods from date of inception(August 20, 2001) through December 31, 2005, to reflect thecorrection of certain errors related to (1) the accounting description andvaluation of certain stock options assumed by the Company in connection withthe merger of Navidec, Inc.; (2) the accounting for post-merger operationsof Navidec Financial Services, Inc.; and (3) the accounting forexpenses incurred on the Company’s behalf by its former parent, BPZ & Associates,Inc. prior to the merger with Navidec, Inc.
| */s/ Johnson Miller & Co., CPA’s PC*                                                                          |   |
|------------------------------------------------------------------------------------------------------------------------|--------|
| Johnson Miller & Co., CPA’s PC                                                                                |   |
|                                                                                                                   |   |
|                                                                                                                   |   |
| Midland, Texas                                                                                                         |   |
| March 30, 2006  (September 14, 2006 as to the information entitled   “September 2006 Restatement” in Note 1) |   |
|                                                                                                                        |        |  |

 

30

----

**BPZEnergy, Inc. and Subsidiaries(An Exploratory Stage Company)Consolidated Balance SheetsAs of December 31, 2005 and 2004(Restated)**
| ** **                                                                                                                                                             | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| ** **                                                                                                                                                             | ** ** | ** **  | ** ** | ** **  | ** ** |
| **ASSETS**                                                                                                                                                             |       |        |       |        |       |
|                                                                                                                                                                   |       |        |       |        |       |
| Current assets:                                                                                                                                                        |       |        |       |        |       |
| Cash and cash  equivalents                                                                                                                                             |       | $           | 29,455,130 |        | $          | 4,014,191 |   |
| Restricted cash                                                                                                                                                        |       | —      |       | 100,000     |       |
| Other                                                                                                                                                                  |       | 869,669     |       | 72,159      |       |
| Total current  assets                                                                                                                                                  |       | 30,324,799  |       | 4,186,350   |       |
|                                                                                                                                                                   |       |        |       |        |       |
| Property, equipment and  construction in progress, net                                                                                                                 |       | 4,365,040   |       | 5,505       |       |
| Restricted cash                                                                                                                                                        |       | 1,455,953   |       | —      |       |
| Investment in Ecuador  property, net                                                                                                                                   |       | 1,945,188   |       | 969.240     |       |
|                                                                                                                                                                   |       |        |       |        |       |
| Total assets                                                                                                                                                           |       | $           | 38,090,980 |        | $          | 5,161,095 |   |
|                                                                                                                                                                   |       |        |       |        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                         |       |        |       |        |       |
|                                                                                                                                                                   |       |        |       |        |       |
| Current liabilities:                                                                                                                                                   |       |        |       |        |       |
| Accounts payable                                                                                                                                                       |       | $           | 747,347    |        | $          | 311,612 |   |
| Accrued  liabilities                                                                                                                                                   |       | 470,632     |       | 54,342      |       |
| Other  liabilities                                                                                                                                                     |       | 70,516      |       | —      |       |
| Note payable                                                                                                                                                           |       | —      |       | 208,986     |       |
|                                                                                                                                                                   |       |        |       |        |       |
| Total current  liabilities                                                                                                                                             |       | 1,288,495   |       | 574,940     |       |
|                                                                                                                                                                   |       |        |       |        |       |
| Long-term debt                                                                                                                                                         |       | 70,908      |       | —      |       |
|                                                                                                                                                                   |       |        |       |        |       |
| Commitments and  Contingencies (Note 11)                                                                                                                               |       |        |       |        |       |
|                                                                                                                                                                   |       |        |       |        |       |
| Stockholders’ equity:                                                                                                                                             |       |        |       |        |       |
| Preferred stock, no par  value, 25,000,000 authorized; none issued and outstanding                                                                                     |       | —      |       | —      |       |
| Common stock, no  par value, 250,000,000 authorized; 40,349,979 and 16,581,385 shares issued  and outstanding at December 31, 2005 and December 31, 2004, respectively |       | 56,873,641  |       | 12,967,238  |       |
| Additional paid  in capital                                                                                                                                            |       | 6,393,411   |       | 7,755,231   |       |
| Deferred  stock-based compensation                                                                                                                                     |       | (3,992,172  | )          | —      |       |
| Stock  subscription receivable                                                                                                                                         |       | (230,825    | )          | (230,825    | )          |
| Deficit  accumulated during the exploratory stage                                                                                                                      |       | (22,312,478 | )          | (15,905,489 | )          |
|                                                                                                                                                                   |       |        |       |        |       |
| Total  stockholders’ equity                                                                                                                                       |       | 36,731,577  |       | 4,586,155   |       |
|                                                                                                                                                                   |       |        |       |        |       |
| Total liabilities and  stockholders’ equity                                                                                                                       |       | $           | 38,090,980 |        | $          | 5,161,095 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

31

----

**BPZEnergy, Inc. and Subsidiaries(An Exploratory Stage Company)Consolidated Statements of OperationsYears ended December 31, 2005 and 2004 andFor the Period from August 20, 2001 (Inception) to December 31, 2005(Restated)**
| ** **                                                       | ** ** | **Cumulative  Amounts from  August 20, 2001  (Inception) to  December 31, 2005** | ** **  | **2005**   | ** ** | **2004**    | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|-------------|------------|------------|-------------|------------|
|                                                             |       |                                                                                                           |        |       |       |        |       |
| Revenue                                                          |       | $                                                                                                              | —      |       | $          | —      |       | $ | — |   |
|                                                             |       |                                                                                                           |        |       |       |        |       |
| Operating and  administrative expenses:                          |       |                                                                                                           |        |       |       |        |       |
| General and  administrative                                      |       | 7,177,777                                                                                                      |        | 4,422,747  |       | 1,856,111   |       |
| Stock-based  compensation                                        |       | 8,441,560                                                                                                      |        | 1,382,479  |       | 7,059,081   |       |
| Geological,  geophysical and engineering                         |       | 1,359,096                                                                                                      |        | 998,131    |       | 360,965     |       |
| Depreciation  expense                                            |       | 29,795                                                                                                         |        | 29,638     |       | 157         |       |
|                                                             |       |                                                                                                           |        |       |       |        |       |
| Total operating  expenses                                        |       | 17,008,228                                                                                                     |        | 6,832,995  |       | 9,276,314   |       |
|                                                             |       |                                                                                                           |        |       |       |        |       |
| Operating loss                                                   |       | (17,008,228                                                                                                    | )           | (6,832,995 | )          | (9,276,314  | )          |
|                                                             |       |                                                                                                           |        |       |       |        |       |
| Other income (expense):                                          |       |                                                                                                           |        |       |       |        |       |
| Income from  investment in Ecuador property, net of amortization |       | 616,587                                                                                                        |        | 468,726    |       | 147,861     |       |
| Interest expense                                                 |       | (78,108                                                                                                        | )           | (11,149    | )          | (66,959     | )          |
| Amortization of  deferred financing costs                        |       | (428,000                                                                                                       | )           | (67,561    | )          | (360,439    | )          |
| Registration  delay expense                                      |       | (515,967                                                                                                       | )           | (515,967   | )          | —      |       |
| Interest income                                                  |       | 509,808                                                                                                        |        | 509,808    |       | —      |       |
| Merger costs                                                     |       | (5,470,455                                                                                                     | )           | —     |       | (5,470,455  | )          |
| Miscellaneous  income                                            |       | 61,885                                                                                                         |        | 42,149     |       | 13,129      |       |
|                                                             |       |                                                                                                           |        |       |       |        |       |
| Total other  income (expense)                                    |       | (5,304,250                                                                                                     | )           | 426,006    |       | (5,736,863  | )          |
|                                                             |       |                                                                                                           |        |       |       |        |       |
| Loss before income  taxes                                        |       | (22,312,478                                                                                                    | )           | (6,406,989 | )          | (15,013,177 | )          |
|                                                             |       |                                                                                                           |        |       |       |        |       |
| Income taxes                                                     |       | —                                                                                                         |        | —     |       | —      |       |
|                                                             |       |                                                                                                           |        |       |       |        |       |
| Net loss                                                         |       | $                                                                                                              | (22,312,478 | )          | $          | (6,406,989  | )          | $ | (15,013,177 | ) |
|                                                             |       |                                                                                                           |        |       |       |        |       |
| Basic and diluted net  loss per share                            |       |                                                                                                           |        | $          | (0.20      | )           | $          | (0.99 | ) |
|                                                             |       |                                                                                                           |        |       |       |        |       |
| Weighted average common shares outstanding                       |       |                                                                                                           |        | 31,899,291 |       | 15,169,823  |       |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

32

----

**BPZEnergy, Inc. and Subsidiaries(An Exploratory Stage Company)Consolidated Statements of Stockholders’ Equity (Deficit)Years Ended December 31, 2005 and 2004(Restated)**
| ** **                                                  | ** ** | **Common Stock Issued** | ** ** | **Additional  Paid-in** | ** ** | **Deferred  Stock-based** | ** ** | **Stock  Subscription** | ** ** | **Deficit  Accumulated  During the  Exploratory** | ** ** | ** **  | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------|------------|-------------------------|------------|---------------------------|------------|-------------------------|------------|--------------------------------------------------------|------------|-------------|------------|
| ** **                                                  | ** ** | **Shares**                        | ** ** | **Amount**              | ** ** | **Capital**               | ** ** | **Compensation**        | ** ** | **Receivable**                                         | ** ** | **Stage**   | ** ** | **Total** | ** ** |
|                                                        |       |                              | ** ** | ** **              | ** ** | ** **                |       |                    |       |                                                   | ** ** | ** **  |       |   |   |
| Balance, December 31,  2003                                 |       | 4,103,454                         |       | $                       | 1,000      |                      | $          | —                  |       | $                                                      | —     |        | $          | — |   | $ | (892,312 | ) | $ | (891,312 | ) |
| Common stock issued for  services                           |       | 2,857,642                         |       | 3,714,935               |       | —                    |       | —                  |       | —                                                 |       | —      |       | 3,714,935 |   |
| Stock-based compensation                                    |       | —                            |       | —                  |       | 700,000                   |       | —                  |       | —                                                 |       | —      |       | 700,000 |   |
| Common stock issued in  acquisition                         |       | 3,860,517                         |       | 979,981                 |       | —                    |       | —                  |       | —                                                 |       | —      |       | 979,981 |   |
| Warrant and stock  options issued or assumed in acquisition |       | —                            |       | —                  |       | 7,134,620                 |       | —                  |       | —                                                 |       | —      |       | 7,134,620 |   |
| Conversion of long-term  debt to common stock               |       | 1,802,376                         |       | 685,000                 |       | —                    |       | —                  |       | —                                                 |       | —      |       | 685,000 |   |
| Common stock issued for  cash and future consideration      |       | 236,528                           |       | 350,000                 |       | —                    |       | —                  |       | (230,825                                               | )          | —      |       | 119,175 |   |
| Exercise of stock  options assumed in acquisition           |       | 220,868                           |       | 708,986                 |       | (708,986                  | )          | —                  |       | —                                                 |       | —      |       | — |   |
| Common stock sold for  cash, net of offering costs          |       | 3,000,000                         |       | 5,506,807               |       | —                    |       | —                  |       | —                                                 |       | —      |       | 5,506,807 |   |
| Conversion of note  payable to common stock                 |       | 500,000                           |       | 1,020,529               |       | —                    |       | —                  |       | —                                                 |       | —      |       | 1,020,529 |   |
| Forgiveness of debt by  parent                              |       | —                            |       | —                  |       | 629,597                   |       | —                  |       | —                                                 |       | —      |       | 629,597 |   |
| Net loss                                                    |       | —                            |       | —                  |       | —                    |       | —                  |       | —                                                 |       | (15,013,177 | )          | (15,013,177 | ) |
|                                                        |       |                              |       |                    |       |                      |       |                    |       |                                                   |       |        |       |   |   |
| Balance, December 31,  2004                                 |       | 16,581,385                        |       | 12,967,238              |       | 7,755,231                 |       | —                  |       | (230,825                                               | )          | (15,905,489 | )          | 4,586,155 |   |
|                                                        |       |                              |       |                    |       |                      |       |                    |       |                                                   |       |        |       |   |   |
| Stock-based compensation                                    |       | 35,000                            |       | 146,650                 |       | 300,000                   |       | —                  |       | —                                                 |       | —      |       | 446,650 |   |
| Exercise of stock  options assumed in acquisition           |       | 401,389                           |       | 1,288,459               |       | (1,288,459                | )          | —                  |       | —                                                 |       | —      |       | — |   |
| Exercise of warrants                                        |       | 1,403,500                         |       | 4,566,621               |       | (698,361                  | )          | —                  |       | —                                                 |       | —      |       | 3,868,260 |   |
| Restricted stock awards                                     |       | 1,120,000                         |       | 4,928,000               |       | —                    |       | (3,992,172              | )          | —                                                 |       | —      |       | 935,828 |   |
| Common stock issued to  acquire property interest           |       | 250,000                           |       | 1,112,500               |       | —                    |       | —                  |       | —                                                 |       | —      |       | 1,112,500 |   |
| Common stock sold for  cash, net of offering costs          |       | 11,466,000                        |       | 31,917,213              |       | —                    |       | —                  |       | —                                                 |       | —      |       | 31,917,213 |   |
| Warrants issued in  connection with sale of common stock    |       | —                            |       | (325,000                | )          | 325,000                   |       | —                  |       | —                                                 |       | —      |       | — |   |
| Common stock issued  pursuant to merger earn-out agreement  |       | 9,000,000                         |       | —                  |       | —                    |       | —                  |       | —                                                 |       | —      |       | — |   |
| Common stock issued for  registration delay expenses        |       | 92,705                            |       | 271,960                 |       | —                    |       | —                  |       | —                                                 |       | —      |       | 271,960 |   |
| Net loss                                                    |       | —                            |       | —                  |       | —                    |       | —                  |       | —                                                 |       | (6,406,989  | )          | (6,406,989 | ) |
|                                                        |       |                              |       |                    |       |                      |       |                    |       |                                                   |       |        |       |   |   |
| Balances at December 31, 2005                               |       | 40,349,979                        |       | $                       | 56,873,641 |                      | $          | 6,393,411               |       | $                                                      | (3,992,172 | )           | $          | (230,825 | ) | $ | (22,312,478 | ) | $ | 36,731,577 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

33

----

**BPZEnergy, Inc. and Subsidiaries(An Exploratory Stage Company)Consolidated Statements of Cash FlowsYears ended December 31, 2005 and 2004 andFor the Period from August 20, 2001 (Inception) to December 31, 2005(Restated)**
| ** **                                                                   | ** ** | **Cumulative  Amounts from  August 20, 2001  (Inception) to  December 31, 2005** | ** **  | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|-------------|------------|------------|------------|------------|
|                                                                         |       |                                                                                                           |        |       |       |       |       |
| Cash flows from  operating activities:                                       |       |                                                                                                           |        |       |       |       |       |
| Net loss                                                                     |       | $                                                                                                              | (22,312,478 | )          | $          | (6,406,989 | )          | $ | (15,013,177 | ) |
| Adjustments to  reconcile net loss to net cash used by operating activities: |       |                                                                                                           |        |       |       |       |       |
| Stock-based  compensation                                                    |       | 8,441,560                                                                                                      |        | 1,382,479  |       | 7,059,081  |       |
| Stock issued in  merger                                                      |       | 979,981                                                                                                        |        | —     |       | 979,981    |       |
| Options assumed  in merger                                                   |       | 4,490,474                                                                                                      |        | —     |       | 4,490,474  |       |
| Stock issued for  registration delay expenses                                |       | 271,960                                                                                                        |        | 271,960    |       | —     |       |
| Depreciation  expense                                                        |       | 29,795                                                                                                         |        | 29,638     |       | 157        |       |
| Amortization of  investment in Ecuador property                              |       | 179,312                                                                                                        |        | 136,552    |       | 42,760     |       |
| Amortization of  deferred financing fees                                     |       | 428,000                                                                                                        |        | 67,561     |       | 360,439    |       |
| Expenses paid by  affiliate                                                  |       | 629,596                                                                                                        |        | —     |       | 266,074    |       |
| Changes in  operating assets and liabilities:                                |       |                                                                                                           |        |       |       |       |       |
| Increase in  other assets                                                    |       | (869,669                                                                                                       | )           | (865,070   | )          | (418       | )          |
| Increase in  accounts payable                                                |       | 747,347                                                                                                        |        | 435,735    |       | 301,137    |       |
| Increase in  accrued liabilities                                             |       | 452,134                                                                                                        |        | 397,792    |       | 39,692     |       |
| Increase in  other liabilities                                               |       | 70,516                                                                                                         |        | 70,516     |       | —     |       |
| Net cash used by  operating activities                                       |       | (6,461,472                                                                                                     | )           | (4,479,826 | )          | (1,473,800 | )          |
|                                                                         |       |                                                                                                           |        |       |       |       |       |
| Cash flows from  investing activities:                                       |       |                                                                                                           |        |       |       |       |       |
| Property and  equipment additions                                            |       | (4,394,835                                                                                                     | )           | (4,389,177 | )          | (5,662     | )          |
| Restricted cash                                                              |       | (1,455,953                                                                                                     | )           | (1,355,953 | )          | 140,000    |       |
| Investment in  Ecuador property                                              |       | (1,440,000                                                                                                     | )           | —     |       | (1,440,000 | )          |
| Net cash used by  investing activities                                       |       | (7,290,788                                                                                                     | )           | (5,745,130 | )          | (1,305,662 | )          |
|                                                                         |       |                                                                                                           |        |       |       |       |       |
| Cash flows from  financing activities:                                       |       |                                                                                                           |        |       |       |       |       |
| Borrowings                                                                   |       | 2,245,324                                                                                                      |        | 115,326    |       | 1,375,000  |       |
| Repayments of  borrowings                                                    |       | (450,389                                                                                                       | )           | (234,904   | )          | (215,485   | )          |
| Proceeds from  exercise of warrants, net                                     |       | 3,868,260                                                                                                      |        | 3,868,260  |       | —     |       |
| Proceeds from  sale of common stock, net                                     |       | 37,544,195                                                                                                     |        | 31,917,213 |       | 5,625,982  |       |
| Net cash  provided by financing activities                                   |       | 43,207,390                                                                                                     |        | 35,665,895 |       | 6,785,497  |       |
|                                                                         |       |                                                                                                           |        |       |       |       |       |
| Net increase in cash  and cash equivalents                                   |       | 29,455,130                                                                                                     |        | 25,440,939 |       | 4,006,035  |       |
| Cash and cash  equivalents at beginning of period                            |       | —                                                                                                         |        | 4,014,191  |       | 8,156      |       |
| Cash and cash  equivalents at end of period                                  |       | $                                                                                                              | 29,455,130  |       | $          | 29,455,130 |       | $ | 4,014,191 |   |
|                                                                         |       |                                                                                                           |        |       |       |       |       |
| Supplemental cash flow  information:                                         |       |                                                                                                           |        |       |       |       |       |
| **Cash paid for:**                                                           |       |                                                                                                           |        |       |       |       |       |
| Interest                                                                     |       | $                                                                                                              | 77,704      |       | $          | 13,761     |       | $ | 63,943 |   |
| **Non — cash items:**                                                   |       |                                                                                                           |        |       |       |       |       |
| Common stock issued for  property interest                                   |       | $                                                                                                              | 1,112,500   |       | $          | 1,112,500  |       | $ | — |   |
| Warrants issued to  private placement agent                                  |       | 325,000                                                                                                        |        | 325,000    |       | —     |       |
| Imputed financing costs                                                      |       | 428,000                                                                                                        |        | —     |       | 428,000    |       |
| Issuance of common  stock for subscription receivable                        |       | 230,825                                                                                                        |        | —     |       | 230,825    |       |
| Conversion of long-term  debt to common stock                                |       | 685,000                                                                                                        |        | —     |       | 685,000    |       |
| Conversion of notes payable to common stock                                  |       | 1,020,529                                                                                                      |        | —     |       | 1,020,529  |       |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

34

----

** BPZ Energy, Inc and Subsidiaries(An Exploratory Stage Company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31,2005 and 2004**

**Note 1 — Basis ofPresentation and Significant Accounting Policies**

**September 2006Restatement**

BPZ Energy, Inc. (“BPZ” or the “Company”) is filingthis amendment to its Annual Report on Form 10-KSB for the year ended December31, 2005 (“Amendment No. 1”), to amend and restate the consolidated financialstatements and other financial information from inception on August 20, 2001 toDecember 31, 2005 and for each of the quarters in years 2005 and 2004 withrespect to the accounting and disclosure for the following:

·                  asto the merger with Navidec, Inc. (“Navidec”), the description of theaccounting and the valuation of certain Navidec options assumed by the Company;

·                  theaccounting for the post-merger operations of Navidec FinancialServices, Inc. (“NFS”); and

·                  theaccounting for expenses incurred on the Company’s behalf by its former parent,BPZ & Associates, Inc. (“Associates”) prior to the merger with Navidec.

The table below reflects the total annual impact onnet loss as a result of the restatements from the amounts reported in theCompany’s 2005 Annual Report on Form 10-KSB filed on March 31, 2006.
| **Twelve Months  Ended  December 31,** | ** ** | **2005 Form  10-KSB** | ** **  | **Accounting  for NFS** | ** ** | **Allocation of  Expenses  From Associates** | ** ** | **Reclassification  & Other  (Options, etc.)** | ** ** | **2005 Form  10-KSB/A** | ** ** |
|--------------------------------------------------|------------|----------------------------|-------------|------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------|------------|
| 2004                                             |       | $                          | (10,652,671 | )                            | $          | (8,087,752                                             | )          | $                                                            | (103,184   | )                            | $          | 3,830,430 |   | $ | (15,013,177 | ) |
| 2005                                             |       | $                          | (8,563,848  | )                            | $          | 2,156,859                                              |       | $                                                            | —     |                         | $          | — |   | $ | (6,406,989 | ) |

 

*The Navidec Merger*

The Company’s description of the transaction has beenamended to clarify that the merger is considered, from an accountingperspective to be in substance, a capital transaction rather than a business combination.On July 8, 2004, Navidec and BPZEnergy-Texas entered into a Merger Agreement (the “Merger Agreement”) providingfor the acquisition of BPZ-Texas by Navidec in a transaction intended toqualify as a tax free share exchange (the “Merger”). The Merger was consummatedon September 10, 2004. The Company changed its name fromNavidec, Inc. to BPZ Energy, Inc. on February 4, 2005. Althoughthe Company’s name has been changed, the pre-merger company may be referred toas Navidec in this filing to avoid confusion.

The Merger was structured from a legal standpoint asthe acquisition of BPZ-Texas by Navidec; however, the stockholder group ofBPZ-Texas obtained majority ownership and management control of the combinedcompany. It is equivalent to the issuance of common stock by BPZ-Texas for thenet assets of the Navidec, accompanied by a recapitalization. The accountingtreatment is identical to that resulting from a reverse merger of BPZ-Texaswith Navidec under SFAS 141, except that no goodwill or other intangible assethas been recorded.

The Company’s historical financial statements prior tothe acquisition become those of BPZ-Texas (accounting acquirer). Operationsprior to the Merger are those of BPZ-Texas and earnings per share for periodsprior to the Merger are restated to reflect the number of equivalent sharesreceived by BPZ-Texas, with the historical stockholders’ equity of BPZ-Texasprior to the Merger being retroactively restated (a recapitalization) toreflect the equivalent number of shares received in the Merger by BPZ-Texas andthe capital structure (the number and type of shares issued) of Navidec (thelegal acquirer). Accordingly, all financial statements included herein orincorporated by reference reflect the acquisition by BPZ-Texas of the netassets of Navidec and the recapitalization of BPZ-Texas’ common stock based onthe exchange ratio provided in the Merger Agreement.

*Navidec Options*

The Company is restating its consolidated financialstatements to reflect a change in the valuation of the options assumed by theCompany in the Merger with Navidec to purchase 1,332,076 shares of Navideccommon stock. All shares underlying such options are issuable as common stockof the Company. The proceeds from the exercise of the assumed options must beremitted to NFS pursuant to the Merger Agreement. As such, the Company believesthat $0.00 should be the exercise price input in the Black-Scholes Model usedto value these instruments. In its prior restatement on Form 8-K/A filedJanuary 17, 2006, the Company used the stated exercise price (weighted average)per the respective option agreements. The fair value of these options wasdetermined to be $3.21 (compared to $1.48 in the Company’s prior restatement)based on the exercise price noted and the market price of the underlying commonstock on the date of grant, among other Black-Scholes inputs.

35

----

*Operations of NFS*

The Company is also restating its consolidatedfinancial statements to exclude the operations of NFS for all periodspresented. The Merger Agreement provided that all of the pre-merger businessoperations, assets and liabilities of Navidec would be transferred to awholly-owned subsidiary, NFS, followed by the transfer of ownership of NFS tothe pre-merger shareholders of record as of September 9, 2004, the dayprior to the consummation of the Merger. The Company previously concluded inits 2004 Form 10-KSB/A filed on January 17, 2006 that it was the record ownerof NFS shares, but that any ownership was at most temporary, and restated itsconsolidated financial statements to account for NFS on the equity method untilsuch time as the final distribution of NFS shares to the pre-mergershareholders has been completed in all respects. However, the Companysubsequently learned through discovery performed with respect to an action theCompany filed against NFS in District Court, Arapahoe County, Colorado (the “Court”)that share certificates of NFS were issued in the names of the shareholders ofthe pre-merger Navidec effective September 9, 2004 and no NFS certificates wereever issued to the Company. In addition, a Findings of Fact and Conclusions ofLaw (the “Order”) issued by the Court stated that the Company was not ashareholder of NFS at any time after September 9, 2004. Based on thesefindings, the Company concluded that it should not account for the post-Mergeroperations of NFS in the Company’s consolidated financial statements.

*Allocation ofCosts Incurred by Associates*

The Company is also restating its consolidatedfinancial statements as a result of a change in the methodology used toallocate costs from BPZ & Associates (“Associates”), its former parent. TheCompany has identified costs that were incurred by Associates in support ofBPZ-Texas’ activities from BPZ-Texas’ inception in August 2001 until the mergerwith Navidec on September 10, 2004. Specific costs incurred by Associates onbehalf of BPZ-Texas have been included in BPZ-Texas’ financial statements.Additionally, all of Associates’ costs on BPZ-Texas’ projects in excess ofthird party reimbursements have been included in BPZ-Texas’ financialstatements in an effort to reflect all the costs of doing business. The Companybelieves its allocation methodology is reasonable.

*Effect ofRestatements*

The following table reconciles selected annual andquarterly financial data as reported in various filings:
| ** **                       | ** ** | **2004 Form  10-KSB  Filed  April 15,  2005** | ** ** | **January 2006  Restatement  Adjustments** | ** ** | **2005 Form  10-KSB  Filed  March 31,  2006** | ** ** | **Accounting  for NFS** | ** ** | **Allocation of  Expenses  From  Associates** | ** ** | **Reclassification  & Other  (Options, etc.)** | ** ** | **2005 Form  10-KSB/A  Filed  September 26,  2006** | ** ** |
|----------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------------------|------------|------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
|                             |       |                                                    |       |                                            |       |                                                    |       |                         |       |                                               |       |                                                         |       |                                                          |       |
| **Selected  Balance Sheet Data** | ** ** | ** **                                              | ** ** | ** **                                      | ** ** | ** **                                              | ** ** | ** **                   | ** ** | ** **                                         | ** ** | ** **                                                   | ** ** | ** **                                                    | ** ** |
| December 31, 2005                |       |                                                    |       |                                            |       |                                                    |       |                         |       |                                               |       |                                                         |       |                                                          |       |
| Current Assets                   |       | $                                                       | —     |                                            | $          | —                                                  |       | $                            | 30,324,799 |                                               | $          | —                                                       |       | $                                                             | —     |   | $ | — |   | $ | 30,324,799 |   |
| Total Assets                     |       | —                                                  |       | —                                          |       | 38,090,980                                              |       | —                       |       | —                                             |       | —                                                       |       | 38,090,980                                                    |       |
| Current Liabilities              |       | —                                                  |       | —                                          |       | 1,288,495                                               |       | —                       |       | —                                             |       | —                                                       |       | 1,288,495                                                     |       |
| Total Liabilities                |       | —                                                  |       | —                                          |       | 1,359,403                                               |       | —                       |       | —                                             |       | —                                                       |       | 1,359,403                                                     |       |
| Stockholders’ Equity        |       | —                                                  |       | —                                          |       | 36,731,577                                              |       | —                       |       | —                                             |       | —                                                       |       | 36,731,577                                                    |       |
| December 31, 2004                |       |                                                    |       | —                                          |       |                                                    |       |                         |       |                                               |       |                                                         |       |                                                          |       |
| Current Assets                   |       | 4,186,350                                               |       | —                                          |       | 4,186,350                                               |       | —                       |       | —                                             |       | —                                                       |       | 4,186,350                                                     |       |
| Total Assets                     |       | 4,833,855                                               |       | 1,457,751                                       |       | 6,291,606                                               |       | (1,130,511                   | )          | —                                             |       | —                                                       |       | 5,161,095                                                     |       |
| Current Liabilities              |       | 574,940                                                 |       | —                                          |       | 574,940                                                 |       | —                       |       | —                                             |       | —                                                       |       | 574,940                                                       |       |
| Total Liabilities                |       | 574,940                                                 |       | —                                          |       | 574,940                                                 |       | —                       |       | —                                             |       | —                                                       |       | 574,940                                                       |       |
| Stockholders’  Equity       |       | 4,258,915                                               |       | 1,457,751                                       |       | 5,716,666                                               |       | (1,130,511                   | )          | —                                             |       | —                                                       |       | 4,586,155                                                     |       |
|                                  |            |                                                         |            |                                                 |            |                                                         |            |                              |            |                                                    |            |                                                              |            |                                                               |            |  |  |  |  |  |  |  |

 

36

----

 
| ** **                                          | ** ** | **2004 Form  10-KSB  Filed  April 15,  2005** | ** ** | **January 2006  Restatement  Adjustments** | ** ** | **2005 Form  10-KSB  Filed  March 31,  2006** | ** ** | **Accounting  for NFS** | ** ** | **Allocation of  Expenses  From  Associates** | ** ** | **Reclassification  & Other  (Options, etc.)** | ** ** | **2005 Form  10-KSB/A  Filed  September 26,  2006** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------------------|------------|------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
|                                                |       |                                                    |       |                                            |       |                                                    |       |                         |       |                                               |       |                                                         |       |                                                          |       |
| **Results  of Operations**                          | ** ** | ** **                                              | ** ** | ** **                                      | ** ** | ** **                                              | ** ** | ** **                   | ** ** | ** **                                         | ** ** | ** **                                                   | ** ** | ** **                                                    | ** ** |
| Year Ended  December 31, 2005                       |       |                                                    |       |                                            |       |                                                    |       |                         |       |                                               |       |                                                         |       |                                                          |       |
| Net Income (Loss)                                   |       | $                                                       | —     |                                            | $          | —                                                  |       | $                            | (8,563,848 | )                                                  | $          | 2,156,859                                                    |       | $                                                             | —     |   | $ | — |   | $ | (6,406,989 | ) |
| Net Income (Loss) Applicable to Common Stockholders |       | —                                                  |       | —                                          |       | (8,563,848                                              | )          | 2,156,859                    |       | —                                             |       | —                                                       |       | (6,406,989                                                    | )          |
|                                                |       |                                                    |       |                                            |       |                                                    |       |                         |       |                                               |       |                                                         |       |                                                          |       |
| Earnings (Loss) Per Diluted Share                   |       | —                                                  |       | —                                          |       | (0.23                                                   | )          | 0.07                         |       | —                                             |       | —                                                       |       | (0.20                                                         | )          |
|                                                |       |                                                    |       |                                            |       |                                                    |       |                         |       |                                               |       |                                                         |       |                                                          |       |
| Year Ended  December 31, 2004                       |       |                                                    |       |                                            |       |                                                    |       |                         |       |                                               |       |                                                         |       |                                                          |       |
| Net Income (Loss)                                   |       | (18,040,272                                             | )          | 7,387,601                                       |       | (10,652,671                                             | )          | (8,087,752                   | )          | (103,184                                           | )          | 3,830,430                                                    |       | (15,013,177                                                   | )          |
| Net Income (Loss) Applicable to Common Stockholders |       | (18,040,272                                             | )          | 7,387,601                                       |       | (10,652,671                                             | )          | (8,087,752                   | )          | (103,184                                           | )          | 3,830,430                                                    |       | (15,013,177                                                   | )          |
|                                                |       |                                                    |       |                                            |       |                                                    |       |                         |       |                                               |       |                                                         |       |                                                          |       |
| Earnings (Loss) Per Diluted Share                   |       | (2.08                                                   | )          | 0.86                                            |       | (1.24                                                   | )          | (0.53                        | )          | (0.01                                              | )          | 0.25                                                         |       | (0.99                                                         | )          |
|                                                |       |                                                    |       |                                            |       |                                                    |       |                         |       |                                               |       |                                                         |       |                                                          |       |
| **Selected  Cash Flow Data**                        | ** ** | ** **                                              | ** ** | ** **                                      | ** ** | ** **                                              | ** ** | ** **                   | ** ** | ** **                                         | ** ** | ** **                                                   | ** ** | ** **                                                    | ** ** |
| Year Ended  December 31, 2005                       |       |                                                    |       |                                            |       |                                                    |       |                         |       |                                               |       |                                                         |       |                                                          |       |
| Operating Cash Flow                                 |       | $                                                       | —     |                                            | $          | —                                                  |       | $                            | (4,479,826 | )                                                  | $          | —                                                       |       | $                                                             | —     |   | $ | — |   | $ | (4,479,826 | ) |
| Investing Cash Flow                                 |       | —                                                  |       | —                                          |       | (5,745,130                                              | )          | —                       |       | —                                             |       | —                                                       |       | (5,745,130                                                    | )          |
| Financing Cash Flow                                 |       | —                                                  |       | —                                          |       | 35,665,895                                              |       | —                       |       | —                                             |       | —                                                       |       | 35,665,895                                                    |       |
| Year Ended  December 31, 2004                       |       | —                                                  |       |                                            |       |                                                    |       |                         |       |                                               |       |                                                         |       |                                                          |       |
| Operating Cash Flow                                 |       | (1,054,298                                              | )          | (582,392                                        | )          | (1,636,690                                              | )          | —                       |       | —                                             |       | 162,890                                                      |       | (1,473,800                                                    | )          |
| Investing Cash Flow                                 |       | (935,662                                                | )          | (370,000                                        | )          | (1,305,662                                              | )          | —                       |       | —                                             |       | —                                                       |       | (1,305,662                                                    | )          |
| Financing Cash  Flow                                |       | 5,995,995                                               |       | 952,392                                         |       | 6,948,387                                               |       | —                       |       | —                                             |       | (162,890                                                     | )          | 6,785,497                                                     |       |

 

37

----

 
| ** **                       | ** ** | **Original  Filing of  Respective  Forms  10-QSB** | ** ** | **January 2006  Restatement  Adjustments** | ** ** | **Forms  10-QSB/A  Filed  January 17,  2006** | ** ** | **Accounting  for NFS** | ** ** | **Allocation of  Expenses  From Associates** | ** ** | **Reclassifications  & Other  (Options, etc.)** | ** ** | **Form  10-KSB/A  Filed  September 26,  2006** | ** ** |
|----------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------|------------|------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|
|                             |       |                                                    |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| **Selected  Balance Sheet Data** | ** ** | ** **                                              | ** ** | ** **                                      | ** ** | ** **                                         | ** ** | ** **                   | ** ** | ** **                                             | ** ** | ** **                                                    | ** ** | ** **                                          | ** ** |
| September 30,  2005              |       |                                                    |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Current Assets                   |       | $                                                       | —     |                                            | $          | —                                             |       | $                            | 31,214,799 |                                                   | $          | —                                                        |       | $                                                   | —     |   | $ | — |   | $ | 31,214,799 |   |
| Total Assets                     |       | —                                                  |       | —                                          |       | 37,978,075                                         |       | (423,142                     | )          | —                                                 |       | —                                                        |       | 37,554,933                                          |       |
| Current Liabilities              |       | —                                                  |       | —                                          |       | 404,643                                            |       | —                       |       | —                                                 |       | —                                                        |       | 404,643                                             |       |
| Total Liabilities                |       | —                                                  |       | —                                          |       | 404,643                                            |       | —                       |       | —                                                 |       | —                                                        |       | 404,643                                             |       |
| Stockholders’ Equity        |       | —                                                  |       | —                                          |       | 37,573,432                                         |       | (423,142                     | )          | —                                                 |       | —                                                        |       | 37,150,290                                          |       |
| June 30, 2005                    |       |                                                    |       | —                                          |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Current Assets                   |       | 434,652                                                 |       | —                                          |       | 434,652                                            |       | —                       |       | —                                                 |       | —                                                        |       | 434,652                                             |       |
| Total Assets                     |       | 3,486,426                                               |       | 1,389,534                                       |       | 4,875,960                                          |       | (1,076,896                   | )          | —                                                 |       | —                                                        |       | 3,799,064                                           |       |
| Current Liabilities              |       | 1,523,926                                               |       | —                                          |       | 1,523,926                                          |       | —                       |       | —                                                 |       | —                                                        |       | 1,523,926                                           |       |
| Total Liabilities                |       | 1,523,926                                               |       | —                                          |       | 1,523,926                                          |       | —                       |       | —                                                 |       | —                                                        |       | 1,523,926                                           |       |
| Stockholders’ Equity        |       | 1,962,500                                               |       | 1,389,534                                       |       | 3,352,034                                          |       | (1,076,896                   | )          | —                                                 |       | —                                                        |       | 2,275,138                                           |       |
| March 31, 2005                   |       | —                                                  |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Current Assets                   |       | 1,825,541                                               |       | —                                          |       | 1,825,541                                          |       | —                       |       | —                                                 |       | —                                                        |       | 1,825,541                                           |       |
| Total Assets                     |       | 3,766,538                                               |       | 1,563,771                                       |       | 5,330,309                                          |       | (1,243,832                   | )          | —                                                 |       | —                                                        |       | 4,086,477                                           |       |
| Current Liabilities              |       | 538,171                                                 |       | —                                          |       | 538,171                                            |       | —                       |       | —                                                 |       | —                                                        |       | 538,171                                             |       |
| Total Liabilities                |       | 538,171                                                 |       | —                                          |       | 538,171                                            |       | —                       |       | —                                                 |       | —                                                        |       | 538,171                                             |       |
| Stockholders’ Equity        |       | 3,228,367                                               |       | 1,563,771                                       |       | 4,792,138                                          |       | (1,243,832                   | )          | —                                                 |       | —                                                        |       | 3,548,306                                           |       |
| September 30,  2004              |       | —                                                  |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Current Assets                   |       | 4,883,004                                               |       | 100,000                                         |       |                                               |       | —                       |       | —                                                 |       | —                                                        |       | 4,983,004                                           |       |
| Total Assets                     |       | 5,787,677                                               |       | 1,342,990                                       |       |                                               |       | (1,125,194                   | )          | —                                                 |       | —                                                        |       | 6,005,472                                           |       |
| Current Liabilities              |       | 511,842                                                 |       | —                                          |       |                                               |       | —                       |       | —                                                 |       | —                                                        |       | 511,842                                             |       |
| Total Liabilities                |       | 511,842                                                 |       | —                                          |       |                                               |       | —                       |       | —                                                 |       | —                                                        |       | 511,842                                             |       |
| Stockholders’ Equity        |       | 5,275,835                                               |       | 1,342,990                                       |       |                                               |       | (1,125,194                   | )          | —                                                 |       | —                                                        |       | 5,493,630                                           |       |
| June 30, 2004                    | ** ** | ** **                                              |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Current Assets                   |       | 250,976                                                 |       | —                                          |       | 250,976                                            |       | —                       |       | —                                                 |       | —                                                        |       | 250,976                                             |       |
| Total Assets                     |       | 1,378,309                                               |       | 162,890                                         |       | 1,541,199                                          |       | —                       |       | (162,890                                               | )          | —                                                        |       | 1,378,309                                           |       |
| Current Liabilities              |       | 1,471,950                                               |       | —                                          |       | 1,471,950                                          |       | —                       |       | —                                                 |       | —                                                        |       | 1,471,950                                           |       |
| Total Liabilities                |       | 2,455,001                                               |       | —                                          |       | 2,455,001                                          |       | —                       |       | —                                                 |       | —                                                        |       | 2,455,001                                           |       |
| Stockholders’ Equity        |       | (1,076,692                                              | )          | 162,890                                         |       | (913,802                                           | )          | —                       |       | (162,890                                               | )          | —                                                        |       | (1,076,692                                          | )          |
| March 31, 2004                   |       |                                                    |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Current Assets                   |       |                                                    |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       | 11,178                                              |       |
| Total Assets                     |       |                                                    |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       | 251,178                                             |       |
| Current Liabilities              |       |                                                    |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       | 30,250                                              |       |
| Total Liabilities                |       |                                                    |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       | 935,250                                             |       |
|                                  |            |                                                         |            |                                                 |            |                                                    |            |                              |            |                                                        |            |                                                               |            |                                                     |            |  |  |  |  |  |  |  |

 

38

----

 
| ** **                                          | ** ** | **Original  Filing of  Respective  Forms  10-QSB or 8-K** | ** ** | **January 2006  Restatement  Adjustments** | ** ** | **Forms  10-QSB/A  Filed  January 17,  2006** | ** ** | **Accounting  for NFS** | ** ** | **Allocation of  Expenses  From Associates** | ** ** | **Reclassifications  & Other  (Options, etc.)** | ** ** | **Form  10-KSB/A  Filed  September 26,  2006** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------|------------|------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **Results  of Operations**                          | ** ** | ** **                                                               | ** ** | ** **                                      | ** ** | ** **                                         | ** ** | ** **                   | ** ** | ** **                                             | ** ** | ** **                                                    | ** ** | ** **                                          | ** ** |
| 3ME September 30,  2005                             |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Net Income (Loss)                                   |       | $                                                                        | —     |                                            | $          | —                                             |       | $                            | (1,856,000 | )                                                      | $          | 713,408                                                       |       | $                                                   | —     |   | $ | — |   | $ | (1,142,592 | ) |
| Net Income (Loss) Applicable to Common Stockholders |       | —                                                                   |       | —                                          |       | (1,856,000                                         | )          | 713,408                      |       | —                                                 |       | —                                                        |       | (1,142,592                                          | )          |
|                                                |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Earnings (Loss) Per Diluted Share                   |       | —                                                                   |       | —                                          |       | (0.05                                              | )          | 0.02                         |       | —                                                 |       | —                                                        |       | (0.03                                               | )          |
|                                                |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| 9ME September 30,  2005                             |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Net Income (Loss)                                   |       | —                                                                   |       | —                                          |       | (5,337,325                                         | )          | 1,733,716                    |       | —                                                 |       | —                                                        |       | (3,603,609                                          | )          |
| Net Income (Loss) Applicable to Common Stockholders |       | —                                                                   |       | —                                          |       | (5,337,325                                         | )          | 1,733,716                    |       | —                                                 |       | —                                                        |       | (3,603,609                                          | )          |
|                                                |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Earnings (Loss) Per Diluted Share                   |       | —                                                                   |       | —                                          |       | (0.23                                              | )          | 0.06                         |       | —                                                 |       | —                                                        |       | (0.12                                               | )          |
|                                                |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| 3ME June 30, 2005                                   |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Net Income (Loss)                                   |       | (1,265,867                                                               | )          | (529,105                                        | )          | (1,794,972                                         | )          | 446,804                      |       | —                                                 |       | —                                                        |       | (1,348,168                                          | )          |
| Net Income (Loss) Applicable to Common Stockholders |       | (1,265,867                                                               | )          | (529,105                                        | )          | (1,794,972                                         | )          | 446,804                      |       | —                                                 |       | —                                                        |       | (1,348,168                                          | )          |
|                                                |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Earnings (Loss) Per Diluted Share                   |       | (0.07                                                                    | )          | (0.03                                           | )          | (0.11                                              | )          | 0.02                         |       | —                                                 |       | —                                                        |       | (0.05                                               | )          |
|                                                |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| 6ME June 30, 2005                                   |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Net Income (Loss)                                   |       | (2,296,415                                                               | )          | (1,184,910                                      | )          | (3,481,325                                         | )          | 1,020,308                    |       | —                                                 |       | —                                                        |       | (2,461,017                                          | )          |
| Net Income (Loss) Applicable to Common Stockholders |       | (2,296,415                                                               | )          | (1,184,910                                      | )          | (3,481,325                                         | )          | 1,020,308                    |       | —                                                 |       | —                                                        |       | (2,461,017                                          | )          |
|                                                |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Earnings (Loss) Per Diluted Share                   |       | (0.14                                                                    | )          | (0.07                                           | )          | (0.21                                              | )          | 0.04                         |       | —                                                 |       | —                                                        |       | (0.10                                               | )          |
|                                                |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| 3ME March 31,  2005                                 |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Net Income (Loss)                                   |       | (1,030,548                                                               | )          | (655,805                                        | )          | (1,686,353                                         | )          | 573,504                      |       | —                                                 |       | —                                                        |       | (1,112,849                                          | )          |
| Net Income (Loss) Applicable to Common Stockholders |       | (1,030,548                                                               | )          | (655,805                                        | )          | (1,686,353                                         | )          | 573,504                      |       | —                                                 |       | —                                                        |       | (1,112,849                                          | )          |
|                                                |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Earnings (Loss) Per Diluted Share                   |       | (0.06                                                                    | )          | (0.04                                           | )          | (0.10                                              | )          | 0.02                         |       | —                                                 |       | —                                                        |       | (0.04                                               | )          |
|                                                |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| 3ME September 30,  2004                             |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Net Income (Loss)                                   |       | (16,809,938                                                              | )          | 7,930,924                                       |       | (8,879,014                                         | )          | (8,330,032                   | )          | 15,115                                                 |       | 3,830,430                                                     |       | (13,363,501                                         | )          |
| Net Income (Loss) Applicable to Common Stockholders |       | (16,809,938                                                              | )          | 7,930,924                                       |       | (8,879,014                                         | )          | (8,330,032                   | )          | 15,115                                                 |       | 3,830,430                                                     |       | (13,363,501                                         | )          |
|                                                |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Earnings (Loss) Per Diluted Share                   |       | (1.75                                                                    | )          | 0.83                                            |       | (0.90                                              | )          | (0.45                        | )          | 0.00                                                   |       | 0.21                                                          |       | (0.72                                               | )          |
|                                                |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| 9ME September 30,  2004                             |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Net Income (Loss)                                   |       | (17,064,240                                                              | )          | 7,636,324                                       |       | (9,427,916                                         | )          | (8,330,032                   | )          | (103,184                                               | )          | 3,830,430                                                     |       | (14,030,702                                         | )          |
| Net Income (Loss) Applicable to Common Stockholders |       | (17,064,240                                                              | )          | 7,636,324                                       |       | (9,427,916                                         | )          | (8,330,032                   | )          | (103,184                                               | )          | 3,830,430                                                     |       | (14,030,702                                         | )          |
|                                                |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Earnings (Loss) Per Diluted Share                   |       | (2.81                                                                    | )          | 1.28                                            |       | (1.56                                              | )          | (0.71                        | )          | (0.01                                                  | )          | 0.33                                                          |       | (1.20                                               | )          |
|                                                |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| 3ME June 30, 2004                                   |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Net Income (Loss)                                   |       | (135,819                                                                 | )          | (198,850                                        | )          | (334,669                                           | )          | —                       |       | (78,675                                                | )          | —                                                        |       | (413,344                                            | )          |
| Net Income (Loss) Applicable to Common Stockholders |       | (135,819                                                                 | )          | (198,850                                        | )          | (334,669                                           | )          | —                       |       | (78,675                                                | )          | —                                                        |       | (413,344                                            | )          |
|                                                |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Earnings (Loss) Per Diluted Share                   |       | (0.03                                                                    | )          | (0.05                                           | )          | (0.08                                              | )          | —                       |       | (0.02                                                  | )          | —                                                        |       | (0.10                                               | )          |
|                                                |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| 6ME June 30, 2004                                   |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Net Income (Loss)                                   |       | (254,302                                                                 | )          | (294,600                                        | )          | (548,902                                           | )          | —                       |       | (118,299                                               | )          | —                                                        |       | (667,201                                            | )          |
| Net Income (Loss) Applicable to Common Stockholders |       | (254,302                                                                 | )          | (294,600                                        | )          | (548,902                                           | )          | —                       |       | (118,299                                               | )          | —                                                        |       | (667,201                                            | )          |
|                                                |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Earnings (Loss) Per Diluted Share                   |       | (0.06                                                                    | )          | (0.07                                           | )          | (0.13                                              | )          | —                       |       | (0.03                                                  | )          | —                                                        |       | (0.16                                               | )          |
|                                                |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| 3ME March 31,  2004                                 |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Net Income (Loss)                                   |       | (118,483                                                                 | )          | (95,750                                         | )          | (214,233                                           | )          | —                       |       | (39,624                                                | )          | —                                                        |       | (253,857                                            | )          |
| Net Income (Loss) Applicable to Common Stockholders |       | (118,483                                                                 | )          | (95,750                                         | )          | (214,233                                           | )          | —                       |       | (39,624                                                | )          | —                                                        |       | (253,857                                            | )          |
|                                                |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                                   |       |                                                          |       |                                                |       |
| Earnings (Loss)  Per Diluted Share                  |       | (0.03                                                                    | )          | (0.02                                           | )          | (0.05                                              | )          | —                       |       | (0.01                                                  | )          | —                                                        |       | (0.06                                               | )          |
|                                                     |            |                                                                          |            |                                                 |            |                                                    |            |                              |            |                                                        |            |                                                               |            |                                                     |            |  |  |  |  |  |  |  |

 

39

----

 
| ** **                   | ** ** | **Original  Filing of  Respective  Forms  10-QSB or 8/K** | ** ** | **January 2006  Restatement  Adjustments** | ** ** | **Forms  10-QSB/A  Filed  January 17,  2006** | ** ** | **Accounting  for NFS** | ** ** | **Allocation of  Expenses  From  Associates** | ** ** | **Reclassifications  & Other  (Options, etc.)** | ** ** | **Form  10-KSB/A  Filed  September 26,  2006** | ** ** |
|------------------------------|------------|--------------------------------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------|------------|------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|
|                         |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                               |       |                                                          |       |                                                |       |
| **Selected  Cash Flow Data** | ** ** | ** **                                                               | ** ** | ** **                                      | ** ** | ** **                                         | ** ** | ** **                   | ** ** | ** **                                         | ** ** | ** **                                                    | ** ** | ** **                                          | ** ** |
| 9ME September 30,  2005      |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                               |       |                                                          |       |                                                |       |
| Operating Cash Flow          |       | $                                                                        | —     |                                            | $          | —                                             |       | $                            | (3,166,948 | )                                                  | $          | —                                                        |       | $                                                   | —     |   | $ | — |   | $ | (3,166,948 | ) |
| Investing Cash Flow          |       | —                                                                   |       | —                                          |       | (4,247,838                                         | )          | —                       |       | —                                             |       | —                                                        |       | (4,247,838                                          | )          |
| Financing Cash Flow          |       | —                                                                   |       | —                                          |       | (34,106,507                                        | )          | —                       |       | —                                             |       | —                                                        |       | (34,106,507                                         | )          |
| 6ME June 30, 2005            |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                               |       |                                                          |       |                                                |       |
| Operating Cash Flow          |       | (2,255,592                                                               | )          | —                                          |       | (2,255,592                                         | )          | —                       |       | —                                             |       | —                                                        |       | (2,255,592                                          | )          |
| Investing Cash Flow          |       | (1,222,222                                                               | )          | —                                          |       | (1,222,222                                         | )          | —                       |       | —                                             |       | —                                                        |       | (1,222,222                                          | )          |
| Financing Cash Flow          |       | (178,007                                                                 | )          | —                                          |       | (178,007                                           | )          | —                       |       | —                                             |       | —                                                        |       | (178,007                                            | )          |
| 3ME March 31,  2005          |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                               |       |                                                          |       |                                                |       |
| Operating Cash Flow          |       | (947,324                                                                 | )          | —                                          |       | (947,324                                           | )          | —                       |       | —                                             |       | —                                                        |       | (947,324                                            | )          |
| Investing Cash Flow          |       | (1,208,222                                                               | )          | —                                          |       | (1,208,222                                         | )          | —                       |       | —                                             |       | —                                                        |       | (1,208,222                                          | )          |
| Financing Cash Flow          |       | (87,344                                                                  | )          | —                                          |       | (87,344                                            | )          | —                       |       | —                                             |       | —                                                        |       | (87,344                                             | )          |
| 9ME September 30,  2004      |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                               |       |                                                          |       |                                                |       |
| Operating Cash Flow          |       | (779,105                                                                 | )          | (171,406                                        | )          | (950,511                                           | )          | —                       |       | —                                             |       | 162,890                                                       |       | (787,621                                            | )          |
| Investing Cash Flow          |       | (673,848                                                                 | )          | (866,152                                        | )          | (1,540,000                                         | )          | —                       |       | —                                             |       | —                                                        |       | (1,540,000                                          | )          |
| Financing Cash Flow          |       | 4,460,338                                                                |       | 1,037,559                                       |       | 5,497,897                                          |       | —                       |       | —                                             |       | (162,890                                                      | )          | 5,335,007                                           |       |
| 6ME June 30, 2004            |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                               |       |                                                          |       |                                                |       |
| Operating Cash Flow          |       | (224,421                                                                 | )          | (395,109                                        | )          | (619,530                                           | )          | —                       |       | —                                             |       | (8,751                                                        | )          | (628,281                                            | )          |
| Investing Cash Flow          |       | (642,000                                                                 | )          | (428,000                                        | )          | (1,070,000                                         | )          | —                       |       | —                                             |       | —                                                        |       | (1,070,000                                          | )          |
| Financing Cash Flow          |       | 866,065                                                                  |       | 823,109                                         |       | 1,689,174                                          |       | —                       |       | —                                             |       | 8,751                                                         |       | 1,697,925                                           |       |
| 3ME March 31,  2004          |       |                                                                     |       |                                            |       |                                               |       |                         |       |                                               |       |                                                          |       |                                                |       |
| Operating Cash Flow          |       | (113,358                                                                 | )          | (37,800                                         | )          | (151,158                                           | )          | —                       |       | —                                             |       | (57,950                                                       | )          | (209,108                                            | )          |
| Investing Cash Flow          |       | —                                                                   |       | —                                          |       | —                                             |       | —                       |       | —                                             |       | —                                                        |       | —                                              |       |
| Financing Cash Flow          |       | 112,200                                                                  |       | 37,800                                          |       | 150,000                                            |       | —                       |       | —                                             |       | 57,950                                                        |       | 207,950                                             |       |
|                              |            |                                                                          |            |                                                 |            |                                                    |            |                              |            |                                                    |            |                                                               |            |                                                     |            |  |  |  |  |  |  |  |

 

**Organization andBasis of Presentation**

BPZ Energy, Inc., a Colorado corporation, formerlynamed Navidec, Inc., was incorporated in 1993 and is based in Houston, Texas.BPZ is an exploratory stage company with properties in northwest Peru andsouthwest Ecuador and is focused on the exploration and production of oil andnatural gas and intends to utilize part of its future natural gas productionfor the complementary development of gas-fired power generation.

On September 10, 2004, BPZ Energy, Inc., a Texascorporation (“BPZ-Texas”), consummated a reverse merger with Navidec, Inc. (“Navidec”)whereby BPZ-Texas became a wholly owned subsidiary of Navidec (the “Merger”).However, in the Merger, the stockholder group of BPZ-Texas obtained majorityownership and management control of the combined company. The Merger wastreated, for accounting purposes, as a capital transaction rather than abusiness combination. It is equivalent to the issuance of common stock byBPZ-Texas for the net assets of Navidec, accompanied by a recapitalization. Thisaccounting treatment is identical to that resulting from a reverse merger underSFAS 141, except that no goodwill or other intangible asset has been recorded.All financial statements presented herein represent the historical financialstatements of the accounting acquirer, BPZ-Texas. Although the Company’s namehas been changed, the pre-merger company may be referred to as Navidec in thisfiling to avoid confusion.

The Merger required the transfer of all of thepre-merger business assets and liabilities of Navidec to its wholly ownedsubsidiary, Navidec Financial Services, Inc. (“NFS”), and the transfer ofownership of NFS to the shareholders of record of Navidec as of September 9,2004, the day prior to the consummation of the Merger. Upon consummation of theMerger, the Company became contractually and irrevocably bound to the spin-offof NFS to such pre-Merger shareholders. All legal requirements for the transferof ownership of NFS have been completed except for registration of the NFSshares with the Securities and Exchange Commission The Company has no controlover the registration process of NFS and cannot predict when, or if, themanagement of NFS will be able to complete the registration of NFS commonshares. NFS’ results are excluded from the Company’s financial statements forall periods presented.

The Company maintains a registered branch office inPeru. Currently, BPZ has exclusive rights and license agreements for oil andgas exploration and production covering a total of approximately 2.7 millionacres in northwest Peru. BPZ’s license contracts cover 100% ownership of bothBlock Z-1, which was signed in November 2001 and Block XIX, which was signed inDecember 2003. The license contracts provide for an initial exploration periodof seven to ten years and require BPZ to conduct specified activities on theproperties during this period. The total contract term can extend up to 30years for oil exploration, development and production and 40 years for gasexploration, development and production. In December 2003, BPZ entered into aTechnical Evaluation Agreement for Area VI. This agreement gave the Company theright to conduct a technical evaluation of the area over a 24-month period andthe exclusive right to enter into a license contract if the evaluationindicated the potential for successful operations. In December 2005, BPZinitiated negotiations to obtain a license contract for Area VI.

The Company also owns a 10% non-operated workinginterest in a producing oil and gas property located in southwest Ecuador (the “SantaElena Property”). The license agreement covering the property extends throughMay 2016.

BPZ is in the exploratory stage and to date itsactivities in Peru have been limited to analysis and evaluation of technicaldata on the properties and preparation of the development plans for theproperties. The Company has not drilled any wells or recognized any revenuesfrom operations and we do not anticipate generating significant revenues fromour properties prior to 2007.

**Principles ofConsolidation**

The consolidated financial statements include theaccounts of the Company and its wholly owned subsidiaries and branch offices.All intercompany balances and transactions have been eliminated.

40

----

The Company’s accounting policy regarding partnershipor joint venture interests in oil and gas properties is to consolidate suchinterests on a pro-rata basis in accordance with accepted practice in the oiland gas industry. However, the Company has not been able to receive timelyinformation to allow it to proportionately consolidate the minoritynon-operated working interest owned by its consolidated subsidiary, SMC EcuadorInc. See Note 5 to the Consolidated Financial Statements for further discussionregarding the Company’s investment in its Ecuador property. Accordingly, theCompany accounts for this investment under the cost method. As such, theCompany records its share of cash received or paid attributable to this investmentas other income or expense.

**Reporting andFunctional Currency**

The U.S. Dollar is the functional currency for ouroperations in both Peru and Ecuador. Ecuador has adopted the U.S. Dollar as itsofficial currency. Peru, however, uses its local currency, Nuevo Soles, inaddition to the U.S. Dollar and therefore our financial results are subject toforeign currency gains and losses. We have adopted Statement of FinancialAccounting Standards (“SFAS”) No. 52, “Foreign Currency Translation”,which requires that the translation of the applicable foreign currency intoU.S. dollars be performed for balance sheet monetary accounts using currentexchange rates in effect at the balance sheet date, non-monetary accounts usinghistorical exchange rates in effect at the time the transaction occurs, and forrevenue and expense accounts using a weighted average exchange rate during theperiod reported. Accordingly, the gains or losses resulting from suchtranslation are included in other income and expense in the consolidatedstatements of operations. Due to the relatively low level of activity to-dateand the relatively steady exchange rate in Peru, translation differences wereimmaterial.

**Use of Estimates**

The preparation of the consolidated financialstatements in accordance with U.S. generally accepted accounting principlesrequires management to make certain estimates and assumptions. These estimatesand assumptions affect the reported amounts of assets, liabilities, revenuesand expenses in the consolidated financial statements, and the disclosure ofcontingent assets and liabilities. Actual results could differ from theseestimates.

**Reclassifications**

Certain prior period amounts have been reclassified toconform to the current financial statement presentation.

**Cash and CashEquivalents**

The Company considers cash on hand, cash in banks,money market mutual funds and highly liquid debt instruments purchased with anoriginal maturity of three months or less to be cash equivalents. Certain ofthe Company’s cash balances are maintained in foreign banks which are notcovered by deposit insurance. The cash balance in the Company’s U.S. bankaccounts may exceed federally insured limits.

**Restricted Cash**

As discussed in Note 6 to the Consolidated FinancialStatements, the Company has secured various performance bonds, primarilycollateralized by certificates of deposit, to guarantee its obligations andcommitments in connection with its exploratory properties in Peru. All of theperformance bonds have been issued by Peruvian banks and their terms aredictated by the corresponding License Contract or Technical EvaluationAgreement.

**Debt FinancingCosts**

As discussed in Note 3 to the Consolidated FinancialStatements, certain financing costs related to the acquisition of SMC Ecuador,Inc. were capitalized. The deferred debt financing costs were amortized overthe term of the financing.

**Property,Equipment and Construction in Progress**

The Company follows the “successful efforts” method ofaccounting of its costs of acquisition, exploration and development of oil andgas properties. Under this method, oil and gas lease acquisition costs andintangible drilling costs associated with exploration efforts that result inthe discovery of proved reserves and costs associated with developmentdrilling, whether or not successful, are capitalized when incurred. Certaincosts of exploratory wells are capitalized pending determinations that provedreserves have been found. If the determination is dependent upon the results ofplanned additional wells and required capital expenditures to produce thereserves found, the drilling costs will be capitalized as long as sufficientreserves have been found to justify completion of the exploratory well andadditional wells are underway or firmly planned to complete the evaluation ofthe well. All costs related to unsuccessful exploratory wells are expensed whensuch wells are determined to be non-productive or at the one year anniversaryof completion of the well if proved reserves have not been attributed andcapital expenditures as described in the preceding sentence are not required.

The Company assesses its capitalized exploratory wellspending evaluation each quarter to determine whether costs should remaincapitalized or should be charged to earnings. Other exploration costs,including geological, geophysical and engineering costs, are expensed asincurred. The Company recognizes gains or losses on the sale of properties,should they occur,

41

----

on a field-by-field basis.

Projects under construction are not depreciated oramortized until placed in service. For assets we construct, we capitalizedirect costs, such as labor and materials, and indirect costs, such as overheadand interest. As of December 31, 2005, property and equipment consists ofoffice equipment, vehicles and leasehold improvements made to the Company’soffices. All values are stated at cost and are depreciated on a straight-linebasis over the estimated useful life of the assets or the term of the lease.Maintenance and repairs are expensed as incurred. Replacements, upgrades orexpenditures which improve and extend the life of the assets are capitalized.When assets are sold, retired or otherwise disposed, the applicable costs andaccumulated depreciation and amortization are removed from the appropriateaccounts and the resulting gain or loss is recorded.

**Impairment ofLong-Lived Assets**

The Company periodically evaluates the recoverabilityof the carrying value of its long-lived assets, goodwill and identifiableintangibles by monitoring and evaluating changes in circumstances that mayindicate that the carrying amount of the asset may not be recoverable. Examplesof events or changes in circumstances that indicate that the recoverability ofthe carrying amount of an asset should be assessed include but are not limitedto the following: a significant decrease in the market value of an asset, asignificant change in the extent or manner in which an asset is used or asignificant physical change in an asset, a significant adverse change in legalfactors or in the business climate that could affect the value of an asset oran adverse action or assessment by a regulator, an accumulation of costssignificantly in excess of the amount originally expected to acquire orconstruct an asset, and/or a current period operating or cash flow losscombined with a history of operating or cash flow losses or a projection orforecast that demonstrates continuing losses associated with an asset used forthe purpose of producing revenue.

The Company considers historical performance andanticipated future results in its evaluation of potential impairment.Accordingly, when indicators of impairment are present, the Company evaluatesthe carrying value of these assets in relation to the operating performance ofthe business and future discounted and non-discounted cash flows expected toresult from the use of these assets. Impairment losses are recognized when theexpected future cash flows from an asset are less than its carrying value.

**Stock BasedCompensation**

The Company accounts for stock based compensation inaccordance with SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS123”). As allowed under SFAS 123, we have elected to account for ourstock-based compensation to employees using the intrinsic value method ofaccounting which bases compensation expense on the difference between thequoted market price of the award at the measurement date less the amount, ifany, the employee is required to pay for the stock. Equity instruments issuedto non-employees for goods or services are accounted for at fair value at thedate of grant. The fair value for awards issued to non-employees is measuredusing a Black-Scholes valuation model. Expense determined for employees andnon-employees is recognized in the Company’s financial statements over theapplicable service period.

As of December 31, 2005, stock-based awards toemployees consisted of only restricted shares which were valued using themarket price of the Company’s traded common stock on the date of grant. Thefair value method would have yielded the same fair value and compensationexpense as the intrinsic value method used; thus, no pro forma results ofoperations are required to be presented.

Beginning in 2006, we will be required to account forall transactions which result in the exchange of equity instruments for goodsand services, including stock options granted to employees and directors, underSFAS 123(R), “Share-Based Payment.” SFAS 123(R) requires that bothemployee and non-employee share-based transactions be measured at fair valueand recorded as an expense over the service period.

**Income Taxes**

The Company accounts for income taxes using theliability method. Under this method, deferred tax assets and liabilities aredetermined based on differences between the financial reporting and tax basisof assets and liabilities, and are measured using the enacted tax rates andlaws that will be in effect when the differences are expected to reverse.Valuation allowances are established when necessary to reduce deferred taxassets to the amount expected to be realized.

**Environmental**

The Company is subject to environmental laws andregulations of various U.S. and international jurisdictions. These laws andregulations, which are subject to change, regulate the discharge of materialsinto the environment and may require the Company to remove or mitigate theenvironmental effects of the disposal or release of petroleum or chemicalsubstances at various sites.

Environmental costs that relate to current operationsare expensed or capitalized as appropriate. Costs are expensed when they relateto an existing condition caused by past operations and will not contribute tocurrent or future revenue generation. Liabilities related to environmentalassessments and/or remedial efforts are accrued when property or services areprovided and when such costs can be reasonably estimated.

42

----

**Loss per CommonShare**

In accordance with provisions of SFAS No. 128,Earnings per Share, basic earnings per share is computed on the basis of theweighted-average number of common shares outstanding during the periods.Diluted earnings per share is computed based upon the weighted-average numberof common shares outstanding plus the assumed issuance of common shares for allpotentially dilutive securities. Diluted earnings per share equals basicearnings per share for the periods presented because the effects of potentiallydilutive securities are antidilutive.

**New AccountingPronouncements**

*Accounting Changesand Error Corrections*

In June 2005, the Financial Accounting Standards Boardissued SFAS No. 154, Accounting Changes and Error Corrections, which,replaced Accounting Principles Board Opinion No. 20, Accounting Changes (“APB20”), and SFAS No. 3, Reporting Accounting Changes in Interim FinancialStatements. SFAS 154 requires retrospective application to prior periods’financial statements of a voluntary change in accounting principle unless it isimpracticable. In contrast, APB 20 previously required that most voluntarychanges in accounting principle be recognized by including the cumulativeeffect of changing to the new accounting principle in net income in the periodof change. SFAS 154 is effective for accounting changes and corrections oferrors made in fiscal years beginning after December 15, 2005. Earlierapplication is permitted for accounting changes and correction of errors madein fiscal years beginning after June 1, 2005. SFAS 154 does not change thetransition provisions of any existing accounting pronouncements, includingthose that are in a transition phase as of its effective date. We have electedto adopt the provisions of SFAS 154 on January 1, 2006. We do not expectadoption to have a material effect on our results of operations or financialposition.

**Note 2 —NavidecMerger**

On July 8, 2004, Navidec and BPZ-Texas entered into aMerger Agreement (the “Merger Agreement”) which was consummated on September10, 2004. The Merger was structured from a legal standpoint as the acquisitionof BPZ-Texas by Navidec. However, the stockholder group of BPZ-Texas obtainedmajority ownership and management control of the combined company so, insubstance, the transaction was a recapitalization of BPZ-Texas rather than abusiness combination. This accounting treatment is identical to that resultingfrom a reverse merger of BPZ-Texas with Navidec under SFAS 141, except that nogoodwill or other intangible asset has been recorded. All financial statementspresented herein represent the historical financial statements of theaccounting acquirer, BPZ-Texas. BPZ-Texas entered into the Merger primarily togive it access to the public markets to finance its planned activities in SouthAmerica.

Immediately prior to the recapitalization ofBPZ-Texas, Navidec transferred all its assets and liabilities to a subsidiary,Navidec Financial Services (“NFS”), which was not acquired by BPZ-Texas and waspart of a planned spin-off to Navidec shareholders of record at the time of theMerger. The recapitalization of BPZ-Texas was accomplished by Navidec, whichhad 3,198,368 shares outstanding, issuing 9,000,000 shares of its common stockin a one-for-one exchange for all of the outstanding common shares ofBPZ-Texas. As additional incentive for the shareholders of Navidec to enterinto the Merger, NFS received an additional 662,149 shares of common stock ofNavidec. In its recapitalization, The Company assumed options to purchase1,332,076 shares of Navidec common stock, which had previously been issued toemployees, directors and consultants of Navidec and were outstanding on thedate of the Merger. Under the terms of the Merger Agreement, the proceedsreceived from the exercise of these stock options are payable to NFS. TheCompany also assumed outstanding Class A ($2.00 per share) and Class B ($4.00per share) warrants to purchase 1,129,000 shares (564,500 shares per class) ofNavidec common stock.

The Company also granted to NFS fully vested optionsto purchase 1,500,000 shares of common stock at an exercise price of $2.00 pershare as compensation for certain investor relations services NFS agreed toprovide from July 1, 2004 to July 1, 2005. Additionally, the Company grantedoptions to purchase 1,000,000 shares of common stock at an exercise price of$1.30 per share to John R. McKowen in connection with his service as afinancial consultant to the Company Of such option shares, 500,000 vested uponconsummation of the Merger and the remaining 500,000 option shares are to vestupon the receipt of additional investment proceeds totaling $6,000,000,provided such funding is received no later than September 10, 2006.

All shares underlying such options and warrants areissuable as common stock of the Company. See Note 8 — Stockholders’ Equity ofthe Notes to Consolidated Financial Statements for details about the stockoptions and warrants assumed or granted in connection with the Merger.

After the transfer of the assets and liabilities ofNavidec to NFS, Navidec had no assets, liabilities or stockholders’ equity. The662,149 shares of common stock the Company issued to NFS in connection with theacquisition were valued at the average closing price of Navidec’s common stockquoted on the OTCBB market during a five-day trading period beginning twotrading days prior to the announcement of the Merger Agreement on July 8,2004. Navidec was publicly traded and had a market for its equity, whileBPZ-Texas was privately owned. The stock options assumed to purchase 1,332,076shares of Navidec common stock and the warrants assumed and issued to purchase1,129,000 shares and 2,500,000 shares of Navidec common stock, respectively,were valued using the Black-Scholes model. Inputs into the Black-Scholesvaluation model for the valuation of the warrants and stock options includedthe exercise price and remaining term for the stock options and warrants, and avolatility factor based on historical stock prices of Navidec.

The followingtable summarizes the foregoing compensation and Merger-related transactions asthey were recorded in the year ended December 31, 2004:
| ** **                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | **Income  Statement** | ** ** | **Balance Sheet** | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|------------|------------|-----------------------|------------|------------------------|------------|
| **Description**                                                          | ** ** | ** ** | ** ** | **Shares** | ** ** | **Fair  Value(a)**    | ** ** | **Expensed**           | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Deficit  Accumulated  During the  Exploratory  Stage** | ** ** |
| BPZ common stock  issued to NFS                                          |       | 662,149    |       | $          | 1.48       |                  | $          | 979,981                |       | $ | 979,981 |   | $ | — |   | $ | 979,981 |   |
| BPZ options issued  to NFS (for investor relation services)              |       | 1,500,000  |       | 1.76       |       | 2,644,146             |       | —                 |       | 2,644,146 |   | 2,644,146 |   |
| BPZ options  issued to former CEO (for financial consulting services)(b) |       | 1,000,000  |       | 1.20       |       | 675,000               |       | —                 |       | 675,000 |   | 675,000 |   |
| Assumption of  Navidec stock options                                     |       | 1,332,076  |       | 3.21       |       | 4,275,964             |       | —                 |       | 4,275,964 |   | 4,275,964 |   |
| Assumption of  Navidec Class A warrants                             |       | 564,500    |       | 0.30       |       | 169,350               |       | —                 |       | 169,350 |   | 169,350 |   |
| Assumption of  Navidec Class B warrants                             |       | 564,500    |       | 0.08       |       | 45,160                |       | —                 |       | 45,160 |   | 45,160 |   |
| Common stock  issued to Navidec shareholders                             |       | 3,198,368  |       | N/A        |       | —                |       | —                 |       | — |   | — |   |
| Total purchase  consideration                                            |       |       |       |       |       | $                     | 8,789,601  |                   | $          | 979,981 |   | $ | 7,809,620 |   | $ | 8,789,601 |   |
|                                                                          |            |            |            |            |            |                       |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |

----

(a)             Fair values per sharewere rounded to two decimal places for presentation purposes.

(b)            Amountsrecorded represent the immediate vesting/expense of 500,000 options ($600,000)and the amortization of the second group of 500,000 options ($75,000) for thethree months ended December 31, 2004.

43

----

*Transfer of NFS*

The Merger Agreement also provided that all of thepre-merger business operations, assets and liabilities of Navidec would betransferred to its then wholly-owned subsidiary, NFS, followed by the transferof ownership of NFS to the Navidec pre-merger shareholders of record as ofSeptember 9, 2004, the day prior to the consummation of the Merger. Accordingly,the pre-merger shareholders of BPZ-Texas are not entitled to receive shares ofNFS. All legal requirements for the transfer of ownership of NFS have beencompleted except for registration of the NFS shares with the Securities andExchange Commission. The Company intends to assist the management of NFS, asrequested, in its efforts to register the NFS shares, but has no control overthe registration process of NFS and cannot predict when, or if, the managementof NFS will complete such registration.

In June 2006, a Findings of Fact and Conclusions ofLaw issued by the District Court, Arapahoe County, Colorado stated that theCompany was not a shareholder of NFS at any time after September 9, 2004. Basedon these findings, the Company concluded that it should not account for thepost-Merger operations of NFS in its consolidated financial statements.

**Note 3 — OtherCurrent Assets**

Below is a summaryof other current assets as of December 31, 2005 and 2004:
| ** **                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
|                        |       |     |       |     |       |
| Value added tax             |       | $        | 362,555    |     | $          | — |   |
| Prepaid expenses  and other |       | 270,903  |       | 4,598    |       |
| Deposits                    |       | 181,347  |       | —   |       |
| Deferred  financing costs   |       | —   |       | 67,561   |       |
| Interest  receivable        |       | 54,864   |       | —   |       |
|                        |       |     |       |     |       |
|                        |       | $        | 869,669    |     | $          | 72,159 |   |

 

44

----

Value-added tax (referred to as “IGV” in Peru) isgenerally imposed on goods and services at a rate of 19%. Certain expendituresare exempt from IGV or eligible for immediate refund. IGV paid on capitalexpenditures is generally recoverable from future revenue billings within Peruand is not considered part of the capitalized costs of the equipment to whichit relates. The Company has applied for early recovery of IGV paid as it doesnot anticipate first sales of power to the Peruvian power market until 2007.Prepaid expenses are primarily related to crane, barge and barge equipmentrentals which will be credited against the monthly charter or daily rates onceoperations commence. Deposits are primarily to secure delivery of the drillingrig and rent deposits in connection with the Company’s offices in Houston andPeru.

Deferred financing costs at December 31, 2004consisted primarily of capitalized financing costs related to the acquisitionof SMC Ecuador, Inc. The Company amortized these costs to expense over theterm of the financing.

**Note 4 — Property,Equipment and Construction in Progress**

Below is a summaryof property, equipment and construction in progress as of December 31, 2005 and2004:
| ** **                                              | ** ** | **2005**  | ** ** | **2004** | ** ** |
|---------------------------------------------------------|------------|-----------|------------|----------|------------|
|                                                    |       |      |       |     |       |
| Construction in  progress:                              |       |      |       |     |       |
| Power plant and related equipment                       |       | $         | 2,252,413  |     | $          | — |   |
| Platforms and wells                                     |       | 1,190,707 |       | —   |       |
| Pipelines and processing facilities                     |       | 512,357   |       | —   |       |
| Office  equipment, leasehold improvements, and vehicles |       | 439,359   |       | 5,662    |       |
| Accumulated  depreciation and amortization              |       | (29,796   | )          | (157     | )          |
|                                                    |       |      |       |     |       |
| Net property,  equipment and construction in process    |       | $         | 4,365,040  |     | $          | 5,505 |   |

 

In 2005 the Company incurred costs associated withexploration, development and production of natural gas reserves and with thecomplementary development of gas-fired power generation for its own use inPeru. The costs relate to the initial engineering design work for the powerplant, gas processing facility and pipeline, and acquiring and refurbishing oneof the Company’s offshore platforms located in Block Z-1. The Company incurredcosts for office equipment and leasehold improvements for its offices inHouston, Peru and Ecuador and for vehicles used in the Peruvian operations.

**Note 5 —Investment in Ecuador Property and Note Payable**

The Company has an investment in an oil and gasproperty in Ecuador (the “Santa Elena Property”) totaling $1,945,188 as ofDecember 31, 2005. The Company accounts for this investment under the costmethod and records its share of cash received or paid as other income orexpense. Since the Company’s investment represents ownership of an oil and gasproperty, which is a depleting asset, the Company is amortizing the cost of theinvestment on a straight-line basis over the remaining term of the licenseagreement which expires in May 2016. Accordingly, the Company recordedamortization expense of $136,552 and $42,760 for the years endedDecember 31, 2005 and 2004, respectively.

In connection with the acquisition of the Santa Elenaproperty, the Company had a note payable balance of $208,986 as ofDecember 31, 2004. The note agreement required monthly installmentpayments of $31,366, including imputed interest at 15%, through July 1,2005 and has been paid in full as of December 31, 2005.

As part of the note agreement, the holder of the notepayable received beneficial ownership of a 4% net working interest in the SantaElena Property. In June 2005, the Company entered into an agreement toissue 250,000 shares of the Company’s common stock, valued at $1,112,500, toacquire the holder’s 4% net working interest in the property. Accordingly, as ofDecember 31, 2005, the Company owned the full 10% working interest in theSanta Elena Property.

**Note 6 —Restricted Cash**

As of December 31, 2005, the Company had postedperformance bonds totaling $1,690,000 to secure the performance of itsobligations and commitments related to its properties in Peru. Of such amount,$1,455,953 is collateralized by a restricted cash deposit. The remaining$240,000 performance bonds have been guaranteed by two individual shareholdersof the Company.

As of December 31, 2004, the Company had postedperformance bonds totaling $340,000 to secure the performance of itsobligations and commitments related to its properties in Peru. Of such amount,$100,000 was collateralized by a restricted cash deposit. The $100,000restricted cash deposit was classified as a current asset as the Company hadmet its obligations under the license contract and the performance bond expiredin March 2005. The remaining $240,000 performance bonds were guaranteed bytwo individual shareholders of the Company.

All of the performance bonds were issued by Peruvianbanks and their terms are governed by the corresponding license contract ortechnical evaluation agreement.

**Note 7 — Long-TermDebt**

On December 31, 2005, the Company had long-termdebt of $70,908, consisting of two secured loans for the purchase of officefurniture. Both loans have a term of 60 months, bearing interest at 5.94% and9.44%, with principal and interest payments due on a monthly basis. There wasno long-term debt outstanding at December 31, 2004.

**Note 8 —Stockholders’ Equity**

The Company has 250,000,000 shares of common stock, nopar value, and 25,000,000 shares of preferred stock authorized for issuance.

In connection with the private placement of 11,466,000common shares, the Company was obligated to prepare and file with the SEC aRegistration Statement on Form SB-2 and to use its best efforts to causethe Registration Statement to be declared effective by the SEC no later thanninety days from July 19, 2005. The Registration Statement was notdeclared effective by the required date and the Company became liable to theInvestors for liquidated damages in an amount equal to 1.0% of the purchase

45

----

price of the shares, approximately $343,980, for eachthirty day period until the Registration Statement is declared effective by theSEC. Certain of the private placement investors, totaling 79% of the aggregateinvestment, have agreed to accept common stock in lieu of cash for a maximumperiod of 90 days. As of December 31, 2005, the Company recordedregistration delay expense totaling $515,967. Of this amount, $271,960 wassettled by the issuance of 92,705 shares of common stock and $72,017 was paidin cash prior to December 31, 2005 and $135,977 was settled by the issuance of49,596 shares of common stock and $36,013 was paid in cash subsequent toDecember 31, 2005. As of March 31, 2006, the Company’s Registration Statementon Form SB-2 had not been declared effective by the SEC and the Companycontinues to be liable to the Investors for the aforementioned liquidateddamages.

**Stock SubscriptionReceivable**

During 2004, the Company issued 236,528 shares to anindividual investor for $119,175 of cash proceeds and a subscription receivableof $230,825. The investor has pledged assets to a Peruvian bank which secureone of the Company’s performance bonds. The subscription receivable is due atsuch time as the Company obtains its own performance bond to replace the oneposted by the investor or until the performance bond is no longer required.

**PotentiallyDilutive Securities**

In addition to theshares issued and outstanding, the Company has the following potentiallydilutive securities. None of these potentially dilutive shares have beenincluded in the calculation of earnings per share as the effect would beanti-dilutive.
| ** **                                                          | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Stock options  outstanding                                          |       | 2,878,652                   |       | 3,555,041                   |       |
| Warrants  outstanding                                               |       | 100,000                     |       | 1,129,000                   |       |
| Shares issuable  to consultant for services                         |       | 10,000                      |       | —                      |       |
| Contingent  incentive earn-out shares                               |       | 485,000                     |       | —                      |       |
| Earn-out shares                                                     |       | —                      |       | 9,000,000                   |       |
| Contingent  Merger earn-out shares                                  |       | 9,000,000                   |       | 9,000,000                   |       |
| Total potentially dilutive securities issued                        |       | 12,473,652                  |       | 22,684,041                  |       |
|                                                                |       |                        |       |                        |       |
| Shares available  pursuant to Long-Term Incentive Compensation Plan |       | 2,880,000                   |       | —                      |       |

 

**Stock OptionsOutstanding**

In connection with the Merger, BPZ, as the accountingacquirer, assumed all Navidec stock options outstanding, which were fullyvested on the date of the Merger and expire on September 10, 2007.Exercise prices on these stock options range from $1.30 to $1.93 per share.Under the terms of the Merger agreement, NFS is entitled to receive allproceeds from the exercise of these options. As of December 31, 2004,there were 1,055,041 Navidec stock options outstanding. During the year endedDecember 31, 2005, 401,389 Navidec stock options were exercised and653,652 were outstanding as of the end of the period.

Additionally, the Company granted options to purchase1,000,000 shares of common stock at an exercise price of $1.30 per share to theformer CEO of Navidec in connection with his service as a director andfinancial consultant to the Company. Of such stock options, 500,000 were fullyvested on the date of the Merger. Vesting of the remaining 500,000 stockoptions is contingent upon the receipt of additional investment proceedstotaling $6 million, including proceeds from the exercise of outstandingwarrants, provided such funding is received no later than September 10,2006. These stock options, when vested, will expire 10 years from the date ofgrant. They were recorded at a fair value of $1.20 per share using theBlack-Scholes model. The unvested options are being amortized over the 24-monthvesting period at the rate of $25,000 per month unless the Company concludesthat such options are no longer probable of vesting.

In connection with the Merger, BPZ also issued optionsto purchase 1,500,000 shares of common stock at an exercise price of $2.00 pershare to NFS. Such options expire on July 31, 2006. Subsequent to theMerger, NFS conveyed 540,000 of such options to third parties. During 2005,275,000 options had been exercised, resulting in net proceeds to the Company of$550,000. As of December 31, 2005 there were 1,225,000 of such optionsoutstanding, of which 810,000 were held by NFS.

All of the above stock options were recorded at fairmarket value on the date of the Merger. Accordingly, no disclosure of pro formaresults of operations under SFAS 123(R) is required.

**WarrantsOutstanding**

In connection with the Merger, BPZ, as the accountingacquirer, assumed outstanding warrants to purchase 1,129,000 shares of theCompany’s common stock. Of this total, 564,500 Class A warrants had anexercise price of $2.00 per share and 564,500 Class B warrants had anexercise price of $4.00 per share. All of such warrants were scheduled toexpire during 2005. As

46

----

of December 31, 2005, with the exception of 500of the Class A warrants, all of such warrants had been exercised, resulting innet proceeds to the Company of $3,318,260.

In connection with the private placement of 11,466,000shares of common stock, Morgan Keegan & Company, Inc. alsoreceived warrants to purchase 100,000 shares of the Company’s common stock atan exercise price of $3.00 per share. Such warrants expire on July 19,2010. These warrants were valued at $325,000 using the Black-Scholes model,which amount was treated as additional non-cash stock offering costs.

**Shares Issuablefor Services**

The Company has a contingent obligation to issue10,000 shares on May 21, 2006, pursuant to a service agreement, to a consultantfor legal and business advisory services to be rendered in Peru.

**ContingentIncentive Earn-Out Shares**

During 2005, the Company’s Board of Directors awardeda total of 485,000 shares of incentive stock awards to three of the Company’sofficers. The incentive stock awards vest and the earn-out shares are issuableonce the Company is entitled to receive as its proportionate share from grossproduction from any oil and gas wells owned or operated by the Company not lessthan 2,000 barrels of oil per day or its equivalent (approximately 12 millioncubic feet of gas per day) prior to December 28, 2007, the same target asthe Merger earn-out shares (see below). The total future stock-basedcompensation expense associated with these contingent incentive stock awards is$2,134,000 ($441,517 for 2005). As the Company has not yet obtained a firmfinancing commitment for its gas-to-power project, the Company does notconsider the achievement of this target to be probable for accounting purposesand is not currently accruing the associated stock-based compensation expense.

**Merger Earn-OutShares**

Under the terms of the Merger Agreement, the Companyis committed to issue 18,000,000 shares to the former shareholders of BPZ-Texason a contingent earn-out basis if the Company achieves certain reserve andproduction goals. The first earn-out target relating to reserves was achievedin December 2004 and 9,000,000 of the earn-out shares were issuable atthat time. However, the contingent earn-out shares could only be issued afterthe shareholders approved an increase in the number of authorized common sharesof the Company. The shareholders approved an increase in the number ofauthorized shares from 20,000,000 to 250,000,000 at its 2005 Annual Meetingheld on July 1, 2005 and the 9,000,000 shares were issued at that time.The remaining 9,000,000 earn-out shares are issuable once the Company isentitled to receive as its proportionate share from gross production from anyoil and gas wells owned or operated by the Company not less than 2,000 barrelsof oil per day or its equivalent (approximately 12 million cubic feet of gasper day) prior to December 28, 2007.

For accounting purposes, the earn-out arrangement istreated as a stock dividend because the earn-out is payable to the shareholdersof the accounting acquirer, BPZ-Texas. Accordingly, except for a retroactiveincrease in the number of common shares outstanding for all periods presented,no accounting entry is required upon the issuance of the earn-out shares.

**Long-TermIncentive Compensation Plan**

The BPZ Energy, Inc. 2005 Long-Term IncentiveCompensation Plan (the “LTIP” or “Plan”) permits the Board of Directors toaward eligible employees, directors and consultants with incentive-based andnon-incentive-based compensation. The maximum number of shares of stock of theCompany that may be subject to incentives under the Plan, including withoutlimitation incentive options is 4,000,000 shares, and such shares shall bereserved at all times until issued under the Plan. Of such amount, no more than1,600,000 shares in the aggregate shall be eligible for the issuance ofperformance shares, stock grants, restricted stock grants and other stock-basedincentives. The LTIP will be administered and managed within the discretion ofthe compensation committee of the Company or, in the absence of such committee,by the Board of Directors. Incentives under the LTIP may be granted to eligibleemployees, directors or consultants in any one or a combination of incentiveoptions, non-statutory stock options, stock appreciation rights, restrictedstock grants, stock grants and performance shares. As of December 31, 2005there were 2,880,000 of such shares available to be granted by the Company.

**Note 9 — Affiliateand Related Party Transactions**

As of December 31, 2005 and December 31,2004, the Company had no outstanding balances with affiliates or relatedparties.

The Company has identified costs that were incurred onits behalf by BPZ & Associates (“Associates”), BPZ-Texas’ parent prior tothe merger with Navidec. Associates incurred certain costs in support ofBPZ-Texas’ activities from its inception in August 2001 until the merger withNavidec on September 10, 2004. Specific costs incurred by Associates on behalfof BPZ-Texas have been included in BPZ-Texas’ financial statements.Additionally, all of Associates’ costs on BPZ-Texas’ projects in excess ofthird party reimbursements were included in BPZ-Texas’ financial statements inan effort to reflect all the costs of doing business. The Company believes itsallocation methodology is reasonable. The total costs allocated from Associatesto BPZ-Texas in 2004 were as follows:

|                                                  | ** ** | **January 1,  2004 to  September 10,  2004** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------------|------------|
| Costs  Allocations from Associates to BPZ-Texas: |       | $                                                           | 685,575    |   |
|                                                  |            |                                                             |            |  |

 

During 2004, BPZ-Texas made cash payments toAssociates totaling $789,438. Of such payments, $419,438 was attributable topersonnel and office costs incurred by Associates on behalf of BPZ-Texas. Theremaining amount of $370,000 related to the acquisition of SMCEcuador, Inc., with $167,500 paid to third parties and $202,500 paid forthe benefit of Associates.

47

----

**Note 10 — IncomeTaxes**

There was noincome tax expense or benefit for the years ended December 31, 2005 and 2004.The following table reconciles income taxes at the statutory rate to theCompany’s effective rate for the years ended December 31, 2005 and 2004:
| ** **                                       | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|--------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                             |       |      |       |      |       |
| Benefit computed  at the expected statutory rate |       | $         | (2,178,376 | )         | $          | (5,104,480 | ) |
| Less: valuation  allowance                       |       | 2,178,376 |       | 5,104,480 |       |
| Income tax expense                               |       | $         | —     |      | $          | — |   |

 

The Company recorded a valuation allowance for thefull amount of the deferred tax asset resulting from the income tax benefitabove, as it believes, based on the weight of available evidence, that it ismore likely than not that the deferred tax asset will not be realized.

**Note 11 —Commitments and Contingencies**

*Transfer of NFS*

On September 9, 2004 the day prior to the effectivedate of the Merger, Navidec assigned all of its pre-merger business operations,assets and liabilities to Navidec Financial Services, Inc. (“NFS”) and allissued and outstanding shares of NFS were subsequently transferred to theNavidec pre-merger shareholders of record as of September 9, 2004, for no cashconsideration.

The transfer of NFS shares was effected by NFS to thepre-merger Navidec shareholders of record as of September 9, 2004. Consistentwith the terms of the Merger Agreement, the Company had no control in theactions resulting in the transfer of the NFS shares and the Company believed,based on information provided by NFS and its advisors, that NFS had undertakenthe necessary actions to comply with applicable registration requirements.However, because a registration of the NFS shares was not effective at the timeof the transfer of the NFS shares, and has still not become effective, it mightbe determined that the transfer of the NFS shares was made without fullcompliance with registration or qualification requirements under applicable securitieslaws. As a result, although the Company took no actions in connection with thetransfer, because the Company is a successor by merger to Navidec, Inc., ifregulatory authorities determine that the Company did not comply withapplicable registration requirements in connection with the transfers, fines orother sanctions could be imposed on the Company with respect to thetransaction.

While federal and state regulators might conclude thatthe Company was subject to responsibility for registration of the shares, theCompany regards the possibility of liability arising from the distribution ofthe NFS shares as remote for the following reasons:

The Company took no action with respect to thetransfer of NFS shares which, pursuant to the terms of the Merger Agreement,was agreed to be handled by NFS, including any necessary qualifications orregistrations under applicable securities laws. Further, the Company believed,based on information provided by NFS and its advisors, that NFS had undertakento comply with all applicable registration requirements. Additionally, thetransfer, which was tantamount to a stock dividend to the pre-mergershareholders of Navidec, Inc., did not involve cash consideration, making afinding of any damage to shareholders unlikely. Finally, it is the Company’sunderstanding that NFS is taking action to register the NFS shares and iscommunicating with the SEC to address this issue to the SEC’s satisfaction.

Although the Company regards the possibility ofliability resulting from the transfer of NFS as remote, the Company doesrecognize that there may be a risk of such liability, and therefore cautionscurrent and prospective Company shareholders of such risk.

*Peru Properties*

The Company has various obligations and commitments inconnection with its properties in Peru. In connection with its Block Z-1property, the Company posted a $1,300,000 performance bond inJanuary 2005. To satisfy its current performance obligation under thesecond exploration phase of the Block Z-1 license agreement, the Company mustdrill at least one well or acquire a specified amount of seismic data prior toJuly 2006. The Company intends to satisfy its obligation by drilling awell which is currently budgeted to cost approximately $5,000,000. In addition,in connection with its Block XIX property, the Company posted a $350,000performance bond in August 2005. To satisfy its current performanceobligation under the second exploration phase of the Block XIX licenseagreement which began in August 2005 and will last for 24 months, theCompany must acquire and process a specified amount of 2-D seismic data andprepare an integrated geological, geochemical and reservoir engineeringevaluation of hydrocarbon prospects.

The Company acquired four offshore platforms in connectionwith its Block Z-1 property. The Company is currently in the process ofrefurbishing one of the offshore platforms and intends to maintain all of suchplatforms for use throughout the life of the Block Z-1 contract. Theseplatforms revert back to the Government of Peru at the end of the contract,provided they are in good working condition, with no further 

48

----

obligation to the Company to dismantle or remove them.The Company and its legal advisors have reviewed Peruvian law and existingregulations from the Peruvian Ministry of Energy and Mines in conjunction withthe requirements of FAS 143 “Accounting for Asset Retirement Obligations” (“ARO”)as it applies to tangible long lived assets and their future retirement anddismantlement. The Company has concluded that there is no legal obligation todismantle the platforms, as defined in FAS 143, and therefore recognition of anARO is not required. Accordingly, no such provision is reflected in theaccompanying consolidated financial statements. If, however, current laws orregulations were changed or the platforms were no longer in good working order,the Company could be obligated to dismantle and remove them. The currentestimated cost to dismantle an offshore platform is estimated to beapproximately $2 million, depending upon the condition of the platform and thedepth of the water.

On May 27, 2005, BPZ signed a Mandate Letter withthe International Finance Corporation (“IFC”), a member of the World Bank Groupbased in Washington, D.C., to facilitate the financing of the Company’s initialcapital expenditure program in Block Z-1 in northwest Peru. On November 1,2005, an amendment was signed extending the original term of the Mandate Letterfrom December 31, 2005 to August 31, 2006. The Mandate Letter specifiesthat IFC will appraise BPZ’s project in Peru to determine the feasibility andstructure of a potential financing transaction. Any IFC investment will dependon the project and the Company meeting IFC’s financing criteria, the overallfinancing plan being acceptable to IFC, approval of the investment bymanagement and the Board of IFC, and the execution of all appropriatedocumentation, in form and substance satisfactory to IFC. As part of theMandate, BPZ agreed to pay total fees of $285,000 during the appraisal periodand customary expenses. As of September 30, 2005, $85,000 of fees andapproximately $8,200 of reimbursable out-of-pocket expenses had been incurred.

In December 2005, the Company signed a drillingcontract with Petrex S.A., a subsidiary of Saipem SpA of Italy. Under thecontract, Petrex S.A. will provide a platform rig capable of drilling to 16,000feet and upgrade the rig to meet the Company’s specifications. The Companyintends to utilize the rig for the initial development of the Corvina gas fieldand may also utilize it for the expected development of the Albacora oil field,and potential appraisal wells in the Piedra Redonda gas field. The Company hasagreed to pay a $5.5 million fee to mobilize and upgrade the rig. In exchange,the Company will receive a competitive fixed day rate and exclusive rights touse the rig, at its option, during the two-year period commencing with deliveryof the rig.

In December 2005, the Company notified Perupetrothat it has exercised its exclusive option to convert the current TechnicalEvaluation Agreement (“TEA”) in Area VI, which covers 1,444,175 acres andencompasses the entire Lancones Basin, to a License Contract for theexploration and development of hydrocarbons. In addition, the Company announcedthat it will not apply for a license contract for Area XVI.

The Company will continue to make commitments in theordinary course of business as it pursues its development plans for theproperties.

*FinancingActivities*

In connection with the March 10, 2006 privateplacement of 1,670,000 common shares, the Company was obligated to prepare andfile with the SEC a Registration Statement on Form SB-2 within sixty days,and to use its best efforts to cause the Registration Statement to be declaredeffective by the SEC no later than ninety days, from March 8, 2006. If theRegistration Statement is not filed, or declared effective by May 9, 2006,the Company will be liable to the Investors for liquidated damages in an amountequal to 1.0% of the purchase price of the shares, approximately $50,100, foreach thirty day period until the Registration Statement is declared effectiveby the SEC.Such liquidated damages are payable in common stock or cash at the Company’ssole discretion. As of the date of this filing, the RegistrationStatement has not been declared effective by the SEC.

49

----

**Note 12 — LegalProceedings**

*SEC Inquiry ofNavidec*

Navidec, Inc. was advised in a letter datedFebruary 24, 2004 that the SEC was conducting an informal inquiry todetermine whether Navidec, Inc. had violated federal securities laws. TheSEC made an informal request that Navidec voluntarily produce certaindocuments, which were provided to the SEC in May 2004. Based on theinquiries made and the information requested, the Company believes that the SEC’sinvestigation relates, at least in part, to the restatement of reportedearnings for the first and second quarters of 2003 by Navidec, Inc. Thisrestatement was reported in Navidec, Inc.’s Form 10-Q for the thirdquarter of 2003 filed on December 11, 2003.

In December 2004, the Company received notice that theSEC had issued an Order Directing a Private Investigation and DesignatingOfficers to Take Testimony, and would be conducting a formal investigation. BPZis cooperating fully with the SEC in this matter. As of December 31, 2005, atotal of approximately $50,000, primarily in legal fees, had been incurred inconnection with the SEC investigation. Pursuant to the Merger Agreement, theCompany has been indemnified by NFS for the costs of the SEC investigation andNFS has borne the costs incurred to date. BPZ is not aware of the futureactions, if any, which the SEC intends to pursue in this matter, but noassurance can be given that the investigation will be resolved without negativeconsequences to the Company.

*Transfer ofOwnership in NFS*

On July 8, 2004, Navidec and BPZ-Texas entered into aMerger Agreement (the “Merger Agreement”) which was consummated on September10, 2004 (the “Merger”). The Merger Agreement provided that all of thepre-merger business operations, assets and liabilities of Navidec would betransferred to a wholly-owned subsidiary, Navidec Financial Services, Inc. (“NFS”),followed by the transfer of NFS to the pre-merger shareholders of record as ofSeptember 9, 2004, the day prior to the consummation of the Merger. See “*Business and Properties—Navidec Merger Transaction*,”“*Risk Factors - The transfer of NFS couldresult in liability to us because the shares transferred were not registeredwith the SEC,*” and Note 2 to the Consolidated Financial Statements,included in this filing, for detailed discussion regarding the Merger.

The Merger Agreement provided that the transfer of allof the pre-merger business operations, assets and liabilities of NFS waseffective as of September 9, 2004. Accordingly, the Company originally believedthat it had no continuing ownership of NFS and, therefore, did not account forthe post-merger operations of NFS in the presentation of its financialstatements. After receipt of comments from the SEC in connection with itsreview of the Company’s registration statement on Form SB-2 originally filed onJuly 27, 2005 and further review of this issue, the Company concluded it wasthe record, but not beneficial, owner of NFS shares, and that any ownershipinterest was at most temporary. The Company therefore decided to restate itsfinancial statements to more accurately reflect the impact of its temporaryownership of NFS on the equity method. However, the SEC continued to comment onthe accounting presentation of the Company’s ownership of NFS.

In part because of difficulty obtaining necessaryinformation from NFS to clarify the ownership issue, the Company commenced anaction against NFS (the “Action”) on or about February 13, 2006, in DistrictCourt, Arapahoe County, Colorado (the “Court”), seeking dissolution of NFS, theappointment of a receiver, and access to NFS corporate records. The Companycommenced the Action uncertain whether or when the required spin-off of NFSshares pursuant to the terms and conditions of the Merger had occurred underColorado corporate law. The Company asserted in the Action that it believed itwas a record shareholder of NFS as of the date of the request and had standingfor the relief sought. NFS denied that the Company had standing to act as ashareholder and asserted that the Company had not been a shareholder of NFSsince September 9, 2004.

See Note 14 — Subsequent Events for an updateregarding the legal proceedings related to the transfer of ownership in NFS.

**Note 13 — MinimumLease Payments**

The Company leases office space in Houston, Texasunder a five-year operating lease and in Lima, Peru under a month-to-monthoperating lease. Total rent expense incurred for the years endedDecember 31, 2005 and 2004 was approximately $98,000 and $18,000respectively.

**Note 14 —Subsequent Events**

On March 10, 2006 the Company completed a privateplacement of 1,670,000 shares of common stock, no par value, to fourinstitutional and accredited investors pursuant to a Stock Purchase Agreementdated as of March 8, 2006. The common stock was priced at $3.00 per shareresulting in proceeds to the Company of approximately $5.0 million. Inconnection with the offer and sale of the common stock in the privateplacement, the Company relied on an exemption from registration under Section4(2) of the Securities Act of 1933, as amended, and Regulation D, Rule 506promulgated thereunder. The sale of common stock was made to accreditedinvestors as defined in Regulation D, Rule 501(a). In the Stock PurchaseAgreement, the Company agreed to prepare and file with the Securities andExchange Commission (“SEC”), no later than 60 days after the closing date ofthe private placement, a registration statement covering resale of the sharesof common 

50

----

stock issued in the placement. The Company also agreedto use its best efforts to cause the registration statement to be declaredeffective no later than 5 business days after the Company receives a noticethat the SEC will not review the registration statement or 90 days after theclosing date if the SEC reviews the registration statement. If the Companyfails to file the registration statement before the deadline for such filing,or the registration statement is not declared effective within 30 days of thedeadline for it to be declared effective, the Company will be obligated to theInvestors for liquidated damages in an amount equal to 1.0% of the purchaseprice of the shares, for each thirty day period until the RegistrationStatement is declared effective by the SEC.

On May 19, 2006, the Company entered into a SettlementAgreement and Mutual Release (the “Agreement”) by and among the Company, NFSand John McKowen, the Chief Executive Officer of NFS and former Chief ExecutiveOfficer and Director of the Company (collectively, the “Parties”). TheAgreement settled all disputes amongst the Parties relating to the Action,seeking dissolution of NFS, the appointment of a receiver, and access to theNFS corporate records. The Agreement provided for (i) agreed access by theCompany to the financial records of NFS, (ii) a complete mutual releasebetween the Parties of any and all claims relating to the Action, and (iii) thegranting of certain rights extending the exercise period for options andwarrants held by NFS and certain of its affiliates, certain rights concerningcashless exercise of those securities if they are not registered by January 30,2007, and certain modifications to the registration rights held by NFS andcertain of its affiliates, permitting the Company to complete the registrationof securities issued in the $34.4 million private placement completed by theCompany in July, 2005, before registering Company securities held by NFS andcertain of its affiliates.

In addition, the Agreement provided that NFS wouldfile for declaratory relief or a declaratory action in the Court solely on theissue of whether the Company was a record owner of NFS shares at any time afterSeptember 9, 2004. On June 20, 2006, the Court issued its Findings of Fact andConclusions of Law (the “Order”) in connection with the declaratory action soughtby the Parties on the issue of our record ownership in NFS. The Order statedthat we were not a shareholder of NFS at any time after September 9, 2004.

**Item 8. Changes inand Disagreements with Accountants on Accounting and Financial Disclosures**

None.

**Item 8A. Controlsand Procedures**

**(a) Evaluationof Disclosure Controls and Procedures**

The Company maintains disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in its Exchange Act reports is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms, andthat such information is accumulated and communicated to its management,including its Chief Executive Officer, to allow timely decisions regardingrequired disclosure based closely on the definition of “disclosure controls andprocedures” in Rule 13a-15(e). In designing and evaluating the disclosurecontrols and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

As of the end of the period covered by this 2005 Form10-KSB/A (“Amendment No. 1”), we carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of ourdisclosure controls and procedures as defined in Rule 13a-15(e) of the ExchangeAct. Based upon that evaluation and the

51

----

restatements discussed below, our Chief ExecutiveOfficer and Chief Financial Officer concluded that, as of December 31, 2005,our disclosure controls and procedures were not effective to ensure that theinformation required to be disclosed in the Company’s Exchange Act reports wasrecorded, processed, summarized and reported on a timely basis.

On January 17, 2006, the Company amended its 2004Annual Report on Form 10-KSB/A and Quarterly Reports on Form 10-QSB/A for theperiods ended March 31, 2005 and June 30, 2005. This Amendment No. 1 amends theCompany’s 2005 Annual Report on Form 10-KSB filed on March 31, 2006. Thedeficiencies in our internal controls are related to the failure to properly (i) accountfor and describe the September 2004 merger with Navidec, Inc.; (ii) valuecertain options assumed by the Company; (ii) account for the post-mergeroperations of Navidec Financial Services, Inc.; and (iv) account forexpenses incurred on the Company’s behalf by its former parent, BPZ & Associates,Inc., prior to the merger. The Company’s management and Audit Committee havediscussed the restatement issues and related internal controls deficiencieswith Johnson Miller & Co., CPA’s PC, its independent registered publicaccounting firm, and we have appropriately recorded and disclosed those itemsin this Amendment No. 1.

**(b) Changesin Internal Controls over Financial Reporting**

We are in the process of improving our internalcontrols in an effort to remediate these deficiencies. These improvementsinclude strengthening our accounting staff through the hiring of a Controllerand an accounting and financial reporting manager in 2005 and 2006,respectively. We have also engaged an independent consulting firm to documentand test our internal controls and make recommendations for improvement.Additional effort may be needed to fully remedy these deficiencies and we arecontinuing our efforts to improve and strengthen our control processes andprocedures. Our management and directors will continue to work with ourauditors and other outside advisors to ensure that our controls and proceduresbecome adequate and effective.

**Item 8B. OtherInformation**

None.

**PART III**

**Item 9. Directors,Executive Officers Promoters and Control Persons; Compliance with Section 16(a)of the Exchange Act**

Thefollowing table sets forth the names of our directors and executive officersalong with their positions and ages as of December 31, 2005, except asotherwise noted. All directors have served since their appointment in September2004 except for Messrs. Lendrum, Miller and Strauch, who were appointed asdirectors in July 2005.
| **Name**                                    | ** ** | **Age** | ** ** | **Position**                                      |
|---------------------------------------------|------------|---------|------------|---------------------------------------------------|
| Dr. Fernando Zúñiga  y Rivero     |       | 78      |       | Chairman  of the Board                            |
| Manuel Pablo Zúñiga-Pflücker |       | 44      |       | Chief  Executive Officer, President, and Director |
| Frederic Briens                             |       | 46      |       | Chief  Operating Officer                          |
| Randall D. Keys(1)                          |       | 46      |       | Chief  Financial Officer                          |
| Edward G. Caminos(2)                        |       | 43      |       | Chief  Financial Officer, Corporate Controller    |
| Thomas Kelly(3)                             |       | 51      |       | Director                                          |
| Gordon Gray                                 |       | 53      |       | Director                                          |
| John J. Lendrum III                         |       | 55      |       | Director                                          |
| E. Barger Miller III                        |       | 67      |       | Director                                          |
| Dennis G. Strauch                           |       | 58      |       | Director                                          |

----

(1)             Resigned from all positionswith the Company and its subsidiaries effective June 15, 2006.

(2)             Appointed as interim ChiefFinancial Officer, effective June 15, 2006.

(3)             Resigned as director of theCompany, effective March 3, 2006.

Dr. Zúñiga y Rivero is the father of the Company’s President, CEO andDirector, Mr. Zúñiga-Pflücker. There are no other familyrelationships between any directors or executive officers of the Company. Setforth below are brief descriptions of the recent employment and businessexperience of the officers and directors of the Company.

**Dr. Fernando Zúñiga****y Rivero, Chairman of theBoard.**   Dr.Zúñiga y Rivero became Chairman ofthe Board of BPZ upon consummation of the Merger with Navidec, Inc. inSeptember 2004. Immediately prior to the Merger and since 1996, he served asChairman of BPZ & Associates Inc., the former parent company of BPZ—Texas.,which has been inactive subsequent to the Merger. Dr. Zúñiga y Rivero was also Energy Division project officer of TheWorld Bank, where he planned and implemented exploration promotion projects in58 countries, primarily in East and West Africa, Eastern Europe, Southeast Asiaand Latin America from 1979 to 1996. Dr. Zúñiga yRivero has fifty years of experience in the international energy industrystarting as an exploration geologist, biostratigrapher, and exploration head ofan 

52

----

Exxon affiliate in Peru; continuing as explorationproduction manager, integrated operations manager, general manager, andultimately serving as Chairman and CEO of Petroleos del Peru, the national oilcompany of Peru. Dr. Zúñiga y Rivero holds B.S., M.S.and Ph.D. in Geology from the University of San Augustin, Peru, and conductedpostgraduate studies at the University of California, Los Angeles. In April2005, Dr. Zúñiga y Rivero became a directorof Transmeridian Exploration, Inc., a public oil and gas company withoperations in Kazakhstan.

**Manuel Pablo Zúñiga-Pflücker****, President, Chief ExecutiveOfficer and Director.**   Mr. Zúñiga-Pflücker became President andDirector of BPZ upon consummation of the Merger with Navidec, Inc. in September2004 and in May 2005 assumed the additional title of Chief Executive Officer.Immediately prior to the Merger and since its formation in 2001, Mr. Zúñiga-Pflücker served as President of BPZ—Texas. Mr. Zúñiga-Pflücker also served as President of BPZ & Associates, Inc.,the former parent company of BPZ—Texas, from 1989 until its Merger withNavidec, Inc. in September 2004, at which time BPZ & Associates, Inc.became inactive. Mr. Zúñiga-Pflücker began his career withOccidental Petroleum Corporation. Mr. Zúñiga-Pflückerhas spent the past 20 years in the international oil and gas business, and hasbeen involved in projects throughout Latin America and other areas of the worldranging from exploitation of marginal oil and gas fields to frontier explorationprojects. He has also focused on the creative development of natural gas fieldsutilizing power generation and gas to liquids technology. He holds a B.S. inmechanical engineering from the University of Maryland as well as an M.S. inpetroleum engineering from Texas A&M University.

**Frederic Briens, Chief Operating Officer.**   Mr. Briens joined BPZas Vice President of Engineering in December 2004 and was named Chief OperatingOfficer in May 2005. From 2002 through 2004, Mr. Briens served as Geosciencesand Business Development Manager for Perenco in Venezuela. From 1999 to 2002,Mr. Briens was the Chief Reservoir Engineer for Lundin Petroleum inSwitzerland. Mr. Briens is a petroleum engineer with over 20 years of operatingexperience in international oil and gas projects spanning the globe. He hasalso served in senior technical and operating positions with Conoco,Schlumberger and Chevron. Mr. Briens holds an M.S. and a Ph.D. in petroleumengineering from Texas A&M University, an MBA from Colorado StateUniversity and an engineering degree from Ecole Centrale de Paris. Mr. Brienswas a co-founder of BPZ & Associates, Inc., a predecessor to the Company,in 1989.

**Randall D. Keys, Chief Financial Officer.**   Immediately prior tohis resignation, Mr. Keys served as Chief Financial Officer of BPZ, which hewas appointed to in May 2005. Mr. Keys was previously a financial consultant tothe Company from October 2004 until May 2005. From 2002 through 2004, Mr. Keysserved as a financial consultant and Chief Financial Officer of TransmeridianExploration, Inc., an Amex-listed oil and gas company with operations inKazakhstan. From 1998 to 2001, he served as Chief Financial Officer of CoreLaboratories, N.V., a NYSE-listed global oilfield service company, and one of itspredecessors. He earned a B.B.A. in accounting from the University of Texas andis a Certified Public Accountant. He also serves as a Director and Chairman ofthe Audit Committee of Far East Energy Corporation, a public oil and gascompany with coal-bed methane operations in China.

**Edward G.Caminos, Chief Financial Officer.**   Mr. Caminoswas appointed as interim Chief Financial Officer of the Company, effective June15, 2006. Mr. Caminos has served as Corporate Controller of the Company sinceJanuary 2005. Prior to joining the Company, Mr. Caminos served asDirector Financial Reporting for the Americas Division at Duke Energy fromJune 2004 to January 2005. From February 2001 to May 2004,Mr. Caminos served as Financial Reporting Manager and interimController for the Europe Division, prior to its sale, at Reliant Energy.

**Thomas Kelly, Director.**   Prior to hisresignation, Mr. Kelly served as a Director of BPZ upon consummation of theMerger with Navidec, Inc. in September 2004 until May 2006. Mr. Kelly alsoserved as Chief Executive Officer and Director of BPZ upon consummation of theMerger until May 2005. He is currently Chairman of the Board of United Fuel& Energy Corporation, a publicly-traded provider of fuel, lubricants andrelated services and was its CEO from 1998 through May 2004. He is also adirector of Allis Chalmers Energy, Inc. Mr. Kelly is an independent oil and gasproducer in Midland, Texas who has invested in a variety of acquisition,exploitation and exploration programs since 1980 and continuing from 2000 topresent. Prior to 2000, Mr. Kelly founded and managed several energy relatedcompanies including Baytech, Inc. and First Permian, LLC. He graduated with adegree in business from Baylor University.

**Gordon Gray, Director.**   Mr. Gray became aDirector of BPZ upon consummation of the Merger with Navidec, Inc. in September2004. Since 1982, Mr. Gray has served as President of Allied Crude Purchasing,Inc., a privately owned transportation company, which purchases crude oil atthe well site and transports it by truck or pipeline to sales points throughoutTexas and Eastern New Mexico. Mr. Gray has owned and operated oil productionand oil field service businesses for over 30 years. His activities are centeredin the Permian Basin area of West Texas.

**John J. Lendrum III.**   Mr. Lendrum became aDirector of BPZ in July 2005. Mr. Lendrum was appointed in April 2005 asPresident, Chief Operating Officer and a Director of Torch Energy AdvisorsIncorporated (“Torch”), a Houston-based company which specializes in theexploitation and development of oil and gas properties, mid-stream gas assets,and well servicing. From 1993 to 2005, Mr. Lendrum founded and served asPresident of Rockport Resources Capital Corporation, which focused on providingcapital to the energy industry. During this period, he was also a principal inStar Natural Gas Company, a privately-held company with mid-stream natural gasassets. Previously, Mr. Lendrum served as Executive Vice President and ChiefFinancial Officer of Torch and in senior financial and business developmentroles with the Torch managed companies of Nuevo Energy Company, Energy AssetsInternational and Bellwether Exploration. Mr. Lendrum began his career with theinternational public accounting firm of KPMG Peat Marwick and earned a BBA in Financeand completed his graduate studies in Accounting Theory at the University ofTexas at Austin. Mr. Lendrum serves as Chairman of the Company’s AuditCommittee.

53

----

**E. Barger Miller III.**   Mr. Miller became aDirector of BPZ in July 2005. Mr. Miller has served since 1990 as Chairman andCEO of E.B. Miller & Co., a privately held company which provides projectplanning and business development services for energy and power companies, primarilyin Latin America. He was recently involved in a large power transaction inEcuador and a downstream project in Bolivia. Mr. Miller has over 40 years ofbroad-based experience in the energy industry, including positions as CEO ofMinden Oil & Gas, Inc., a public exploration and production company, andinvestment banking positions with Graber, Miller, Ronn & Co. andCharterhouse Japhet. He began his career with Exxon Corporation. Mr. Millerholds an MBA from Northwestern University and a B.S. in Chemistry, with a minorin Petroleum Engineering, from Stanford University. Mr. Miller serves asChairman of the Company’s Nominating and Corporate Governance Committee.

**Dennis G. Strauch.**   Mr. Strauch became aDirector of BPZ in July 2005. Mr. Strauch has served since 2001 as ManagingGeneral Partner of Delmar Holdings, LP, a private firm which manages U.S. oiland gas properties. From 1992 to 2001, Mr. Strauch held various positions,including President and CEO, with Zarara Oil and Gas Limited and itspredecessors. Zarara, a publicly traded company in the US and UK, hadinternational oil and gas operations in Africa, the Middle East, the Far Eastand South America. Mr. Strauch has over 30 years experience in the oil and gasindustry with extensive international and domestic technical experience in theareas of acquisitions, reservoir engineering and economic evaluations. He beganhis career with Schlumberger and has served in senior management and technicalpositions with ARAMCO, Petro-Lewis, Whiting Petroleum and Geodyne Resources.Mr. Strauch holds an MBA from the University of Denver and a degree inGeophysics from the Colorado School of Mines. He is a Registered ProfessionalEngineer in the State of Colorado. Mr. Strauch serves as Chairman of theCompany’s Compensation Committee.

**Involvement in Certain Legal Proceedings**

To theknowledge of management, during the past five years, no present or formerdirector, executive officer or affiliate was involved in any legal proceedingeither individually or as an affiliate of a legal entity that requiresdisclosure.

**Section 16(a)Beneficial Ownership Reporting Compliance**

Based solely on a review of their Form 3, 4 and 5filings with the SEC, and amendments thereto, the Company believes that duringthe fiscal year ended December 31, 2005, all of its officers and directorstimely complied with the reporting requirements of Section 16(a) of theSecurities Exchange Act of 1934, except for Dr. Fernando Zúñiga y Rivero, who inadvertently filed one report late.

The Boardconsiders Mr. John J. Lendrum, III, one of the Company’s independent directors,to be an “audit committee financial expert” as defined under the applicablerules of the SEC.

**Code of Ethics**

We have adopted a Code of Ethics for ExecutiveOfficers, which applies to our Chief Executive Officer, Chief Operating Officerand our Chief Financial Officer. The full text of our Code of Ethics forExecutive Officers is published on our website, at www.bpzenergy.com, under the“Investor-Relations” caption. We intend to disclose future amendments to, orwaivers from, certain provisions of this Code on our website within fourbusiness days following the date of such amendment or waiver. Informationcontained on the website is not part of this report.

54

----

**Item 10. ExecutiveCompensation**

This section sets out the annual compensation paid duringthe year ended December 31, 2005 and the two prior fiscal years to our ChiefExecutive Officer and any other executive officers who received annualcompensation in excess of $100,000 during the last fiscal year.
|                                                | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **      | ** ** | ** **        | ** ** | **Long Term Compensation**     | ** ** |
|------------------------------------------------|------------|------------|------------|------------------------------|------------|-----------------|------------|-------------------|------------|------------------------------------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **      | ** ** | ** **        | ** ** | **Awards**                               | ** ** | **Payouts** | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Restricted**  | ** ** | **Securities**    | ** ** | ** **                               | ** ** | ** ** | ** ** |
| **Name and Principal Position** | ** ** | ** ** | ** ** | **Fiscal  Year  Ending**     | ** ** | **Salary  ($)** | ** ** | **Bonus(e)  ($)** | ** ** | **Other Annual  Compensation  ($)** | ** ** | **Stock  Awards  ($)** | ** ** | **Underlying  Options/SARS  (#)** | ** ** | **LTIP  Payouts  ($)** | ** ** | **All Other  Compensation  ($)** | ** ** |
| Dr.  Fernando Zúñiga y Rivero        |       | 2005       |       | $                            | 120,000    |            | —     |              | —     |                                     | —     |   | — |   | — |   | — |   |
| *Chairman of the Board*                        |       | 2004       |       | 40,000                       |       | —          |       | —            |       | —                                   |       | — |   | — |   | — |   |
|                                                |       | 2003       |       | —                       |       | —          |       | —            |       | —                                   |       | — |   | — |   | — |   |
|                                                | * *   | * *   | * *   | * *                     | * *   | * *        | * *   | * *          | * *   | * *                                 | * *   | * * | * * | * * | * * | * * | * * |
| Manuel Pablo Zúñiga-Pflücker    |       | 2005       |       | $                            | 120,000    |            | —     |              | —     |                                     | —     |   | — |   | — |   | — |   |
| *President,  Chief Executive*                  |       | 2004       |       | 40,000                       |       | —          |       | —            |       | —                                   |       | — |   | — |   | — |   |
| *Officer and  Director(a)*                     |       | 2003       |       | —                       |       | —          |       | —            |       | —                                   |       | — |   | — |   | — |   |
| * *                                       | * *   | * *   | * *   | * *                     | * *   | * *        | * *   | * *          | * *   | * *                                 | * *   | * * | * * | * * | * * | * * | * * |
| Frederic  Briens                               |       | 2005       |       | $                            | 120,000    |            | —     |              | —     |                                     | $          | 1,980,000 |   | — |   | — |   | — |   |
| *Chief Operating Officer(b)*                   |       | 2004       |       | 20,000                       |       | —          |       | —            |       | —                                   |       | — |   | — |   | — |   |
|                                                |       | 2003       |       | —                       |       | —          |       | —            |       | —                                   |       | — |   | — |   | — |   |
|                                                | * *   | * *   | * *   | * *                     | * *   | * *        | * *   | * *          | * *   | * *                                 | * *   | * * | * * | * * | * * | * * | * * |
| Randall D. Keys                                |       | 2005       |       | $                            | 90,000     |            | —     |              | —     |                                     | $          | 1,980,000 |   | — |   | — |   | — |   |
| *Chief  Financial Officer(c)*                  |       | 2004       |       | —                       |       | —          |       | —            |       | —                                   |       | — |   | — |   | — |   |
| * *                                       |       | 2003       |       | —                       |       | —          |       | —            |       | —                                   |       | — |   | — |   | — |   |
| * *                                       | * *   | * *   | * *   | * *                     | * *   | * *        | * *   | * *          | * *   | * *                                 | * *   | * * | * * | * * | * * | * * | * * |
| Thomas  Kelly                                  |       | 2005       |       | —                       |       | —          |       | —            |       | —                                   |       | — |   | — |   | — |   |
| *Former Chief Executive*                       |       | 2004       |       | —                       |       | —          |       | —            |       | —                                   |       | — |   | — |   | (d) |   |
| *Officer and Director(**d**)*                  |       | 2003       |       | —                       |       | —          |       | —            |       | —                                   |       | — |   | — |   | — |   |
|                                                |            |            |            |                              |            |                 |            |                   |            |                                          |            |  |  |  |  |  |  |  |  |  |  |

----

(a)             Mr. Zúñiga-Pflücker has been President and a Director of the Company since theMerger with Navidec, Inc. in September 2004. He was named Chief ExecutiveOfficer in May 2005.

(b)            Mr. Briens was hired as VicePresident of Engineering in December 2004 and was named Chief Operating Officerin May 2005. Mr. Briens received a restricted stock award of 450,000 sharesvalued at $4.40 per share, which was the closing market price of our commonstock on the date of grant. This restricted stock award vests in three equalannual installments beginning on May 16, 2006. As of December 31, 2005, theunvested restricted shares had a value of $1,912,500, based on our closingmarket price of $4.25 per share.

(c)             Mr. Keys served as afinancial consultant from October 2004 through May 2005 at which time he wasappointed Chief Financial Officer of the Company. Prior to his appointment asChief Financial Officer, Mr. Keys received total consulting fees of $108,300and 15,000 shares of common stock valued at $63,750. Mr. Keys received arestricted stock award of 450,000 shares valued at $4.40 per share, which wasthe closing market price of our common stock on the date of grant. Thisrestricted stock award vests in three equal annual installments beginning onMay 16, 2006. As of December 31, 2005, the unvested restricted shares had avalue of $1,912,500, based on our closing market price of $4.25 per share. AsMr. Keys resigned from all positions with the Company and its subsidiarieseffective June 15, 2006, the remaining 300,000 unvested restricted shares wereforfeited.

(d)            Mr. Kelly was ChiefExecutive Officer of the Company from the Merger with Navidec, Inc. inSeptember 2004 until May 2005, when he was succeeded by Mr. Zúñiga-Pflücker. Mr. Kelly continues as a Director of the Company. Seediscussion of stock awarded to Mr. Kelly prior to the Merger in “OtherCompensation and Employment Agreements or Arrangements”, below.

(e)             The Board of Directors hasnot made a formal decision with regard to any discretionary bonus compensationfor the year ended December 31, 2005.

**OPTIONS/SARGRANTS IN LAST FISCAL YEAR**

The following table sets forth information concerning theCompany’s grant of options to purchase shares of the Company’s common stock andstock appreciation rights (“SARs”) during the fiscal year ended December 31,2005, to the Company’s Chief Executive Officer and to any other executiveofficers who earned more than $100,000 during the fiscal year ended December31, 2005:
| **Name**                                    | ** ** | ** ** | ** ** | **Number Of  Securities  Underlying  Options/SARs  Granted (#)** | ** ** | **Percent Of Total  Options/SARs  Granted To  Employees in  Fiscal Year** | ** ** | **Exercise Or  Base Price  ($/SH)** | ** ** | **Expiration  Date** | ** ** |
|---------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------|------------|
| Dr. Fernando Zúñiga  y Rivero     |       | —     |       | —                                                                     |       | —                                                                                             |       | —                                        |       |
| Manuel Pablo Zúñiga-Pflücker |       | —     |       | —                                                                     |       | —                                                                                             |       | —                                        |       |
| Frederic Briens                             |       | —     |       | —                                                                     |       | —                                                                                             |       | —                                        |       |
| Randall D. Keys                             |       | —     |       | —                                                                     |       | —                                                                                             |       | —                                        |       |
| Thomas Kelly                                |       | —     |       | —                                                                     |       | —                                                                                             |       | —                                        |       |

 

**AGGREGATEDOPTION/SAR EXERCISES IN LAST FISCAL YEARAND YEAR-END OPTION/SAR VALUES**

The following table contains information with respect tothe exercise of options to purchase shares of common stock during the fiscalyear ended December 31, 2005 by the Company’s Chief Executive Officer and anyother executive officers who earned more than $100,000 during the fiscal yearended December 31, 2005:

55

----

 
| **Name**                                    | ** ** | ** ** | ** ** | **Shares Acquired  On Exercise (#)** | ** ** | **Value  Realized ($)** | ** ** | **Number Of  Unexercised  Securities  Underlying  Options/SARs  At Year End (#)  Exercisable/  Unexercisable** | ** ** | **Value Of  Unexercised  In The-Money  Option/SARs  At Year End ($)  Exercisable/  Unexercisable** | ** ** |
|---------------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
| Dr. Fernando Zúñiga  y Rivero     |       | —     |       | —                                              |       | —                       |       | —                                                                                                                             |       |
| Manuel Pablo Zúñiga-Pflücker |       | —     |       | —                                              |       | —                       |       | —                                                                                                                             |       |
| Frederic Briens                             |       | —     |       | —                                              |       | —                       |       | —                                                                                                                             |       |
| Randall D. Keys                             |       | —     |       | —                                              |       | —                       |       | —                                                                                                                             |       |
| Thomas Kelly                                |       | —     |       | —                                              |       | —                       |       | —                                                                                                                             |       |

 

**LONG-TERMINCENTIVE PLANS—AWARDS IN LAST FISCAL YEAR**

The following table contains information with respect tothe awards made to the Company’s Chief Executive Officer and to any otherexecutive officers who earned more than $100,000 during the fiscal year ended December31, 2005 under the Company’s Long-Term Incentive Plans during the fiscal yearended December 31, 2005:
| ** **                                  | ** ** | **Number Of  Shares, Units** | ** ** | **Performance  Or Other  Period Until** | ** ** | **Estimated Future Payouts Under  Non-Stock Price-Based Plans** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|---------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| **Name**                                    | ** ** | ** **                             | ** ** | **Or Other  Rights (#)**                | ** ** | **Maturation  Or Payout**                                                           | ** ** | **Threshold  (#)** | ** ** | **Target  (#)** | ** ** | **Maximum  (#)** | ** ** |
| Dr. Fernando Zúñiga  y Rivero     |       | —                                 |       | —                                            |       | —                                                                                   |       | — |   | — |   |
| Manuel Pablo Zúñiga-Pflücker |       | —                                 |       | —                                            |       | —                                                                                   |       | — |   | — |   |
| Frederic Briens(a)                          |       | 225,000                                |       | 12/28/2007                                        |       | 225,000                                                                                  |       | 225,000 |   | 225,000 |   |
| Randall D. Keys(a)                          |       | 225,000                                |       | 12/28/2007                                        |       | 225,000                                                                                  |       | 225,000 |   | 225,000 |   |
| Thomas Kelly                                |       | —                                 |       | —                                            |       | —                                                                                   |       | — |   | — |   |
|                                             |            |                                        |            |                                                   |            |                                                                                          |            |  |  |  |  |  |  |

----

(a)             Messrs. Briens and Keys eachreceived a contingent incentive stock award of 225,000 shares, which vest and areissuable once the Company is entitled to receive as its proportionate sharefrom gross production from any oil and gas wells owned or operated by theCompany not less than 2,000 barrels of oil per day or its equivalent(approximately 12 million cubic feet of gas per day) prior to December 28,2007. This vestingprovision is the same as the second earn-out target under the Merger Agreement,as discussed in “Business and Properties — Navidec Merger Transaction”,included herein. As Mr. Keys resigned from all positions with the Company andits subsidiaries effective June 15, 2006, the 225,000 unvested contingentincentive stock award was forfeited.

**Officer Compensation and Employment Agreements orArrangements**

We have no employment agreements with any of our executiveofficers. Each of our executive officers currently receives a base salary of$120,000 per year. Each is eligible for cash bonus compensation at thediscretion of the Board of Directors, but there is no formal plan covering suchbonuses, nor were any bonuses paid for the fiscal year ended December 31, 2004.The Board has not made a formal decision with regard to any bonus compensationfor the year ended December 31, 2005.

Mr. Kelly, the former Chief Executive Officer and aDirector of the Company, did not draw any salary from the Company during 2004,including periods prior to and after the consummation of the Merger withNavidec. Prior to the Merger, BPZ-Texas issued 1,683,236 shares of common stockto Mr. Kelly as compensation for financial advisory services in arranging themerger with Navidec, assisting with the private placement, and helping theCompany identify potential financing sources. Mr. Kelly also provided certainletter of credit guarantees in favor of the Company. Mr. Kelly is entitled toreceive earn-out shares, when and if they are issued, on a proportionate basiswith the other pre-Merger shareholders of BPZ-Texas. See “Business andProperties — Navidec Merger Transaction and Note 9 to the December 31, 2004 and2003 Consolidated Financial Statements, included herein, for further discussionabout the earn-out shares.

**Long-Term Incentive Plan**

The BPZ Energy, Inc. 2005 Long-Term Incentive CompensationPlan (“LTIP”) reserves 4,000,000 shares of common stock for awards under theplan. Of such amount, no more than 1,600,000 shares in the aggregate shall beeligible for the issuance of designated stock-based incentives, includingperformance shares, stock grants, restricted stock grants and other designatedstock-based incentives. As of December 31, 2005, we had issued restricted stockawards totaling 1,120,000 shares and had 2,880,000 shares available for futureawards under the LTIP, of which 480,000 are available for issuance ofdesignated stock-based incentives.

56

----

In connection with the Merger, BPZ assumed the Navidec 2004Stock Option Plan (the “Navidec Plan”), which provided for the issuance of upto a maximum of three million shares of no par value common stock covered bythis plan. Subsequent to the Merger with Navidec, Inc., the Companydiscontinued the Navidec Plan and no further options were granted under theNavidec Plan. As of December 31, 2005, there were 653,652 remaining stockoptions outstanding under the Plan, all of which are fully vested and expire onSeptember 10, 2007.

**Director Compensation**

There arecurrently no arrangements to pay any cash compensation, such as annual retaineror meeting fees to Directors. Directors are entitled to receive reimbursementfor reasonable direct expenses incurred in attending meetings of the Board ofDirectors. During 2004, there were no payments of director fees to any of theDirectors. In July 2005, the Company approved a grant of 50,000 shares ofrestricted common stock, vesting at the end of two years from the date ofgrant, to each of the Company’s three newly appointed independent directors,Messrs. Lendrum, Miller and Strauch.

**Limitation of Liability and Indemnification**

OurArticles of Incorporation contain a provision eliminating our directors’liability to us or our shareholders for monetary damages for a breach of theirfiduciary duty. However, a director’s liability is not eliminated incircumstances involving certain wrongful acts, such as the breach of a director’sduty of loyalty or acts or omissions which involve intentional misconduct or aknowing violation of law. Our Articles of Incorporation also obligate us toindemnify our directors and officers to the fullest extent permitted underColorado law. While we believe that these provisions are standard and necessaryto assist us in attracting and retaining qualified individuals to serve asdirectors, they could also serve to insulate our directors against liabilityfor actions which damage us or our shareholders. Furthermore our assets couldbe used or attached to satisfy any liabilities subject to such indemnification.

**Item 11. SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters**

The following table sets forth information as of December31, 2005, concerning the beneficial ownership of BPZ’s common stock by eachperson who beneficially owns more than five percent of the common stock, itsaffiliates, and by each of BPZ’s executive officers and directors, and by allexecutive officers and directors as a group.
| **Name and Address of Beneficial Owner(1)**         | ** ** | ** ** | ** ** | **Number of Shares of  Common Stock  Beneficially Owned** | ** ** | **Percent of  Beneficial  Ownership(2)** | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| Gordon Gray(3)                                                               |       | 3,710,774  |       | 9.2                                                                                | %          |
| Thomas Kelly                                                                 |       | 3,465,486  |       | 8.6                                                                                | %          |
| Fernando Zúñiga y Rivero(4)                                        |       | 1,699,477  |       | 4.2                                                                                | %          |
| Manuel Pablo Zúñiga-Pflücker                                  |       | 3,304,539  |       | 8.2                                                                                | %          |
| Frederic Briens                                                              |       | 112,348    |       | 0.3                                                                                | %          |
| Dennis G. Strauch                                                            |       | 25,000     |       | 0.1                                                                                | %          |
| Randall D. Keys                                                              |       | 15,000     |       | 0.0                                                                                | %          |
| John J. Lendrum III                                                          |       | —     |       | —                                                                             |       |
| E. Barger Miller III                                                         |       | —     |       | —                                                                             |       |
| All directors and executive officers as a group (nine  persons)              |       | 12,332,624 |       | 30.6                                                                               | %          |
| Allied Crude Purchasing, Inc.(3)  3900 West Highway 180  Snyder, Texas 79549 |       | 3,710,774  |       | 9.2                                                                                | %          |
| John R. McKowen(5)                                                           |       | 2,010,295  |       | 4.8                                                                                | %          |

----

(1)             Except as indicated herein,the business address for each beneficial owner is 580 Westlake Park Blvd, Suite525, Houston, Texas 77079. The principal business address for Mr. McKowen is6399 S. Fiddler’s Green Circle, Suite 300, Greenwood Village, CO 80111.

(2)             The calculations ofpercentage beneficial ownership are based on 40,349,979 shares issued as ofDecember 31, 2005, plus any potentially dilutive securities for each person orgroup. Of such issued shares, 707,903 shares are held by Navidec FinancialServices, Inc., an affiliate of the Company.

(3)             The shares reflected aboveas beneficially owned by Mr. Gray consist of 3,710,774 shares that hebeneficially owns and controls through his sole ownership of Allied CrudePurchasing, Inc.

(4)             The number of sharesreflected above as beneficially owned by Mr. Zúñiga yRivero does not include 158,595 shares held of record by his wife, Blanca Pflücker de Zúñiga, as Mr. Zúñiga y Rivero disclaims beneficial ownership of these shares.

(5)             The number of shares ofcommon stock beneficially owned by Mr. McKowen includes (i) options topurchase 375,000 shares of common stock which are exercisable within 60 days ofDecember 31, 2005, (ii) 707,903 shares of common stock held by Navidec 

57

----

                           Financial Services, Inc. (“NFS”) and (iii) warrants topurchase 810,000 shares of the Company’s common stock at an exercise price of$2.00 per share held by NFS. Mr. McKowen is the Chief Executive Officer of NFS,an affiliate of the Company and was Chief Executive Officer of the Company fromAugust 2003 until September 2004. He served as a Director of the Company fromDecember 2002 until July 2005. The number of shares of common stockbeneficially owned by Mr. McKowen excludes 118,382 shares and options topurchase 375,000 shares of common stock which were conveyed to his wife, fromwhom he is legally separated pursuant to a qualified domestic relations order,as Mr. McKowen disclaims beneficial ownership of these shares.

Rule 13d-3under the Securities Exchange Act of 1934, provides for the determination ofbeneficial owners of securities. That rule includes as beneficial owners ofsecurities, any person who directly or indirectly has, or shares, voting powerand/or investment power with respect to such securities. Rule 13d-3 alsoincludes as a beneficial owner of a security any person who has the right toacquire beneficial ownership of such security within sixty days through anymeans, including the exercise of any option, warrant or conversion of asecurity. Any securities not outstanding which are subject to such options,warrants or conversion privileges are deemed to be outstanding for the purposeof computing the percentage of outstanding securities of the class owned bysuch person. Those securities are not deemed to be outstanding for the purposeof computing the percentage of the class by any other person. Included in thistable are only those derivative securities that have exercise prices which itis reasonable to believe could be “in the money” within the next sixty days.

**Equity Compensation Plan Information** (as ofDecember 31, 2005)
| ** **                                                     | ** ** | **Number of   securities to  be issued upon   exercise  of outstanding   options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **(a)**                                                                                                                                                    | ** ** | **(b)**                                                                                                     | ** ** | **(c)**                                                                                                                                                                                                      | ** ** |
| *Equity compensation plans  approved by security holders:*     | * *   | * *                                                                                                                                                   | * *   | * *                                                                                                    | * *   | * *                                                                                                                                                                                                     | * *   |
| BPZ Long  Term Incentive Compensation Plan                     |       | —                                                                                                                                                     |       | $                                                                                                           | —     |                                                                                                                                                                                                         | 2,880,000  |   |
| *Equity compensation plans not  approved by security holders:* | * *   | * *                                                                                                                                                   | * *   | * *                                                                                                    | * *   | * *                                                                                                                                                                                                     | * *   |
| Contingent  Incentive Earn-Out Shares                          |       | 485,000                                                                                                                                                    |       | $                                                                                                           | —     |                                                                                                                                                                                                         | —     |   |
| Navidec,  Inc. 2004 Stock Option Plan                          |       | 653,652                                                                                                                                                    |       | 1.67                                                                                                        |       | —                                                                                                                                                                                                       |       |
| Warrants  pursuant to Business Consulting Agreement            |       | 1,125,000                                                                                                                                                  |       | 2.00                                                                                                        |       | —                                                                                                                                                                                                       |       |
| Stock  Options pursuant to Director’s Agreement           |       | 1,000,000                                                                                                                                                  |       | 1.30                                                                                                        |       | —                                                                                                                                                                                                       |       |
| Total not  approved by security holders                        |       | 3,263,652                                                                                                                                                  |       | 1.42                                                                                                        |       | —                                                                                                                                                                                                       |       |
| Total all compensation plans                                   |       | 3,263,652                                                                                                                                                  |       | 1.42                                                                                                        |       | 2,880,000                                                                                                                                                                                                    |       |

 

**Description of Equity Compensation Plans Not Approved bySecurity Holders**

**Contingent Incentive Earn-Out Shares**

In July 2005, we awarded contingent incentive stock awardstotaling 485,000 shares to three of the Company’s officers, two of whom areexecutive officers. The incentive stock awards vest and are issuableonce the Company is entitled to receive as its proportionate share from grossproduction from any oil and gas wells owned or operated by the Company not lessthan 2,000 barrels of oil per day or its equivalent (approximately 12 millioncubic feet of gas per day) prior to December 28, 2007. This vesting provision isthe same as the second earn-out target under the Merger Agreement, as discussedin “Business and Properties — Navidec Merger Transaction,” included herein.

**Navidec, Inc. 2004 Stock Option Plan**

Subsequentto the Merger, the Company discontinued the Navidec 2004 Stock Option Plan (the“Navidec Plan”) and no further options were granted under the Navidec Plan. Thefollowing discussion pertains to the period prior to the Merger.

On April26, 2004, the Board of Directors of Navidec, Inc. adopted the Navidec Plan forcurrent or former key employees, consultants and members of the Board ofDirectors of the Company or a subsidiary of the Company providing materialservices to the Company. The Navidec Plan was included as an exhibit to aregistration statement on Form S-8 filed on June 15, 2004. The Board ofNavidec, Inc. administers the Navidec Plan, or the Board may appoint acommittee of two or more non-employee directors to administer the Navidec Plan.The Board or such committee may, in its sole discretion, select eligibleoptionees. The Board may also amend, modify or terminate the Plan at any time.None of these actions, however, shall affect any outstanding option under theNavidec Plan without the consent of the optionee holding the option.

58

----

The Navidec Plan reserves 3,000,000 shares of common stockfor issuance upon exercise of options. During the period from the establishmentof the Navidec Plan until the date of the Merger, Navidec issued options topurchase 2,157,361 shares of common stock at an average exercise price of $1.45per share. The Board will adjust the aggregate number of shares under the Planif there is any change in the outstanding shares of stock of the Companybecause of a stock dividend or split, recapitalization, reclassification orother similar capital change. The options granted under the Plan expire on theearliest to occur of (i) the date set forth in such option, not to exceed10 years from the date of grant; (ii) the third anniversary of thecompletion of the merger or sale of substantially all of the stock or assets ofthe Company with or to another company in which the Company is not thesurviving corporation (except for merger with a wholly owned subsidiary); or(iii) the termination of the employment of an optionee for cause by theCompany. Options may be subject to a vesting schedule as set forth in an optionagreement. Notwithstanding any other terms, an option is fully vested andexercisable (i) immediately prior to the completion of the merger or saleof substantially all of the stock or assets of the Company with or to anothercompany in which the Company is not the surviving corporation (except formerger with a wholly-owned subsidiary); (ii) upon termination of theoptionee’s employment because of death, disability or retirement upon reachingthe age of 65; or (iii) upon retirement from the Board upon reaching theage of 70 for non-employee Directors. The Board may reprice outstanding optionsafter the grant to provide for a lower option exercise price. The Board has thediscretion to cancel outstanding Options in return for payment if anacquisition occurs with respect to the Company. No future options will be issuedunder this plan.

**Warrants Issued Pursuant to Business Consulting Agreement**

In connection with the Merger, the Company entered into aBusiness Consulting Agreement with NFS, an affiliate of the Company, underwhich NFS provided investor relations, public relations, and other financialadvisory services to BPZ. Under this agreement, the Company granted to NFSfully vested warrants to purchase 1,500,000 shares of common stock at anexercise price of $2.00 per shares at any time prior to July 31, 2006. Pursuantto an agreement between the parties, NFS discontinued services under theBusiness Consulting Agreement effective May 6, 2005.

**Stock Options Issued Pursuant to Director’s Agreement**

In July 2004, BPZ entered into a Director Agreement withMr. McKowen, then the Chief Executive Officer of Navidec, related to hisservice as a Director to BPZ upon consummation of the Merger between Navidecand BPZ-Texas. Pursuant to that Agreement, Mr. McKowen received options toacquire up to 1,000,000 million shares of the Company’s common stock at $1.30per share. Of such option shares, 500,000 became vested upon the closing of the$6,000,000 private placement in September 2004. The remaining 500,000 shareswill vest upon the receipt of additional investment proceeds totaling$6,000,000, including proceeds from the exercise of outstanding warrants,provided such funding is received by the Company no later than September 10,2006. Such options, when vested, expire ten years from the date of grant. Mr.McKowen did not stand for re-election to the BPZ Board of Directors at theAnnual Meeting on July 1, 2005.

**Item 12. CertainRelationships and Related Transactions**

In October 2003, Navidec made a $200,000 investment in theKirby Enterprise Fund (the Fund), of which Chuck Kirby, a control person of theFund, was also at the time a person of at least 5% beneficial ownership of theCompany. The Fund is a limited liability company organized to invest in equitysecurities. This investment was sold during 2004 and was not part of the assetsconveyed to the Company in the Merger.

At December 31, 2003, the Company had a net receivable of$162,890 due from BPZ & Associates, Inc., which was the parent of theCompany prior to the Merger. Additionally, BPZ Energy, Inc. made additionalcash payments to BPZ & Associates, Inc. totaling $789,501 prior to theMerger. Of such payments, $370,000 relates to the acquisition of SMC Ecuador,Inc., of which $167,500 was paid to third parties and $202,500 was for thebenefit of BPZ & Associates, Inc. The remaining balance of $582,391 wasattributable to personnel and office expenses incurred by BPZ & Associates,Inc. on behalf of BPZ-Texas and has been recorded as part of the Company’sgeneral administrative expenses.

In 2003, BPZ-Texas entered into a loan agreement withAllied Crude Purchasing, Inc. (“Allied Crude”), a company controlled by GordonGray, a Director of the Company, under which BPZ-Texas made total borrowings of$665,000. Prior to the consummation of the Merger with Navidec, BPZ-Texasconverted this debt into 1,802,376 shares of common stock. Mr. Gray is entitledto receive additional earn-out shares, when and if they are issued, on aproportionate basis with the other pre-Merger shareholders of BPZ-Texas. See “Businessand Properties — Navidec Merger Transaction” and Note 9 to the December 31,2004 and 2003 Consolidated Financial Statements, included herein, for furtherdiscussion about the earn-out shares.

Prior to the consummation of the Merger with Navidec,BPZ-Texas issued 1,683,236 shares of common stock to Thomas Kelly, former ChiefExecutive Officer and a Director of the Company, as compensation for hisfinancial advisory services in arranging the merger with Navidec, assistingwith the private placement, and helping the Company identify potentialfinancing sources. Mr. Kelly also provided certain letter of credit guarantees,which are no longer in place. Mr. Kelly is entitled to receive additionalearn-out shares, when and if they are issued, on a proportionate basis with theother pre-Merger shareholders of BPZ-Texas. See “Business and Properties —Navidec Merger 

59

----

Transaction” and Note 9 to the December 31, 2004 and 2003Consolidated Financial Statements, included herein, for further discussionabout the earn-out shares.

In July 2004, BPZ entered into a Director Agreement withMr. McKowen, then CEO of Navidec, related to his service as a Director to BPZupon consummation of the Merger between Navidec and BPZ-Texas. Pursuant to thatAgreement, Mr. McKowen received options to acquire up to 1,000,000 millionshares of the Company’s common stock at $1.30 per share. Of such option shares,500,000 became vested upon the closing of the $6,000,000 private placement inSeptember 2004. The remaining 500,000 shares will vest upon the receipt ofadditional investment proceeds totaling $6,000,000, including proceeds from theexercise of outstanding warrants, provided such funding is received by theCompany no later than September 10, 2006. Such options, when vested, expire ten(10) years from the date of grant. Mr. McKowen did not stand for re-election tothe BPZ Board of Directors at the Annual Meeting on July 1, 2005.

On July 20, 2004, the Board of Directors of Navidec, Inc.approved an advance of $400,000 to BPZ-Texas under a promissory note dated July15, 2004. Navidec, Inc. funded this advance from proceeds received as a resultof recent stock option exercises and from the proceeds of a $260,000 personalloan made to Navidec, Inc. from John R. McKowen, a former director and formerofficer of the Company. This secured promissory note to BPZ-Texas was repaidfrom the proceeds of the private placement following the closing of the Merger.

In connection with the Merger, the Company entered into abusiness consulting agreement with NFS, an affiliate of the Company, underwhich NFS would provide investor relations, public relations, and otherfinancial advisory services to BPZ. Under this agreement, BPZ was obligated topay NFS fees of $30,000 per month for a period of twelve months ending on July31, 2005. This agreement was cancelable upon 30 days notice at any time afterOctober 31, 2004. Additionally, BPZ agreed to grant NFS fully vested warrantsto purchase 1,500,000 shares of Navidec, Inc. common stock at an exercise priceof $2.00 per shares at any time prior to July 31, 2006. Pursuant to anagreement between the parties, NFS discontinued services under the BusinessConsulting Agreement effective May 6, 2005.

As part of the Merger Agreement, BPZ & Associates, Inc.retained a 10% overriding royalty interest in the future gross revenues, net ofgovernment royalties, derived from the four blocks in Peru currently owned bythe Company. BPZ & Associates, Inc. is an entity controlled by certainofficers and directors of the Company. After further consideration, theprincipals of BPZ & Associates, Inc. concluded that it would be in the bestinterests of the Company and its shareholders to eliminate this overridingroyalty interest and to put into place a more traditional management incentiveplan based upon the results of the Company and other appropriate measures ofCompany success. Accordingly, BPZ & Associates, Inc. has relinquished this10% overriding royalty interest.

Except asset forth herein, there have been no material transactions, series of similartransactions or currently proposed transactions, to which we or any of oursubsidiaries was or is to be a party, in which the amount involved exceeds$60,000 and in which any director or executive officer or any security holderwho is known to the Company to own of record or beneficially more than 5% ofthe Company’s common stock, or any member of the immediate family of any of theforegoing persons, had a material interest.

60

----

**Item 13. Exhibits**
| 3.1    |   | Third  Amended and Restated Articles of Incorporation of BPZ Energy, Inc.  (incorporated by reference to Exhibit 3.1 to BPZ Energy, Inc.’s  Registration Statement on Form SB-2 Amendment No. 2 (SEC File  No. 333-122816)).                                                                                  |   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                                                                                                                                                                                                        |   |
| 3.2    |   | Amended  and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the  Company’s Form SB-2 (SEC File No. 333-14497) filed on  October 18, 1996).                                                                                                                                                           |   |
|   |   |                                                                                                                                                                                                                                                                                                                                        |   |
| 3.3    |   | Amendment  to Second Amended and Restated Articles of Incorporation of Navidec, Inc.  (incorporated by reference to Exhibit 3.4 to the Company’s Form SB-2  (SEC File No. 333-122816) filed on February 14, 2005).                                                                                            |   |
|   |   |                                                                                                                                                                                                                                                                                                                                        |   |
| 4.1    |   | Form of  Certificate for Common Stock of BPZ Energy, Inc., a Colorado corporation  (incorporated by reference to Exhibit 4.1 to the Company’s Form SB-2  (SEC File No. 333-122816) filed on February 14, 2005).                                                                                          |   |
|   |   |                                                                                                                                                                                                                                                                                                                                        |   |
| 4.2    |   | BPZ  Energy, Inc. 2005 Long-Term Incentive Compensation Plan (incorporated  by reference to Exhibit 4.1 to the Company’s Form S-8 (SEC File No. 333-  126388) filed on July 5, 2005).                                                                                                                                             |   |
|   |   |                                                                                                                                                                                                                                                                                                                                        |   |
| 10.1   |   | Merger  Agreement between Navidec, Inc. and BPZ, Inc. dated July 8,  2004 (incorporated by reference to Exhibit 10.1 from the Company’s  Form 8-K filed July 13, 2004).                                                                                                                                  |   |
|   |   |                                                                                                                                                                                                                                                                                                                                        |   |
| 10.2   |   | Closing  Agreement between Navidec, Inc. and BPZ, Inc. dated September 8,  2004(incorporated by reference to Exhibit 10.1 from the Company’s  Form 8-K filed September 14, 2004).                                                                                                                        |   |
|   |   |                                                                                                                                                                                                                                                                                                                                        |   |
| 10.3   |   | Business  Consulting Agreement dated July 8, 2004 by and between BPZ Energy, Inc.,  a Colorado corporation, and Navidec Financial Services, Inc., a Colorado  corporation (incorporated by reference to Exhibit 10.3 to the Company’s  Form SB-2 (SEC File No. 333-122816) filed on  February 14, 2005). |   |
|   |   |                                                                                                                                                                                                                                                                                                                                        |   |
| 10.4   |   | License  Contract from the Government of Peru for Block Z-1 dated November 30,  2001 (incorporated by reference to Exhibit 10.5 to the Company’s  Form SB-2 (SEC File No. 333-122816) filed on  February 14, 2005).                                                                                           |   |
|   |   |                                                                                                                                                                                                                                                                                                                                        |   |
| 10.5   |   | Amendment  to License Contract from the Government of Peru for Block Z-1 dated  February 3, 2005 (incorporated by reference to Exhibit 10.5 of the  Company’s Annual Report on Form 10-KSB for the year ended  December 31, 2004).                                                                                 |   |
|   |   |                                                                                                                                                                                                                                                                                                                                        |   |
| 10.6   |   | License  Contract from the Government of Peru for Block XIX dated December 12,  2003 (incorporated by reference to Exhibit 10.6 to the Company’s  Form SB-2 (SEC File No. 333-122816) filed on  February 14, 2005).                                                                                           |   |
|   |   |                                                                                                                                                                                                                                                                                                                                        |   |
| 10.7   |   | Technical  Evaluation Agreement from the Government of Peru for Area VI dated December 12,  2003 (incorporated by reference to Exhibit 10.7 to the Company’s  Form SB-2 (SEC File No. 333-122816) filed on  February 14, 2005).                                                                               |   |
|   |   |                                                                                                                                                                                                                                                                                                                                        |   |
| 10.8   |   | Promotional  Technical Evaluation Agreement from the Government of Peru for Area XVI dated  December 12, 2003 (incorporated by reference to Exhibit 10.8 to the  Company’s Form SB-2 (SEC File No. 333-122816) filed on  February 14, 2005).                                                                  |   |
|   |   |                                                                                                                                                                                                                                                                                                                                        |   |
| 14.1   |   | Code  of Ethics for Executive Officers (filed herewith).                                                                                                                                                                                                                                                                                    |   |
|   |   |                                                                                                                                                                                                                                                                                                                                        |   |
| 16.1   |   | Letter  from Hein & Associates, LLP (incorporated by reference to  Exhibit 16.1 from Navidec’s Form 8-K filed November 18,  2004).                                                                                                                                                                             |   |
|   |   |                                                                                                                                                                                                                                                                                                                                        |   |
| 21.1   |   | Subsidiaries  of the Small Business Issuer (filed herewith).                                                                                                                                                                                                                                                                                |   |
|   |   |                                                                                                                                                                                                                                                                                                                                        |   |
| 31.1   |   | Certification  of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. (filed herewith).                                                                                                                                                                                                            |   |
|   |   |                                                                                                                                                                                                                                                                                                                                        |   |
| 31.2   |   | Certification  of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. (filed herewith).                                                                                                                                                                                                            |   |
|   |   |                                                                                                                                                                                                                                                                                                                                        |   |
| 32.1   |   | Certification  of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  (filed herewith).                                                                                                                                                        |   |
|   |   |                                                                                                                                                                                                                                                                                                                                        |   |
| 32.2   |   | Certification of the  Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (filed  herewith).                                                                                                                                                        |   |

 

61

----

**Item 14. PrincipalAccountant Fees and Services**

Johnson Miller & Co., CPA’s PC has acted asindependent certified public accountants for the Company since November 17,2004, and has been selected by the Board to serve again in that capacity for2006.  The following table lists theaggregate fees and costs billed by Johnson Miller & Co., CPA’s PC for 2004and 2005 services identified below:
| ** **             | ** ** | **Amount Billed** | ** ** |
|------------------------|------------|------------------------|------------|
| ** **             | ** ** | **2004**               | ** ** | **2005** | ** ** |
| **Audit Fees**         |       | $                      | 72,445     |   | $ | 139,035 |   |
| **Audit-Related Fees** |       | 34,719                 | (a)        | 9,027 | (b) |
| **Tax Fees**           |       | —                 |       | — |   |
| **All Other Fees**     |       | —                 |       | — |   |
| **Total**              |       | $                      | 107,164    |   | $ | 148,062 |   |

----

(a)             Audit-related feesfor 2004 consist of:

·                    Out-of-pocket expenses

·                    Planning meetings

·                    Private placement memorandum andrelated pro forma financial statements

·                    Attendanceat the annual shareholders’ meeting

(b)            Audit-related fees for2005 consist of:

·                    Out-of-pocketexpenses

62

----

**SIGNATURES**

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized, on September 26, 2006.
|        | BPZ Energy, Inc. |
|--------|------------------|
|   |             |   |
|   | By:              | */s/ Manuel Pablo Zuniga-Pflucker* |
|   |             | Manuel Pablo  Zuniga-Pflucker |
|   |             | President &  Chief Executive Officer |

 

63

----