**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-KSB**

 
| **T**      | ** ** | **ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                         |
| ** ** | ** ** | **For the fiscal year ended December 31,  2005**                                                                                                                                                                        |
|       |       |                                                                                                                                                                                                                         |
| **£** | ** ** | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF  THE EXCHANGE ACT**                                                                                                                                               |
|       |       |                                                                                                                                                                                                                         |
| ** ** | ** ** | **For the transition period from                  to                ** |

 

**Commission file number: 000-30598**

 

**WHITTIER ENERGY CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Nevada**                                            | ** ** | **20-0539412**                     |
|-------------------------------------------------------|------------|------------------------------------|
| (State of incorporation)                              |       | (IRS employer  identification no.) |
|                                                  |       |                               |
| **333 Clay Street, Suite 700****Houston, Texas** | ** ** | **77002**                          |
| (Address of principal  executive  offices)            |       | (Zip code)                         |

 

**(713) 850-1880**

(Registrant’stelephone number, including area code)

 

SECURITIES REGISTERED UNDER SECTION 12(g) OFTHE ACT:

 

**Common Stock, $.001 par value**

(Title of class)

 

Check whether theissuer is not required to file reports pursuant to Section 13 or 15(d) ofthe Exchange Act. £

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). o Yes  ý No

 

Check whether theissuer (1) filed all reports required to be filed by Section 13 or 15(d) ofthe Exchange 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 ý  No o

 

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-B isnot contained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or anyamendment to this Form 10-KSB. o

 

The issuer’s revenues forits most recent fiscal year were $26,942,091.

 

The aggregate marketvalue of the voting Common Stock held by non-affiliates as of March 27,2006 was $96,993,304. The numberof shares of $0.001 par value Common Stock outstanding as of March 27, 2006was 12,515,265.

 

This Form 10-KSB isnot eligible for and is not in transitional small business disclosure format.

 

###  

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### **TABLE OF CONTENTS**

 
| **PART I.** |
|------------------|
| ** **       | ** ** | ** ** |
| **Item 1.**      | **Business** |   |
|             | The Company |   |
|             | History |   |
|             | Business Strategy |   |
|             | Acquisitions and  Dispositions of Oil and Gas Properties |   |
|             | Other Recent Developments |   |
|             | Marketing |   |
|             | Hedging Activities |   |
|             | Competition |   |
|             | Government Regulation |   |
|             | Forward-Looking Statements |   |
|             | Risks of Oil and Gas Activities |   |
|             | Employees |   |
|             | Our Executive Offices and  Website |   |
|             | Available Information |   |
|             |   |   |
| **Item 2.**      | **Description of Properties** |   |
|             | Oil and Gas Properties |   |
|             | Oil and Gas Reserves |   |
|             | Net Quantities of Oil and Gas  Produced |   |
|             | Productive Wells and Acreage |   |
|             |   |   |
| **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** |   |
|             | Market Information and  Holders of Common Stock |   |
|             | Holders of Record |   |
|             | Dividend Policy |   |
|             | Securities Authorized for  Issuance Under Equity Compensation Plans |   |
|             |   |   |
| **Item 6.**      | **Management’s Discussion and  Analysis of Financial Condition and Results  of Operations** |   |
|             | Executive Summary |   |
|             | Liquidity and Capital Resources |   |
|             | Capital Commitments and  Contingencies |   |
|             | Results of Operations |   |
|             | Off-Balance Sheet Arrangements |   |
|             |   |   |
| **Item 7.**      | **Financial Statements** |   |
| ** **       | ** ** | ** ** |
| **Item 8.**      | **Changes in and Disagreements  with Accountants** |   |
| ** **       | ** ** | ** ** |
| **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** |   |
| ** **       | ** ** | ** ** |
| **Item 12.**     | **Certain Relationships and  Related Transactions** |   |
| ** **       | ** ** | ** ** |
| **Item 13.**     | **Exhibits and Reports on Form 8-K** |   |
| ** **       | ** ** | ** ** |
| **Item 14.**     | **Principal Accounting Fees  and Services** |   |

 

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### **PART I**

###  

**Item 1. Business**

 

**The Company**

 

Whittier Energy Corporation, a Nevada corporation, isan independent oil and gas exploration and production company primarily engagedin the acquisition, exploration and development of oil and gas properties inthe continental United States. Our assets consist primarily of operated andnon-operated working interests, royalty interests, partnership interests, andmineral acreage in various oil and gas properties, principally located in theGulf Coast region, South Texas and the Permian Basin. References to “Whittier,”the “Company,” “we,” “us,”and “our” refer to Whittier and itssubsidiaries as of December 31, 2005, unless otherwise indicated.

 

**History**

 

Whittier was originally incorporated in theProvince of British Columbia, Canada, in 1986, under the name Global DataSystems Corp. Global Data Systems was later renamed Comtron Enterprises Inc. inNovember 1989. In October 1993, Comtron Enterprises changed its nameto Olympic Resources Ltd. (“Olympic”). Olympic divested most of its Canadianassets in 2000 and began focusing its attention on gas producing properties inthe United States. Olympic reincorporated into the State of Wyoming from theProvince of British Columbia on January 8, 2003. On September 10,2003, Olympic acquired Whittier Energy Company and Whittier Energy Company’sshareholders received approximately 85% of the outstanding shares of Olympic’svoting common stock. In December 2003, Olympic effected a one-for-tenreverse split of its common stock and merged with and into its subsidiary,Whittier Energy Corporation, a Nevada corporation. As of December 31,2005, Whittier Energy Company’s former shareholders own approximately 30% ofour outstanding common stock.

 

**BusinessStrategy**

 

Ourprimary objective is to build shareholder value by creating a well-capitalizedgrowth platform that provides an underlying base of assets and cash flowwe can grow through acquisitions and drilling. Our strategy has been growththrough acquisitions combined with a disciplined portfolio approach ofinvesting in lower risk development drilling with exposure to higher returnexploration opportunities. We have expanded our business strategy to encompassprospect generation and exploration activities as a result of our June 2005acquisition of RIMCO Production Company, Inc. (“RIMCO”). For 2006, we havebudgeted a total of $27.2 million for exploration and development activities,of which 70% is allocated to exploration. In pursuing our business strategy, wefocus on the following:

 

•                  ***Strategic Acquisitions***. We continually review opportunities toacquire producing properties in our core areas. We prefer negotiatedtransactions and pursue opportunities that contain proved reserve value as wellas meaningful exploitation and exploration upside potential.

 

•                  ***Accelerated Development ofExisting Properties***. We conduct detailed technical analyses of our properties which guideour efforts to add proved reserves and production through in-fill drilling,step-out drilling, well recompletions and low to medium risk exploitation andexploration projects.

 

•                  ***Exploration Activities***. We intend to conduct an activeexploitation and exploration program to grow our proved reserves, productionand cash flow, in part by utilizing the RIMCO exploration team to generatenew oil and gas prospects in our core areas. While we prefer to operate ourprojects, we continually review exploitation and exploration opportunitiesgenerated by industry partners. We will manage our financial and operationalrisks through sales of promoted interests to industry partners on a selectivebasis.

 

•                  ***Rationalization ofProperty Portfolio***. We actively pursue opportunities to reduce and control operatingcosts by selling marginal, high cost and non-core properties.

 

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•                  ***Maintenance of FinancialFlexibility***.We intend to manage and optimize our capital structure to maintain financialflexibility. A significant component of our strategy involves hedging a portionof our expected production to manage our exposure to commodity price and cashflow volatility. We believe our expanded base of internally generated cash flowand other financial resources, including our revolving credit facility andaccess to improved capital markets, will allow us to continue to pursuestrategic acquisitions and generate and participate in exploitation andexploration projects.

 

**Acquisitions and Dispositions of Oil and GasProperties**

 

Whittier maintains an ongoing portfoliooptimization program. We may engage in acquisitions of additional naturalgas or crude oil properties, additional interests in our existing assets orentities owning oil and gas properties or related assets. We may alsodivest non-core assets in order to maintain a well-balanced portfolio withhigh-quality, core properties.

 

*RIMCOAcquisition*

 

On June 15, 2005, Whittier acquired RIMCO, aprivately held Delaware corporation, for approximately $57.1 million, including$55 million in cash and $2.1 million in closing costs and net assumedliabilities. As a result of this transaction, we acquired working interests inapproximately 116 active wells and one unit in 18 producing fields principallylocated in the Gulf Coast region in Texas, Louisiana, and Alabama. Theproperties acquired are located primarily within Whittier’s core Gulf Coastarea, as well as two properties located in the Permian Basin. In Texas, majorproperties include the Tom East Field in Brooks County, the Esperson Dome Fieldin Liberty County, and the Windham Field in Midland County. In Louisiana, majorproperties include the West Coffee Bay Field in Lafourche Parish, the VintonDome Field in Calcasieu Parish, and the greater Duson area in Lafayette Parish.

 

On August 26, 2005, Whittier sold its interestin the Big Escambia Creek Field in Escambia County, Alabama for $4.2 million,with an effective date of May 1, 2005. We had acquired a minornon-operated working interest in approximately eighteen wells in the BigEscambia Creek Field as part of our acquisition of RIMCO. The asset wassold as part of our ongoing strategy of rationalization of non-coreproperties to redeploy the capital into other investments that we believe willgenerate higher overall returns for Whittier.

 

**OtherRecent Developments**

 

*Saleof Series A Preferred Stock*

 

In connection with the acquisition of RIMCO on June 15,2005, we issued and sold 852,912 shares of Series A 8% AutomaticallyConvertible Preferred Stock (“Series A Preferred Stock”) for approximately$45.9 million in net proceeds. The Series A preferred stock was offered andsold pursuant to the private placement exception from registration provided inRegulation D, Rule 506, under Section 4(2) of the Securities Actof 1933, as amended (the “Act”). Each share of Series A Preferred Stockwas convertible into 10 shares of our common stock at the option of the holderand was automatically converted into our common stock upon the completion of aone-for-three reverse stock split of our authorized and outstanding commonstock and the listing of our common stock on the NASDAQ National Market (the “NASDAQ”).

 

*One-for-ThreeReverse Split of our Common Stock*

 

On July 1, 2005, we effected a one-for-threereverse split of our authorized and outstanding shares of common stock.Immediately before the reverse split, Whittier had 100,000,000 shares of commonstock, par value $0.001 per share, authorized, of which 11,583,502 shares ofcommon stock were outstanding. As a result of the reverse split, Whittier had33,333,334 authorized shares of common stock, par value $0.001 per share outstanding.On October 19, 2005, we filed a Certificate of Amendment to our Articlesof Incorporation, increasing the number of authorized shares of Whittier commonstock to 100,000,000 shares. Neither the one-for-three reverse split nor the

 

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amendment to our Articles of Incorporation affected the number ofauthorized and outstanding shares of our Series A Preferred Stock.

 

*Conversionof Series A Preferred Stock and Listing of Common Stock on The NasdaqNational Market*

 

On December 27, 2005, all outstanding sharesof our Series A preferred stock automatically converted into a total of8,529,120 shares of our common stock in connection with the listing of ourcommon stock on the NASDAQ. On that same date, our outstanding shares of commonstock, including the common stock issued upon conversion of our Series APreferred Stock, were listed on the NASDAQ and began trading under the symbolWHIT.

 

*Conversionfrom Successful Efforts to Full Cost Accounting*

 

Inconjunction with the acquisition of RIMCO, Whittier adopted the full costmethod of accounting for its oil and gas activities. We believe that the fullcost method of accounting more appropriately reflects the operating results ofan independent oil and gas producer that expends significant amounts of capitalon exploration activities in order to discover proved reserves. Accordingly, weconcluded that full cost accounting is preferable to the successful effortsmethod of accounting for Whittier’s oil and gas activities on apost-acquisition basis. We arrived at this conclusion based on a number ofconsiderations, including: 1) the material size of the transaction and RIMCO’shistorical use of full cost accounting; 2) the composition of RIMCO’s acquiredassets; 3) the nature of RIMCO’s prospect generation business and technicalpersonnel; and 4) our anticipated exploration projects and capital expendituressubsequent to the acquisition.

 

*NewCredit Facility*

 

Inconnection with the acquisition of RIMCO, on June 15, 2005 Whittierentered into a $75 million revolving credit facility with BNP Paribas as thelead bank and administrative agent. Whittier initially borrowed $20 millionfrom the credit facility to partially fund the acquisition and to fully repayapproximately $8.5 million in principal and accrued interest outstanding on ourprevious revolving credit facility with Compass Bank, as well as $1 million ofbank debt held by RIMCO. During 2005, Whittier repaid $6 million in principaloutstanding on the credit facility, leaving $14 million in principaloutstanding as of December 31, 2005. The borrowing base of the credit facilitywas $26.5 million as of December 31, 2005, and is subject to review andadjustment on a semi-annual basis. Amounts outstanding under the revolver bearinterest at specified margins over the London Interbank Offered Rate (“LIBOR”)of 1.50% to 2.25%. Such margins fluctuate based on the utilization of the creditfacility. All amounts drawn under the revolver mature June 15, 2008.

 

*Repaymentof Convertible Promissory Note*

 

In June 2004, we issued a six-year,approximate $1.8 million subordinated note bearing interest at a rate of 7% perannum and convertible into our common stock at a conversion price of $6.00 per sharein connection with our acquisition of three South Texas gas properties. On July 22,2005, the holders of the note converted $714,936 of the outstanding principalon the note into 119,156 shares of our common stock at a conversion price of $6.00per share. On that same date, Whittier repaid approximately $1.1 million in remainingprincipal and $39,272in accrued but unpaid interest on thenote in cash.

 

**Marketing**

 

Wehave marketed the natural gas and oil produced from our properties throughtypical channels for these products. We generally sell our oil at local fieldprices paid by the principal purchasers of the oil produced. The majority ofour natural gas production is sold at current market rates. Both natural gasand oil are purchased by marketing companies, pipelines, major oil companies,public utilities, industrial customers and other users and processors ofpetroleum products. We are not confined to, or dependent upon, any onepurchaser or small group of purchasers. Accordingly, the loss of a singlepurchaser, or a few purchasers, would not have a long-term material effect onour business because there generally are numerous purchasers in the areas inwhich we sell our production.

 

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**Hedging Activities**

 

Weregularly hedge a portion of our production to reduce our exposure to oil andgas price volatility, as well as to achieve more predictable cash flows fromour oil and gas properties. Our current policy is to hedge a portion of our anticipatedfuture production, either when we believe it is justified by available futureoil and gas prices or in order to finance a planned acquisition of producingoil and gas properties. Gains or losses on both realized and unrealized hedgingtransactions are determined as the difference between the contract price and anapplicable settlement or reference price. Settlement gains and losses aredetermined monthly and are included as increases or decreases in oil and gasrevenues in the period the hedged production is sold. Any ineffective portion ofunrealized gains or losses of such hedges is recognized in earnings in theperiod they occur.

 

**Competition**

 

We compete in theexploration and production segment of the oil and gas industry with a number ofother companies. These companies include large multinational oil and gascompanies and other independent operators with greater financial resources andmore experience than Whittier. We compete both with major oil and gas companiesand with independent producers for, among other things, rights to develop oil andgas properties, access to limited pipeline capacity, procurement of availablematerials and resources, and hiring qualified personnel. We have notexperienced any significant difficulties in sourcing and acquiring the rawmaterials necessary to conduct our operations and do not have any suppliersthat we are principally dependent upon with regards to providing such rawmaterials.

 

#### **Government Regulation**

####  

Our drilling andproduction operations are subject to regulation under a wide range of state andfederal statutes, rules, orders and regulations. State and federal statutes andregulations govern, among other matters, the amounts and types of substancesand materials that may be released into the environment, the discharge anddisposition of waste materials, the reclamation and abandonment of wells andfacility sites and remediation of contaminated sites. They also require permitsfor drilling operations, drilling bonds and reports concerning operations. Thestates where we own properties and conduct exploration activities, and otherstates where we may acquire properties, may have regulationsgoverning conservation matters, including provisions for the unitization orpooling of oil and natural gas properties, the establishment of maximum ratesof production from oil and natural gas wells and the regulation of the spacing,plugging and abandonment of wells. The effect of these regulations is to limitthe amount of oil and natural gas we can produce from our wells, if any, and tolimit the number of wells or the locations at which we can drill. Moreover,each state generally imposes an ad valorem, production or severance tax withrespect to the production and sale of crude oil, natural gas and gas liquidswithin its jurisdiction.

 

*Environmental Regulations*

 

Our exploration,production and marketing operations are regulated extensively at the federal,state and local levels. These regulations affect the costs, manner andfeasibility of our operations. As an owner of oil and gas properties, we aresubject to federal, state and local regulation of discharge of materials into,and protection of, the environment. We have no material outstanding siterestoration or other environmental liabilities, and we do not anticipate thatwe will incur any material environmental liabilities with respect to ourproperties in the future. We believe we utilize operating practices that areenvironmentally responsible and meet, or exceed, regulatory requirements withrespect to environmental and safety matters. We carry general liability insurancein amounts we believe are consistent with industry custom and practice. Despitethe above, however, we may be required to make significant expenditures inour efforts to comply with the requirements of these environmental regulations,which may impose liability on us for the cost of pollution clean-upresulting from operations, subject us to liability for pollution damages andrequire suspension or cessation of operations in affected areas. Changes in oradditions to

 

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regulations regarding theprotection of the environment could increase our compliance costs and might adverselyaffect our business.

 

We are subject to state and local regulations thatimpose permitting, reclamation, land use, conservation and other restrictionson our ability to drill and produce. These laws and regulations can requirewell and facility sites to be closed and reclaimed. We generally acquire anddevelop interests in oil and gas properties that have been operated in thepast, and as a result of these transactions we may retain or assumeclean-up or reclamation obligations for our own operations or those of thirdparties.

 

We did not incur any material costs relating to ourcompliance with federal, state or local laws during the year ended December 31,2005.

 

**Forward-LookingStatements**

 

Includedin this annual report on Form 10-KSB are forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended. All statements, other thanstatements of historical facts, included in this Form 10-KSB that addressactivities, events or developments that we expect or anticipate will or may occurin the future are forward-looking statements. The words “will,” “should,” “believe,”“intend,” “expect,” “anticipate,” “project,” “estimate,” “predict,” “plan” andsimilar expressions are also intended to identify forward-looking statements.

 

Theseforward-looking statements include, but are not limited to, statementsregarding:

 

•                  estimates of proved reservequantities and net present values of those reserves;

 

•                  estimates of probable and possiblereserve quantities;

 

•                  reserve potential;

 

•                  business strategy;

 

•                  estimates of future commodity prices;

 

•                  amounts and types of capitalexpenditures and operating expenses;

 

•                  expansion and growth of our businessand operations;

 

•                  expansion and development trends ofthe oil and natural gas industry;

 

•                  production of oil and natural gasreserves;

 

•                  exploration prospects;

 

•                  wells to be drilled, and drillingresults;

 

•                  operating results and workingcapital; and

 

•                  future methods and types offinancing.

 

Suchforward-looking statements involve assumptions and are subject to known andunknown risks and uncertainties that could cause actual results or performanceto differ materially from those expressed or implied by such forward-lookingstatements. Although we believe that the assumptions reflected in suchforward-looking statements are reasonable, we can give no assurance that such assumptionswill prove to have been correct. Forward-looking statements speak only as ofthe date they are made and we undertake no obligation to update them.

 

**Risks of Oil and Gas Activities**

 

*Estimatesof Proved Oil and Gas Reserves.*Proved reserves are estimatedreserves of crude oil and natural gas that geological and engineering datademonstrate with reasonable certainty to be recoverable in future years

 

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from known reservoirsunder existing economic and operating conditions. Proved developed reserves arethose expected to be recovered through existing wells, equipment and operatingmethods.

 

Petroleum engineering is a subjective process ofestimating underground accumulations of oil and gas that cannot be measured inan exact manner. Estimates of economically recoverable oil and gas reserves andof future net cash flows depend upon a number of variable factors andassumptions, including:

 

•                  historical production from the area comparedwith production from other analogous producing properties;

 

•                  the assumed effects of regulations bygovernmental agencies;

 

•                  assumptions concerning future oil and gasprices; and

 

•                  assumptions concerning future operatingcosts, severance and excise taxes, development costs and workover and remedialcosts.

 

Because all reserve estimates are to some degreesubjective, each of the following items may differ materially from thoseassumed in estimating reserves:

 

•                  the quantities of oil and gas that areultimately recovered;

 

•                  the timing of the recovery of oil and gasreserves;

 

•                  the production and operating costs incurred;and

 

•                  the amount and timing of future developmentexpenditures.

 

Furthermore,different reserve engineers may make different estimates of reserves andcash flows based on the same available data. Actual production, revenues andexpenditures with respect to reserves will vary from estimates and thevariances may be material.

 

Thestandardized measure of discounted future net cash flows included in thisdocument is computed by applying year-end prices of oil and gas (withconsideration of price changes only to the extent provided by contractualarrangements) to the estimated future production of proved oil and gasreserves, less estimated future expenditures (based on year-end costs) to beincurred in developing and producing the proved reserves, less estimated futureincome tax expenses. The estimated future net cash flows are then discountedusing a rate of 10% a year to reflect the estimated timing of the future cashflows.

 

Theestimated discounted future net revenues included herein should not beconsidered the market value of the reserves attributable to our properties.While the estimated discounted future net revenues from proved reserves arebased on prices and costs as of the date of the estimate, actual future pricesand costs may be materially higher or lower. Actual future net revenueswill also be affected by factors such as:

 

•                  theamount and timing of actual production;

 

•                  supplyand demand for oil and gas; and

 

•                  changesin governmental regulations or taxation.

 

Inaddition, the 10% discount factor used to calculate discounted future netrevenues for financial reporting purposes, is not necessarily the mostappropriate discount factor based on the cost of capital in effect from time totime and risks associated with our business and the oil and gas industry ingeneral.

 

*Reserve Replacement.*The future success of Whittierdepends on our ability to find, develop and acquire additional oil and gasreserves that are economically recoverable which, in itself, is dependent onoil and gas prices. Without continued successful exploitation, acquisition orexploration activities, our reserves and revenues will decline as a result ofour current reserves being depleted by production. Whittier may not beable to find or acquire additional reserves at acceptable costs.

 

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*Volatilityof Oil and Gas Prices.*Our future success is largely dependent onoil and gas prices, which are extremely volatile. Any substantial or extendeddecline in the price of oil and gas below current levels could have a materialadverse effect on our business operations and future revenues. Moreover, oiland gas prices depend on factors we cannot control, such as:

 

•                  supply and demand for oil and gas andexpectations regarding supply and demand;

 

•                  weather;

 

•                  actions by the Organization of PetroleumExporting Countries, or OPEC;

 

•                  political conditions in other oil-producingand gas-producing countries including the possibility of insurgency or war insuch areas;

 

•                  general economic conditions in the UnitedStates and worldwide; and

 

•                  governmental regulations.

 

Withrespect to our business, prices of oil and gas will affect:

 

•                  ourrevenues, cash flows and earnings;

 

•                  ourability to attract capital to finance our operations and the cost of suchcapital;

 

•                  theamount that we are allowed to borrow; and

 

•                  thevalue of our oil and gas properties.

 

Wehave hedged a portion of our production to reduce our exposure to oil and gasprice volatility, as well as to achieve more predictable cash flows from ouroil and gas properties. Hedging will prevent Whittier from receiving the fulladvantage of increases in oil or gas prices above the fixed amount specified inthe hedge agreement. In a typical hedge transaction, we have the right toreceive from the hedge counterparty the excess of the fixed price specified inthe hedge agreement over a floating price based on a market index, multipliedby the quantity hedged. If the floating price exceeds the fixed price, we mustpay the counterparty this difference multiplied by the quantity hedged even ifwe had insufficient production to cover the quantities specified in the hedgeagreement. Accordingly, if we have less production than we have hedged when thefloating price exceeds the fixed price, we must make payments against whichthere are no offsetting sales of production. If these payments become toolarge, the remainder of our business may be adversely affected.

 

*Market Demand for Oil and Gas.*Our success isalso materially dependent upon the demand for oil and gas. The availability ofa ready market for our oil and gas production depends on a number of factorsbeyond Whittier’s control, including the demand for and supply of oil and gas,the availability of alternative energy sources, the proximity of reserves to,and the capacity of, oil and gas gathering systems, pipelines or trucking andterminal facilities. If there is no market for the oil and gas that we produce,Whittier will be unable to sell its production. We may also have toshut-in some of our wells temporarily due to a lack of market or adverseweather conditions including hurricanes. If the demand for oil and gas diminishes,Whittier’s financial results would be negatively impacted.

 

Inaddition, there are limited methods of transportation for our production.Substantially all of our oil and gas production is transported by pipelines,trucks and barges owned by third parties. The inability or unwillingness ofthese parties to provide transportation services to Whittier for a reasonablefee could result in management having to find transportation alternatives,increased transportation costs or involuntary curtailment of a significantportion of its oil and gas production, any of which could have a negativeimpact on our results of operation and cash flows.

 

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*Risks of Operating Oil & Gas Properties.*The oil andgas business involves certain operating hazards such as:

 

•                  well blowouts;

 

•                  cratering;

 

•                  explosions;

 

•                  uncontrollable flows of oil, gas or wellfluids;

 

•                  fires;

 

•                  pollution; and

 

•                  releases of toxic gas.

 

Any of these operating hazards could cause seriousinjuries, fatalities or property damage, which could expose Whittier toliabilities. The payment of any of these liabilities could reduce, or eveneliminate, the funds available for exploration, development and acquisition, orcould result in a loss of Whittier’s properties.

 

We maintain insurance against many potential lossesand liabilities arising from our operations in accordance with customaryindustry practices and in amounts that we believe to be prudent. However, ourinsurance does not protect us against all operational risks. The insurancemarket in general and the energy insurance market in particular has been adifficult market over the past several years. Insurance costs are expected tocontinue to increase over the next few years and Whittier may decreasecoverage and retain more risk to mitigate future cost increases. If Whittierincurs substantial liability and the damages are not covered by insurance orare in excess of policy limits, or if Whittier incurs liability at a time when Whittieris not able to obtain liability insurance, then its business, results ofoperations and financial condition could be materially adversely affected.

 

**Employees**

 

The total number of employees of Whittier increasedduring the year from 6 at December 31, 2004 to 20 at December 31,2005. We believe that our relationship with our employees is good. None of ouremployees are covered by a collective bargaining agreement. We use the servicesof independent consultants and contractors to perform various professionalservices, particularly in the areas of operational accounting, field levelproduction, construction, design, well-site surveillance, permitting andenvironmental assessment.

 

**Our Executive Offices and Website**

 

Ourprincipal executive offices are located at 333 Clay Street, Suite 700,Houston, Texas 77002 and our telephone number is (713) 850-1880. Our website ishttp://www.whittierenergy.com. We make available, free of charge through ourwebsite, our annual report on Form 10-KSB, quarterly reports on Form 10-QSB,current reports on Form 8-K, and amendments to those reports filed orfurnished pursuant to Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”) as soon as reasonablypracticable after we electronically file such material with, or furnish it to, theSEC.

 

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**AvailableInformation**

 

We file information statements and annual,quarterly and special reports with the SEC. You may read and copy anydocument that we file at the SEC’s public reference room in Washington,D.C. located at 100 F Street N.E., Room 1580, Washington, D.C. 20549. You may alsocall the SEC at 1-800-SEC-0330 for further information on the public referencerooms. The SEC maintains a web site that contains reports, proxy statements andinformation statements and other information regarding registrants, includingWhittier, that file electronically with the SEC. Our SEC filings are alsoavailable to you free of charge at the SEC’s web site at http://www.sec.gov.

 

**Item 2. Description of Properties**

 

**Oil and Gas Properties**

 

Ourassets consist of operated and non-operated working interests, royaltyinterests, partnership interests, and mineral acreage in various oil and gasproperties, principally located in Louisiana, Texas, Oklahoma, and New Mexicowith minor property interests in California, Colorado, Utah, Wyoming, andPennsylvania. Our significant properties are described by area in the followingparagraphs. Approximately 94% of our proved reserves are located in threeprincipal areas—the Gulf Coast region, South Texas and the Permian Basin.

 
| **Region**    | ** ** | **Average  2005  Net Production  (Mmcfed)** | ** ** | **% of Total** | ** ** | **Net Proved  Reserves  (Bcfe)** | ** ** | **% of total** | ** ** |
|---------------|------------|--------------------------------------------------|------------|--------------------------|------------|---------------------------------------|------------|--------------------------|------------|
| Gulf Coast:   |       |                                             |       |                     |       |                                  |       |                     |       |
| S. Louisiana  |       | 3.1                                              |       | 32                       | %          |                                  | 9.4        |                     | 29         | % |   |
| S.E. Texas    |       | 1.1                                              |       | 11                       | %          |                                  | 1.7        |                     | 5          | % |   |
|          |       |                                             |       |                     |       |                                  |       |                     |       |   |   |
| Subtotal      |       | 4.2                                              |       | 43                       | %          |                                  | 11.1       |                     | 34         | % |   |
|          |       |                                             |       |                     |       |                                  |       |                     |       |   |   |
| South Texas   |       | 3.9                                              |       | 40                       | %          |                                  | 11.4       |                     | 35         | % |   |
| Permian Basin |       | 0.5                                              |       | 5                        | %          |                                  | 8.1        |                     | 25         | % |   |
| Other         |       | 1.1                                              |       | 12                       | %          |                                  | 2.2        |                     | 6          | % |   |
|          |       |                                             |       |                     |       |                                  |       |                     |       |   |   |
| Total         |       | 9.7                                              |       | 100                      | %          |                                  | 32.8       |                     | 100        | % |   |

 

*GulfCoast*

 

SouthLouisiana. Ourproperties located in South Louisiana accounted for roughly 29% of our 2005year-end total proved reserves and 32% of our 2005 average daily net production.Our major operated fields in the region are Beaver Dam Creek in St. HelenaParish, Cut Off in Lafourche Parish and Rayne in Acadia Parish. All are matureproducing fields with established production declines that produce from 14,500feet, 11,500 feet and 13,000 feet, respectively. Our working interest in BeaverDam Creek is 89%, while our working interest in Cut Off and Rayne is 87% and33%, respectively. Our major non-operated producing fields in Louisiana includeCoffee Bay in Lafourche Parish and Duson in Lafayette Parish. Both fieldsproduce from approximately 14,000 feet and we have approximately 10% workinginterest in both fields.

 

Wehave identified one proved drilling location in each of the Beaver Dam Creekand Cut Off fields. The well in Cut Off has reached total depth and we are inthe process of running casing in order to complete the well. We expect to begindrilling the well in Beaver Dam Creek in early April 2006. In addition, wehave access to an extensive 3-D seismic database and have identified severaladditional drilling projects, including a two-well project in Calcasieu Parish,Louisiana with targets at 7,500 feet and 4,000 feet and a two-well project inAcadia Parish with targets at 10,500 feet. We own 66% and 25% working interestsin these projects, respectively. We have also shot a new 43 square mile 3-Dseismic survey in Southwest Louisiana, which is currently being interpreted.

 

9

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SoutheastTexas. Ourproperties in this area account for roughly 5% of total 2005 year-end provedreserves and 11% of our 2005 average daily net production. Our largestproducing field in this area is the Esperson Dome/Ulrich Field, which is amature field that was redeveloped after a 3-D survey was shot in the mid-1990’s.Thirty-four wells have been drilled under the redevelopment program, 26 ofwhich were productive. Production occurs from the Cook Mountain (7,500 feet)and Yegua (11,000 feet) formations with wells in this area typically producingat initial rates of one to three Mmcfed. We own an average working interest inthe field of approximately 22% and have one remaining probable location that isbudgeted to be drilled during the second quarter of 2006. Two3-D supported wells were drilled successfully in the fourth quarter of 2005with one well turned to sales at approximately 1.5 Mmcfed (240 Mcfed net) andthe other well waiting on a pipeline connection.

 

Inaddition to our interest in the Esperson Dome/Ulrich area, we also have anon-operated interest in the Club de Campo Field in Hardin County, Texas and anew 60 square mile 3-D survey located near Beaumont, Texas. We had one wellbudgeted for the Club de Campo Field. This offset well was successfully drilledin the first quarter of 2006 and it is currently waiting on a completion rig. The3-D project was initiated in late 2004 and the data was delivered in the firstquarter of 2005. Based upon the review of the 3-D seismic data, we identified15 Yegua (13,000 feet) and five Nodosaria (7,500 feet) and Hackberry targets. Webegan drilling this project in the first quarter of 2006 and have successfullydrilled five Nodosaria targets. The first well was tested at over 3.4 Mmcfed (440Mcfed net) while the four remaining wells are waiting on a completion rig. Netpay found in these five wells has ranged from 22 feet to over 150 feet. Inaddition to the Nodosaria prospects, we have budgeted the drilling of two ofthe Yegua targets in the second quarter of 2006. Our interest in the project isapproximately 18%. We have leased and optioned approximately 20,000 acres(3,600 net) relating to this project.

 

*SouthTexas*

 

Ourproperties in this area account for roughly 35% of our 2005 year-end totalproved reserves and 40% of our 2005 average daily net production. Our principalfields in the region are Tom East (Vicksburg) and Scott & Hopper(Vicksburg) in Brooks County, Big Wells (San Miguel) in Dimmitt County and TomLyne (Wilcox) in Live Oak County. All four are mature producing fields withestablished production rates that produce from approximately 13,000 feet, 9,000feet, 5,000 feet and 10,000 feet respectively. Our working interest in Tom Eastis 14%, approximately 50% in Scott & Hopper, 100% in Big Wells and 55%in Tom Lyne. Other major producing fields for this region include Rincon andBonnie View, both of which produce from 6,000 feet.

 

Weconducted an active drilling program in the region during 2005 with three wellsdrilled and completed during the year and an additional well spudded in December 2005.This included the Scott & Hopper #4, which was recompleted in October 2005from the 9,500 feet zone to a shallower Vicksburg interval and is currentlyproducing in excess of 4 Mmcfed (1.6 Mmcfed net). The Swierc #4 in the Tom LyneField was successfully drilled and brought onto production during November 2005and is currently producing in excess of 700 Mcfed (400 Mcfed net). The Scott &Hopper #5 was spudded in December 2005 and was turned to sales in March 2006at approximately 500 Mcfed (200 Mcfed net). We also own non-operated interestsin the Hamel Field in Colorado County and a 25% royalty interest in acreagelocated in Zapata County. We recently leased 1,410 acres of this royaltyacreage to a private company which drilled and completed its first well in March 2006and has proposed drilling a second location. The first productive zone in thewell was turned to sales at an initial rate in excess of 4 Mmcfed (1 Mmcfednet) and the operator is currently preparing to perforate and test a secondinterval.

 

Wehave budgeted the drilling of four wells in 2006 for this region. Two of thesewells were successfully drilled in the first quarter of 2006. The Rachal #2 wasturned to sales in excess of 450 Mcfed (120 Mcfed net) while the Rachal #3 wasturned to sales at approximately 400 Mcfed (100 Mcfed net). We have budgeted anoffset well to the Scott & Hopper #4 in the 8,900 feet interval aswell as an additional 8,000 feet test in the Rincon field of Starr County.

 

*PermianBasin*

 

Ourproperties in this area account for roughly 25% of total 2005 year-end provedreserves and 5% of our 2005 average net production. We have interests in twofields in this region, which are the Windham Field in

 

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Midland County,Texas and Langlie Mattix Field in Lea County, New Mexico. Both fields are matureproducing fields with established production rates and shallow declines, and wehave identified proved in-fill locations in both fields. The Windham Field wasdiscovered and developed by RIMCO and its partners in the early 1990’s andproduces from the Devonian and Penn formations at 11,000 feet and 9,000 feet,respectively. We own an average working interest in the field of 53% but havefarmed-in for an additional 30% working interest for the undeveloped locations.We have identified seven proved undeveloped and six probable locations and havebudgeted for drilling three Penn formation wells during the third quarter of2006.

 

TheLanglie Mattix Field is an established Seven Rivers waterflood unit withproduction from depths of 3,500 feet to 4,000 feet and we own a 75% workinginterest in the unit. Portions of the field have been down-spaced to 20 acresand we have identified 11 in-fill locations, which would complete thedevelopment of the southern portion of the unit. We have also identifiedadditional non-proved locations to complete the down-spacing for the western section ofthe unit. Subject to rig availability, which has been very tight in this area,we have budgeted to drill three wells in the fourth quarter of 2006.

 

**Oil and Gas Reserves**

 

The following tablepresents Whittier’s net proved and proved developed reserves as of December 31,2005, 2004 and 2003, respectively, and the net present values as of such dates(based on an annual discount rate of 10%) of the estimated future net revenuesfrom the production and sale of those reserves. All of our oil and gasproperties are located in the United States.

 
| ** **                                                                                           | ** ** | **As of the Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Total  Proved Reserves:**                                                                          | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Oil (Bbls)                                                                                           |       | 2,833,741                                  |       | 1,734,985 |   | 1,462,770 |   |
| Gas (Mcf)                                                                                            |       | 15,810,650                                 |       | 5,559,030 |   | 2,988,550 |   |
| Total thousand  cubic feet of gas equivalent (Mcfe)                                                  |       | 32,813,096                                 |       | 15,968,940 |   | 11,765,170 |   |
|                                                                                                 |       |                                       |       |   |   |   |   |
| Present value of estimated future net revenues after  income taxes, discounted at 10% (in thousands) |       | $                                          | 86,473     |   | $ | 24,851 |   | $ | 15,133 |   |
|                                                                                                 |       |                                       |       |   |   |   |   |
| **Total  Proved Developed Reserves:**                                                                | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Oil (Bbls)                                                                                           |       | 2,030,195                                  |       | 1,603,964 |   | 1,462,770 |   |
| Gas (Mcf)                                                                                            |       | 12,455,090                                 |       | 4,094,890 |   | 2,676,060 |   |
| Total thousand cubic feet of gas equivalent (Mcfe)                                                   |       | 24,636,260                                 |       | 13,718,674 |   | 11,452,680 |   |
|                                                                                                      |            |                                            |            |  |  |  |  |  |  |  |

 

Whittier’sestimates of proved reserves for the years ended December 31, 2005, 2004and 2003, respectively, were taken from independent evaluations prepared inaccordance with the requirements established by the SEC by H.J. Gruy and Associates, Inc.Additionally, WZI, Inc. prepared an independent evaluation with respect toour interest in the Round Mountain Unit for the years ended December 31, 2005and 2004, only. Furthermore, internal estimates of proved reserves wereutilized for certain royalty interests representing less than 1% of Whittier’stotal year-end estimated proved reserves for the year ended December 31, 2004.

 

11

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**NetQuantities of Oil and Gas Produced**

 

Thefollowing table summarizes sales volumes, sales prices and production costinformation for our net oil and gas production for each of the three yearsended December 31, 2005, 2004, and 2003, respectively:

 
| ** **                           | ** ** | **As of the Year Ended December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net sales volumes                    | ** ** | ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Oil (Bbls)                           |       | 250,904                                                             |       | 178,303 |   | 166,510 |   |
| Gas (Mcf)                            |       | 2,049,265                                                           |       | 794,831 |   | 446,760 |   |
| Total (Mcfe)                         |       | 3,554,689                                                           |       | 1,864,649 |   | 1,445,820 |   |
| Average sales price                  |       |                                                                |       |   |   |   |   |
| Oil (per Bbl)                        |       | $                                                                   | 44.37      |   | $ | 30.56 |   | $ | 24.36 |   |
| Gas (per Mcf)                        |       | $                                                                   | 7.71       |   | $ | 5.89 |   | $ | 4.72 |   |
| Average production costs (per Mcfe): |       |                                                                |       |   |   |   |   |
| Lease operating expense              |       | $                                                                   | 1.54       |   | $ | 1.59 |   | $ | 1.47 |   |
| Production taxes                     |       | $                                                                   | .75        |   | $ | .66 |   | $ | .44 |   |
| Total average production costs       |       | $                                                                   | 2.29       |   | $ | 2.25 |   | $ | 1.91 |   |

 

**Productive Wells and Acreage**

 

*ProductiveWells and Developed Acreage*

 

Whittierowns various working and royalty interests in productive oil and gas wells, aswell as developed and undeveloped oil and gas acreage, all of which are locatedonshore in the United States. Productive wells are wells currently producingcommercial quantities of crude oil or natural gas, or wells capable ofproducing commercial quantities, which do not require significant additionalcapital investment to bring onto production. Developed acreage consists of leasedacres spaced or assignable to production, including leases held by production,where wells have been drilled to allow the production of commercial quantitiesof oil or natural gas.

 

As of December 31,2005, Whittier had interests in 258 grossproductive wells, of which 122 were grossoil wells (62 net oil wells)and 136 were gross gas wells (29 net gas wells). There were only two productive multiple completionwells. Production was from approximately59,081 gross developed acres (13,981****net acres).

 

*UndevelopedAcreage*

 

As of December 31,2005, we held interests in approximately 49,307****gross undevelopedacres (14,444****net undeveloped acres).

 

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*DrillingActivity*

 

Duringthe three years ended December 31, 2005, our gross and net interests inexploratory and development wells drilled were as follows:

 
| ** **      | ** ** | **2005**       | ** ** | **2004** | ** ** | **2003**       | ** ** |
|-----------------|------------|----------------|------------|----------|------------|----------------|------------|
| ** **      | ** ** | **Productive** | ** ** | **Dry**  | ** ** | **Productive** | ** ** | **Dry** | ** ** | **Productive** | ** ** | **Dry** | ** ** |
| **Gross Wells** |       |           |       |     |       |           |       |   |   |   |   |   |   |
| Exploratory     |       | 8              |       | 2        |       | 3              |       | 1 |   | 3 |   | — |   |
| Development     |       | 6              |       | 0        |       | 6              |       | — |   | 3 |   | — |   |
| Total           |       | 14             |       | 2        |       | 9              |       | 1 |   | 6 |   | — |   |
|            |       |           |       |     |       |           |       |   |   |   |   |   |   |
| **Net Wells**   |       |           |       |     |       |           |       |   |   |   |   |   |   |
| Exploratory     |       | 2.0            |       | .17      |       | .42            |       | .20 |   | .22 |   | — |   |
| Development     |       | 2.5            |       | —   |       | .76            |       | — |   | .07 |   | — |   |
| Total           |       | 4.5            |       | .17      |       | 1.18           |       | .20 |   | .29 |   | — |   |

 

A wellis considered productive when a determination is made during the drilling ofthe well that it is capable of producing commercial quantities of oil ornatural gas and should therefore be completed. All of the our wells are locatedin the United States.

 

Present Activities

 

Whittierhas drilled ten successful wells (2.5 net) and one dry hole (.3 net) during theyear to date period ended March 27, 2006 and is currently drilling five grosswells (.7 net).

 

**Item 3. Legal Proceedings**

 

Managementis not aware of any legal proceedings contemplated by any governmentalauthority or any other party involving us or our properties. None of ourdirectors, officers or affiliates (i) are a party adverse to us in anylegal proceedings, or (ii) have an adverse interest to us in any legalproceedings. Management is not aware of any other legal proceedings pending orthat have been threatened against us or our properties.

 

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

 

Whittier’s 2005 AnnualStockholders’ Meeting was held on Tuesday, September 27, 2005, but due tothe impact of Hurricane Rita on transportation to and from the Houston area,the meeting was adjourned without any action being taken. We reconvened themeeting on Tuesday, October 18, 2005, and four proposals were submitted toour stockholders. Proxies were solicited by the Board of Directors pursuant toRegulation 14A under the Securities Exchange Act of 1934. There was nosolicitation in opposition to the Board of Directors’ nominees as listed in theproxy statement and all such nominees were duly elected.

 

13

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The results of the stockholders’ votes were asfollows:

 

1.                                       Electionof seven directors to Whittier’s Board of Directors:

 
| ** **          | ** ** | ** **                                          | ** ** | ** **                                                | ** ** | **Number of Shares** | ** ** |
|---------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------------|------------|--------------------------------|------------|
| ** **          | ** ** | ** **                                          | ** ** | **WITHHOLDING**                                           | ** ** |
| ** **          | ** ** | **Number of Shares**                      | ** ** | **AUTHORITY**                                             | ** ** |
| ** **          | ** ** | **Voting FOR Election  As Director** | ** ** | **To Vote for Election  As Director** | ** ** |
| ** **          | ** ** | **Common Stock**                               | ** ** | **Series A  Preferred Stock**                   | ** ** | **Common Stock**          | ** ** | **Series A  Preferred Stock** | ** ** |
| James A. Jeffs      |       | 2,824,255                                           |       | 433,987                                                   |       | 101                            |       | None |   |
| Bryce W. Rhodes     |       | 2,824,255                                           |       | 433,987                                                   |       | 101                            |       | None |   |
| Charles O. Buckner  |       | 2,824,255                                           |       | 433,987                                                   |       | 101                            |       | None |   |
| David A. Dahl       |       | 2,824,255                                           |       | 433,987                                                   |       | 101                            |       | None |   |
| David B. Kilpatrick |       | 2,820,756                                           |       | 433,987                                                   |       | 267                            |       | None |   |
| Ray R. Seegmiller   |       | 2,824,089                                           |       | 433,987                                                   |       | 267                            |       | None |   |
| Arlo G. Sorensen    |       | 2,824,255                                           |       | 433,987                                                   |       | 101                            |       | None |   |

 

2.                                       Approvalof an amendment to our Articles of Incorporation to increase the total numberof authorized shares of common stock from 33,333,334 to 100,000,000 shares:

 
| ** **        | ** ** | **Common Stock** | ** ** | **Series A Preferred Stock** | ** ** |
|-------------------|------------|-----------------------|------------|---------------------------------------------|------------|
| For:              |       | 2,817,620             |       | 433,987                                     |       |
| Against:          |       | 6,736                 |       | None                                        |       |
| Abstain:          |       | None                  |       | None                                        |       |
| Broker Non-Votes: |       | None                  |       | None                                        |       |

 

3.                                       Approvalof an amendment to our Long-Term Incentive Plan increasing the number of sharesof our common stock available under the Plan to 1,876,000:

 
| ** **        | ** ** | **Common Stock** | ** ** | **Series A Preferred Stock** | ** ** |
|-------------------|------------|-----------------------|------------|---------------------------------------------|------------|
| For:              |       | 2,812,453             |       | 433,987                                     |       |
| Against:          |       | 8,903                 |       | None                                        |       |
| Abstain:          |       | 3,000                 |       | None                                        |       |
| Broker Non-Votes: |       | None                  |       | None                                        |       |

 

14

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4.                                       Ratificationof the selection of Grant Thornton LLP as Whittier’s independent auditor forthe fiscal year ending December 31, 2005:

 
| ** **        | ** ** | **Common Stock** | ** ** | **Series A Preferred Stock** | ** ** |
|-------------------|------------|-----------------------|------------|---------------------------------------------|------------|
| For:              |       | 2,824,223             |       | 433,987                                     |       |
| Against:          |       | 133                   |       | None                                        |       |
| Abstain:          |       | None                  |       | None                                        |       |
| Broker Non-Votes: |       | None                  |       | None                                        |       |

 

### **PART II**

###  

**Item 5. Marketfor Common Equity and Related Stockholder Matters**

 

**MarketInformation and Holders of Common Stock**

 

Ourcommon stock has been listed on the NASDAQ under the symbol “WHIT” since December 27,2005. Prior to that time, beginning on July 1, 2005, our common stock wastraded on OTC Bulletin Board under the symbol “WECP.OB” in connection with thecompletion of a one-for-three reverse stock split of our authorized andoutstanding shares of common stock. From January 2, 2004 to June 30,2005, our common stock was reported on the OTC Bulletin Board under the symbol “WHIT.OB.”Prior to that time, from December 6, 2001 to January 2, 2004 ourcommon stock was reported on the OTC Bulletin Board under our prior name “OlympicResources, Ltd.” under the symbol “OLYR”. The table below sets forth, for theperiods indicated, the high and low closing prices per share of the commonstock as reported on the NASDAQ and, prior to December 27, 2005, the OTCBulletin Board, adjusted to reflect the one-for-three reverse split of ouroutstanding common stock on July 1, 2005:

 

**Year Ended December 31, 2005**

 

| **Quarter**    | ** ** | **High Bid** | ** ** | **Low Bid** | ** ** |
|----------------|------------|-------------------|------------|------------------|------------|
|           |       |              |       |             |       |
| First Quarter  |       | $                 | 10.50      |             | $          | 4.65 |   |
| Second Quarter |       | 9.90              |       | 7.50             |       |
| Third Quarter  |       | 12.30             |       | 8.40             |       |
| Fourth Quarter |       | 10.75             |       | 8.00             |       |
|                |            |                   |            |                  |            |  |  |

 

**Year Ended December 31, 2004**

 

| **Quarter**    | ** ** | **High Bid** | ** ** | **Low Bid** | ** ** |
|----------------|------------|--------------|------------|-------------|------------|
|           |       |         |       |        |       |
| First Quarter  |       | $            | 7.50       |        | $          | 3.00 |   |
| Second Quarter |       | 6.90         |       | 4.50        |       |
| Third Quarter  |       | 6.75         |       | 4.50        |       |
| Fourth Quarter |       | 6.00         |       | 4.32        |       |
|                |            |              |            |             |            |  |  |

 

Theabove quotations reflect inter-dealer prices, without retail mark-up, mark-downor commissions and may not represent actual transactions.

 

15

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**Holders of Record**

 

As of March 27,2006, there were approximately 201 holders of record and approximately 1,100 non-registeredshareholders of Whittier’s common stock. Whittier had 12,515,265 sharesoutstanding as of December 31, 2005.

 

**Dividend Policy**

 

Whittierhas not paid dividends on its common stock within the last two fiscal years. Wecurrently intend to retain all earnings to fund our operations and do notintend to pay any cash dividends in the foreseeable future. In addition, theterms of our existing credit facility prohibit the payment of any dividends tothe holders of our common stock without the bank’s consent.

 

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

 

As of December 31, 2005, the following equitysecurities were authorized for issuance under Whittier’s existing compensationplans:

 
| **Plan Category**                                      | ** ** | **Number of Securities to  be Issued upon Exercise  of Outstanding Options,  Warrants and Rights** | ** ** | **Weighted-Average  Exercise Price of  Outstanding Securities** | ** ** | **Number of Securities  Remaining Available for  Future Issuance** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| Equity Compensation Plans Approved by Security  Holders     |       | 753,712                                                                                                                                              |       | $                                                                              | 7.16       |                                                                                        | 1,122,288  |   |
| Equity Compensation Plans Not Approved by Security  Holders |       | —                                                                                                                                               |       | —                                                                         | ** ** | —                                                                                      | ** ** |
| **Total**                                                   |       | 753,712                                                                                                                                              |       | $                                                                              | 7.16       |                                                                                        | 1,122,288  |   |

 

**Item 6. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**ExecutiveSummary**

 

WhittierEnergy Corporation, a Nevada corporation, is an independent oil and gasexploration and production company primarily engaged in the acquisition,exploration and development of oil and gas properties in the continental UnitedStates. Our assets consist primarily of operated and non-operated workinginterests, royalty interests, partnership interests, and mineral acreage invarious oil and gas properties, principally located in the Gulf Coast region,South Texas and the Permian Basin.

 

*RIMCOAcquisition*

 

On June 15, 2005, Whittier acquired RIMCOProduction Company, Inc., a privately held Delaware corporation (“RIMCO”),for approximately $57.1 million, including $55 million in cash and $2.1 millionin closing costs and net assumed liabilities. As a result of this transaction,we acquired working interests in approximately 116 active wells and one unit in18 producing fields principally located in the Gulf Coast region in Texas,Louisiana, and Alabama. On August 26, 2005, Whittier sold its interest inthe Big Escambia Creek Field in Escambia County, Alabama for $4.2 million, withan effective date of May 1, 2005. We had acquired a minor non-operatedworking interest in approximately 18 wells in the Big Escambia Creek Field as part ofour acquisition of RIMCO. The asset

 

16

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was sold as part of our ongoing strategy of rationalization ofnon-core properties to redeploy the capital into other investments that webelieve will generate higher overall returns for Whittier.

 

*Full CostAccounting*

 

Inconjunction with the RIMCO acquisition, Whittier adopted the full cost methodof accounting for its oil and gas activities. We believe that the full costmethod of accounting more appropriately reflects the operating results of anindependent oil and gas producer that expends significant amounts of capital onexploration activities in order to discover proved reserves. Accordingly, weconcluded that full cost accounting is the preferable to the successful effortsmethod of accounting for Whittier’s oil and gas activities on a post-acquisitionbasis. We arrived at this conclusion based on a number of considerations,including: 1) the material size of the transaction and RIMCO’s historical useof full cost accounting; 2) the composition of RIMCO’s acquired assets; 3) thenature of RIMCO’s prospect generation business and technical personnel; and 4) ouranticipated exploration projects and capital expenditures subsequent to the acquisition.

 

17

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**Liquidityand Capital Resources**

 

Wefinance our business using a combination of cash flow from operations, bankdebt and the issuance of equity and/or debt securities. Our future liquidity,in both the short and long-term, is principally dependent upon the volume ofour oil and gas production and the market price we receive on future sales ofthat production as affected by any hedges we may have in place.

 

Ourprimary source of cash during the year ended December 31, 2005 was fromfunds obtained from financing activities, cash flow from operations, andproceeds from the sale of marketable securities and oil and gas properties.Proceeds from the private offering of our Series A Preferred Stock and theinitial borrowing under our new credit facility were used to finance the acquisitionof RIMCO. In addition to these funds, Whittier generated cash flows from thesale of natural gas and crude oil, approximately $1.8 million from the sale ofcommon stock in Chaparral Resources, Inc., and $4.2 million from the saleof our interest in the Big Escambia Creek Field in August 2005. Operatingcash flow fluctuations are substantially driven by commodity prices and changesin our production volumes. Working capital is substantially influenced by thesevariables. Fluctuation in cash flow may result in an increase or decreasein our capital and exploration expenditures. Total cash flows provided byoperating activities of $16.4 million for the year ended December 31, 2005were primarily used to fund exploration and development expenditures and torepay outstanding indebtedness.

 

We have approximately $5million in available cash and approximately $11 million in borrowing capacityunder our new credit facility as of March 27, 2006, after taking intoaccount outstanding letters of credit. Additionally, we are producing at anaverage rate of approximately 14.5 Mmcfe per day and generating net positivecash flows from operations. We incurred approximately $14.6 million in capitalexploration and development expenditures on existing oil and gas propertiesduring 2005 and have budgeted $27.2 million in additional capital expendituresfor 2006. We experienced some delays in our capital expenditures due to theimpact of hurricanes Katrina and Rita and the effects of the tightening ofdrilling rig availability across the industry. We intend to fund our 2006capital expenditures using operating cash flows and additional borrowings underour credit facility, if necessary.

 

*Issuanceof Series A Preferred Stock*

 

Inconnection with the RIMCO acquisition, in June 2005, Whittier issued andsold 852,912 shares of Series A Preferred Stock for an aggregate offeringamount of approximately $50 million. Whittier received approximately $45.9million in proceeds from the offering, net of issuance and registration costs,in which Whittier Ventures, LLC, an affiliate of Whittier, and certain officersand directors participated. The Series A Preferred Stock automaticallyconverted into 8,529,120 shares of Whittier common stock upon the listing of ourcommon stock on the NASDAQ on December 27, 2005. As a condition to theoffering, we agreed to register the common stock underlying the Series APreferred Stock with the U.S. Securities and Exchange Commission (“SEC”) and tomaintain the effectiveness of the registration for two years following itseffective date. We filed two registration statements on Forms SB-2 with theU.S. Securities and Exchange Commission to register the common stock underlyingthe Series A Preferred Stock, both of which were declared effective priorto December 31, 2005.

 

*RevolvingCredit Facility*

 

Inconnection with the acquisition of RIMCO, on June 15, 2005, Whittierentered into its $75 million revolving credit facility with BNP Paribas as thelead bank and administrative agent. Whittier initially borrowed $20 millionfrom the credit facility to partially fund the acquisition and to fully repayapproximately $8.5 million in principal and accrued interest outstanding on ourprevious revolving credit facility with Compass Bank, as well as $1 million ofbank debt held by RIMCO. During 2005, we repaid $6 million in principaloutstanding on the credit facility, leaving $14 million in principaloutstanding as of December 31, 2005. The borrowing base of the credit facilitywas $26.5 million as of December 31, 2005, and is subject to review andadjustment on a semi-annual basis. Amounts outstanding under the revolver bearinterest at specified margins over the London Interbank Offered Rate (“LIBOR”)of 1.50% to 2.25% (6.44% at December 31, 2005). Such margins fluctuatebased on the utilization of the credit facility. All amounts drawn under therevolver mature on June 15, 2008.

 

18

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On July 22, 2005,we repaid a $1.8 million subordinated convertible note using a combination ofcash and equity. We paid approximately $1.1 million in cash for 60% of theoutstanding principal of the note and $39,272 in accrued interest. We alsoissued 119,156 shares of common stock to the holder of the note upon the conversionof the remaining $714,936 in principal at a conversion price of $6.00 pershare. We funded the retirement of the note using available working capital.

 

*DerivativeInstruments and Hedging Activities*

 

Weregularly hedge a portion of our production to reduce our exposure to oil andgas price volatility, as well as to achieve more predictable cash flows fromour oil and gas properties. Our current policy is to hedge a portion of our anticipatedfuture production, either when we believe it is justified by available futureoil and gas prices or in order to finance a planned acquisition of producingoil and gas properties. Gains or losses on both realized and unrealized hedgingtransactions are determined as the difference between the contract price and anapplicable settlement or reference price. Settlement gains and losses aredetermined monthly and are included as increases or decreases in oil and gasrevenues in the period the hedged production is sold. Any ineffective portionof unrealized gains or losses of such hedges is recognized in earnings in theperiod they occur. Our derivative commodity positions outstanding at December 31,2005 are disclosed in Note 10 to our consolidated financial statementscontained herein.

 

**CapitalCommitments and Contingencies**

 

Inconnection with our June 2004 acquisition of three gas fields in SouthTexas, we agreed to drill four wells over a two-year period and pay certaindrilling costs on behalf of the seller’s retained working interests in thosewells. Under the terms of the drilling commitment, we agreed to drill two wellseach in the Scott & Hopper field and the North Rincon field, orreassign a portion of the undeveloped acreage in each field to the seller ofthe properties. We have drilled the first three commitment wells - the Scott &Hopper #4 during February 2005, the Cameron 137 #3 in June 2005 andthe Scott & Hopper #5 in December 2005. The Scott &Hopper #4 and #5 wells were both productive, while the Cameron 137 #3 was non-commercial.We are currently evaluating whether we will drill the final commitment well inthe North Rincon field.

 

**Resultsof Operations**

 

*Forthe Year Ended December 31, 2005 compared with the Year Ended December 31,2004*

 

Whittiergenerated net income of $5.3 million, or $0.60 per fully diluted share, for theyear ended December 31, 2005, compared to net income of $1.4 million, or$0.38, per fully diluted share, for the comparable period ended December 31,2004. The $3.9 million favorable variance was primarily attributable toWhittier’s acquisition of RIMCO in June 2005, higher oil and gas pricesand production, as well as $1.3 million in gain from the sale of marketablesecurities. Whittier generated $16.4 million in net operating cash flows in2005, compared to $4.4 million in net operating cash flows in 2004, an increaseof 275%. The significant components ofWhittier’s results of operations for the years ended December 31, 2005 and2004 are as follows:

 

**Oil andGas Revenues**. Oil and gas revenues increased 166% fromapproximately $10.1 million, or $5.43 per Mcfe, in 2004 to $26.9 million, or $7.58 per Mcfe, in 2005, based upon a91% increase in annual production and a 40% increase in realized commodityprices per Mcfe after hedge settlements. Whittier recognized pre-tax hedgelosses in oil and gas revenues of $4.6 million, or $1.29 per Mcfe, and $1.5million, or $0.82 per Mcfe, during 2005 and 2004, respectively, due to realizedsettlements of its price hedge contracts during the respective periods.Whittier produced 3,554,689 Mcfe during 2005, consisting of 250,904 Bbls of oiland 2,049,265 Mcf of gas, compared to 2004 annual production of 1,864,649 Mcfe,consisting of 178,303 Bbls of oil and 794,831 Mcf of gas. The increase inproduction and revenue was principally due to the RIMCO acquisition, as well asour successful drilling program during 2005.

 

19

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**Sale ofMarketable Securitie**s. During 2005, we sold 543,850 shares ofChaparral Resources, Inc. for $1.8 million, realizing a pre-tax gain of$1.3 million.

 

**Costs andExpenses**. Total operating costs and expenses increased by146% from $8.3 million in 2004 to $20.4 million in 2005, principally due toWhittier’s increased exploration and development activity from the prior year,as well as the RIMCO acquisition. The breakdown of variances for the componentsof operating costs and expenses is as follows:

 

•                  Lease operating expenses increased85% from $3.0 million, in 2004 to $5.5 million in 2005, reflecting the impactof the RIMCO acquisition and additional costs incurred as a result of the GulfCoast hurricanes and several non-recurring workovers in the Beaver Dam Creekfield during the fourth quarter of 2005; per unit cost, however, fell from$1.59 per Mcfe in 2004 to $1.54 per Mcfe in 2005,

 

•                  Production taxes increased 118%, from$1.2 million, or $0.66 per Mcfe, in 2004 to $2.7 million, or $0.75 per Mcfe, in2005. The 14% increase in production taxes per Mcfe from 2004 was attributableto higher taxes incurred on Louisiana production, which is based on apercentage of revenue versus actual production volumes, and a larger ratio ofnatural gas production compared to overall production from the prior year;

 

•                  Depreciation, depletion andamortization (“DD&A”) increased by 234%, from $2.4 million, or $1.31 perMcfe, in 2004 to $8.2 million, or $2.30 per Mcfe, in 2005. The 76% increase inDD&A per Mcfe is primarily a result of the RIMCO acquisition, includingadditional cost basis capitalized to RIMCO’s properties based on the deferredtax liability assumed by Whittier in the transaction;

 

•                  Whittier recognized a non-cash chargeto earnings of $692,000 due to the ineffective portion of the fair valueadjustment to Whittier’s hedge contracts during 2005;

 

•                  General and administrative expenseincreased from $1.7 million in 2004 to $3.4 million in 2005, reflecting our enhancedoperational activity from the prior year including increasing Whittier’s stafffrom six to twenty, largely as a result of the RIMCO acquisition, as well asrelated non-recurring general and administrative costs subsequent to the acquisitionto consolidate our combined operations.

 

**Off-Balance Sheet Arrangements**

 

Withthe exception of operating leases for corporate offices discussed in Note 11 tothe consolidated financial statements, we have no off-balance sheet debt orother off-balance sheet financing arrangements.

 

**Item 7. Financial Statements**

 

Theinformation required under Item 310(a) of Regulation S-B is included inthis report as set forth in the “Index to Financial Statements.”

 

**Index to ConsolidatedFinancial Statements**

 
| Report of  Independent Registered Public Accounting Firm                                                              |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                  |   |
| Consolidated Balance  Sheets as of December 31, 2005 and December 31, 2004                                  |   |
|                                                                                                                  |   |
| Consolidated  Statements of Operations for the years ended December 31, 2005 and 2004                            |   |
|                                                                                                                  |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2005 and 2004                            |   |
|                                                                                                                  |   |
| Consolidated  Statements of Changes in Stockholders’ Equity for the years ended December 31,  2005 and 2004 |   |
|                                                                                                                  |   |
| Notes to  Consolidated Financial Statements                                                                           |   |
|                                                                                                                  |   |
| Supplemental  Information – Disclosures About Oil and Gas Producing Activities – Unaudited                  |   |

 

20

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**Item8. Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure**

 

None.

 

**Item 8A. Controlsand Procedures**

 

### The term “disclosurecontrols and procedures” (defined in Rule 13a-15(e)) refers to thecontrols and procedures of a company that are designed to ensure that informationrequired to be disclosed by a company in the reports that it files under theSecurities and Exchange Act of 1934 (the “Exchange Act”) is recorded,processed, summarized and reported within required time periods. Whittier’s ChiefExecutive Officer and Chief Financial Officer, who also serves as the principalaccounting officer, have evaluated the effectiveness of our disclosure controlsand procedures as of December 31, 2005, and they concluded that, as ofsuch date, Whittier’s controls and procedures were effective. There were nochanges in our internal control over financial reporting occurring during thelast quarter of 2005 that have materially affected, or are reasonably likely tomaterially affect, Whittier’s internal control over financial reporting.

###  

Indesigning and evaluating Whittier’s disclosure controls and procedures,management recognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable, and not absolute, assurancethat the objectives of the control system will be met. In addition, the designof any control system is based in part upon certain assumptions about thelikelihood of future events and the application of judgment in evaluating thecost-benefit relationship of possible controls and procedures. Because of theseand other inherent limitations of control systems, there is only reasonableassurance that our controls will succeed in achieving their goals under allpotential future conditions.

 

**Item 8B. OtherInformation**

 

None.

 

### **PART III**

###  

**Item 9. Directors, ExecutiveOfficers, and Control Persons of the Registrant**

 

Theinformation required to be contained in this Item is incorporated by referenceto our definitive proxy statement to be filed with respect to our 2006 annualmeeting under the sections entitled “Election of Directors,” “InformationConcerning the Board of Directors,” “Corporate Governance” and “ExecutiveOfficers.”

 

**Item 10.Executive Compensation**

 

Theinformation required to be contained in this Item is incorporated by referenceto our definitive proxy statement to be filed with respect to our 2006 annualmeeting under the section entitled “Executive Compensation.”

 

21

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**Item 11.Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters**

 

The information required to be contained in thisItem is incorporated by reference to our definitive proxy statement to be filedwith respect to our 2006 annual meeting under the section entitled “SecurityOwnership of Certain Beneficial Owners and Management.”

 

**Item 12. Certain Relationshipsand Related Transactions**

 

Theinformation required to be contained in this Item is incorporated by referenceto our definitive proxy statement to be filed with respect to our 2006 annualmeeting under the section entitled “Certain Transactions.”

 

**Item 13. Exhibitsand Reports on Form 8-K**

 

(a)                                  The following exhibits are filed as part ofthis Annual Report:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                   |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                              |
| 2.1                  |       | Agreement and  Plan of Merger dated April 18, 2005 by and among Whittier Energy  Corporation, RPC Acquisition Company, Inc. and RIMCO Production Company, Inc.,  incorporated by reference to Exhibit 2.1 of Whittier’s Quarterly Report  on Form 10-QSB for the quarter ended March 31, 2005 and filed on May 13,  2005. |
|                 |       |                                                                                                                                                                                                                                                                                                                                                              |
| 3.1                  |       | Articles of  Incorporation, dated November 13, 2003, for Whittier Energy Corporation,  incorporated by reference to Exhibit 3.1 of Whittier’s Form 8-K  filed January 2, 2004.                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                              |
| 3.2                  |       | Certificate of  Amendment to the Articles of Incorporation of Whittier Energy Corporation,  dated October 19, 2005, for Whittier Energy Corporation, incorporated by  reference to Exhibit 3.1 of Whittier’s Form 8-K filed October 20,  2005.                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                              |
| 3.3                  |       | Corporate  Bylaws, dated November 13, 2003, for Whittier Energy Corporation,  incorporated by reference to Exhibit 3.2 of Whittier’s Form 8-K  filed January 2, 2004.                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                              |
| 4.1                  |       | Registration  Rights Agreement dated June 15, 2005, between Whittier Energy  Corporation and Friedman, Billings, Ramsey & Co., Inc., incorporated  by reference to Exhibit 10.3 of Whittier’s Form 8-K filed June 21,  2005.                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                              |
| 4.2                  |       | Registration  Rights Agreement, dated September 9, 2003, by and among Whittier Energy  Company on behalf of its shareholders and Olympic Resources Ltd. on behalf of  certain holders of Whittier’s warrants, options, or both, incorporated by  reference to Exhibit 4.1 of Whittier’s Form 8-K filed September 25,  2003.         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                              |
| 4.3                  |       | Senior Revolving  Credit Facility dated June 15, 2005, among Whittier Energy Corporation,  as Borrower, and BNP Paribas, as Administrative Agent, and the lenders party  thereto, incorporated by reference to Exhibit 10.1 of Whittier’s Form 8-K  filed June 21, 2005.                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                              |
| 4.4                  |       | Guaranty and  Pledge Agreement dated June 15, 2005, made by Whittier Energy Corporation  and certain of its subsidiaries, as Obligors, in favor of BNP Paribas, as  Administrative Agent, incorporated by reference to Exhibit 10.1 of  Whittier’s Form 8-K filed June 21, 2005.                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                              |
| 10.1                 |       | Stock Option Plan dated effective August 21,  2002, incorporated by reference to Olympic Resources Ltd.’s Form 10-KSB  for the year ended February 28, 2003 filed on June 27, 2003.                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                              |
| 10.2                 |       | Offer to Sell Agreement by and between Texas  Independent Exploration Limited, GulfCoast Acquisitions Limited, Frederick W.  Zimmerman, Frederick W. Zimmerman d/b/a Island Resources, and Whittier Energy  Company, dated June 15, 2004, incorporated by reference to Exhibit 10.1  of Whittier’s Form 8-K filed on July 2, 2004.       |

 

22

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| 10.3   |   | Upside Sharing Payment Agreement by and  between Texas Independent Exploration Limited, GulfCoast Acquisitions  Limited, Frederick W. Zimmerman, Frederick W. Zimmerman d/b/a Island  Resources, and Whittier Energy Company, dated June 16 2004, incorporated  by reference to Exhibit 10.2 of Whittier’s Form 8-K filed on July 2,  2004.                                               |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.4   |   | Drilling Commitment included as Exhibit C  to the Offer to Sell Agreement by and between Texas Independent Exploration  Limited, GulfCoast Acquisitions Limited, Frederick W. Zimmerman, Frederick W.  Zimmerman d/b/a Island Resources, and Whittier Energy Company, dated June 15,  2004, incorporated by reference to Exhibit 10.3 of Whittier’s Form 8-K  filed on July 2, 2004. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.5   |   | Whittier Energy Corporation Long Term  Incentive Plan dated effective December 16, 2003, as amended on October 18,  2005.                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.6   |   | Form of Stock Option Award Agreement  under the Whittier Energy Corporation 2004 Long-Term Incentive Plan,  incorporated by reference to Exhibit 10.1 to the Registrant’s Current  Report on Form 8-K filed on November 9, 2005.                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.7   |   | Executive Employment Agreement dated June 15,  2005, between Whittier Energy Corporation and Bryce W. Rhodes, incorporated  by reference to Exhibit 10.11 of Whittier’s Registration Statement on Form SB-2  filed on August 9, 2005.                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.8   |   | Executive Employment Agreement dated June 15,  2005, between Whittier Energy Corporation and Daniel Silverman, incorporated  by reference to Exhibit 10.11 of Whittier’s Registration Statement on Form SB-2  filed on August 9, 2005.                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.9   |   | Executive Employment Agreement dated June 15,  2005, between Whittier Energy Corporation and Michael B. Young, incorporated  by reference to Exhibit 10.11 of Whittier’s Registration Statement on Form SB-2  filed on August 9, 2005.                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 14.1   |   | Code of Ethics of Whittier Energy Corporation  previously filed as Exhibit 10.9 to Form 10-KSB for the year ended December 31,  2004.                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 21.1   |   | Subsidiaries of  Whittier Energy Corporation, incorporated by reference to Exhibit 21 of  Whittier’s Registration Statement on Form SB-2 filed on August 9,  2005.                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 23.1*  |   | Consent of H.J.  Gruy and Associates, Inc.                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 23.2*  |   | Consent of WZI, Inc.                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 31.1*  |   | Certification of  Chief Executive Officer, pursuant to Rule 13a-14(a) under the  Securities Exchange Act.                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 31.2*  |   | Certification of  Chief Financial Officer, pursuant to Rule 13a-14(a) under the  Securities Exchange Act.                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 32.1*  |   | Certification of  Chief Executive Officer, pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 32.2*  |   | Certification of  Chief Financial Officer, pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                                                                                                |

 

----

* Filed herewith.

 

23

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**Item 14.Principal Accountant Fees and Services**

 

Theinformation required to be contained in this Item is incorporated by referenceto our definitive proxy statement to be filed with respect to our 2006 annualmeeting under the section entitled “Matters Relating to the IndependentAuditor.”

 

24

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**SIGNATURES**

 

In accordance with the Section 13 or 15(d) of theExchange Act, the registrant caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|                        | WHITTIER  ENERGY CORPORATION.                                       |
|-----------------------------|---------------------------------------------------------------------|
|                        |                                                                |
| Dated:  March 27, 2006 | /s/  Bryce W. Rhodes                                                | * * |
|                        | Bryce  W. Rhodes, President,  CEO and Director                      |
|                        |                                                                |
|                        |                                                                |
| * *                    | /s/  Michael B. Young                                               | * * |
|                        | Michael  B. Young, CFO, Treasurer  and Principal Accounting Officer |
|                        |                                                                |
|                             |                                                                     |  |  |

 

In accordance with the Exchange Act, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **Date**             | ** **                                           | **Name and Title**       | ** ** | **Signature** |
|----------------------|------------------------------------------------------|--------------------------|------------|---------------|
|                 |                                                 |                     |
|                 |                                                 |                     |
| March 27,  2006 | Charles O.  Buckner, Director                        | /s/  Charles O. Buckner  |
|                 |                                                 |                     |
|                 |                                                 |                     |
| March 27,  2006 | David A. Dahl,  Director                             | /s/  David A. Dahl       |
|                 |                                                 |                     |
|                 |                                                 |                     |
| March 27,  2006 | James A. Jeffs,  Chairman                            | /a/  James A. Jeffs      |
|                 |                                                 |                     |
|                 |                                                 |                     |
| March 27,  2006 | David B.  Kilpatrick                                 | /s/  David B. Kilpatrick |
|                 |                                                 |                     |
|                 |                                                 |                     |
| March 27,  2006 | Bryce W. Rhodes,  Director, President & CEO | /s/  Bryce W. Rhodes     |
|                 |                                                 |                     |
|                 |                                                 |                     |
| March 27,  2006 | Ray R.  Seegmiller                                   | /s/  Ray R. Seegmiller   |
|                 |                                                 |                     |
|                 |                                                 |                     |
| March 27,  2006 | Arlo G. Sorensen,  Director                          | /s/  Arlo G. Sorensen    |

 

25

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                    |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                         |
| 2.1                  |       | Agreement and Plan of Merger dated April 18, 2005 by and among  Whittier Energy Corporation, RPC Acquisition Company, Inc. and RIMCO  Production Company, Inc., incorporated by reference to Exhibit 2.1  of Whittier’s Quarterly Report on Form 10-QSB for the quarter ended March 31,  2005 and filed on May 13, 2005.                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.1                  |       | Articles of Incorporation, dated November 13, 2003, for Whittier  Energy Corporation, incorporated by reference to Exhibit 3.1 of Whittier’s  Form 8-K filed January 2, 2004.                                                                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.2                  |       | Certificate of Amendment to the Articles of Incorporation of Whittier  Energy Corporation, dated October 19, 2005, for Whittier Energy  Corporation, incorporated by reference to Exhibit 3.1 of Whittier’s Form 8-K  filed October 20, 2005.                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.3                  |       | Corporate Bylaws, dated November 13, 2003, for Whittier Energy  Corporation, incorporated by reference to Exhibit 3.2 of Whittier’s Form 8-K  filed January 2, 2004.                                                                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.1                  |       | Registration Rights Agreement dated June 15, 2005, between  Whittier Energy Corporation and Friedman, Billings, Ramsey & Co., Inc.,  incorporated by reference to Exhibit 10.3 of Whittier’s Form 8-K  filed June 21, 2005.                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.2                  |       | Registration Rights Agreement, dated September 9, 2003, by and  among Whittier Energy Company on behalf of its shareholders and Olympic  Resources Ltd. on behalf of certain holders of Whittier’s warrants, options,  or both, incorporated by reference to Exhibit 4.1 of Whittier’s Form 8-K  filed September 25, 2003.                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.3                  |       | Senior Revolving Credit Facility dated June 15, 2005, among  Whittier Energy Corporation, as Borrower, and BNP Paribas, as Administrative  Agent, and the lenders party thereto, incorporated by reference to Exhibit 10.1  of Whittier’s Form 8-K filed June 21, 2005.                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.4                  |       | Guaranty and Pledge Agreement dated June 15, 2005, made by  Whittier Energy Corporation and certain of its subsidiaries, as Obligors, in  favor of BNP Paribas, as Administrative Agent, incorporated by reference to Exhibit 10.1  of Whittier’s Form 8-K filed June 21, 2005.                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.1                 |       | Stock Option Plan  dated effective August 21, 2002, incorporated by reference to Olympic  Resources Ltd.’s  Form 10-KSB for the year ended February 28, 2003 filed on June 27,  2003.                                                                                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.2                 |       | Offer to Sell  Agreement by and between Texas Independent Exploration Limited, GulfCoast  Acquisitions Limited, Frederick W. Zimmerman, Frederick W. Zimmerman d/b/a  Island Resources, and Whittier Energy Company, dated June 15, 2004,  incorporated by reference to Exhibit 10.1 of Whittier’s Form 8-K  filed on July 2, 2004.                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.3                 |       | Upside Sharing  Payment Agreement by and between Texas Independent Exploration Limited,  GulfCoast Acquisitions Limited, Frederick W. Zimmerman, Frederick W.  Zimmerman d/b/a Island Resources, and Whittier Energy Company, dated June 16  2004, incorporated by reference to Exhibit 10.2 of Whittier’s Form 8-K  filed on July 2, 2004.                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.4                 |       | Drilling Commitment  included as Exhibit C to the Offer to Sell Agreement by and between  Texas Independent Exploration Limited, GulfCoast Acquisitions Limited,  Frederick W. Zimmerman, Frederick W. Zimmerman d/b/a Island Resources, and  Whittier Energy Company, dated June 15, 2004, incorporated by reference  to Exhibit 10.3 of Whittier’s Form 8-K filed on July 2, 2004. |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.5                 |       | Whittier Energy  Corporation Long Term Incentive Plan dated effective December 16, 2003,  as amended on October 18, 2005.                                                                                                                                                                                                                                                                                |

 

26

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| 10.6   |   | Form of Stock  Option Award Agreement under the Whittier Energy Corporation 2004 Long-Term  Incentive Plan, incorporated by reference to Exhibit 10.1 to the  Registrant’s Current Report on Form 8-K filed on November 9, 2005.                  |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                       |
| 10.7   |   | Executive Employment  Agreement dated June 15, 2005, between Whittier Energy Corporation and  Bryce W. Rhodes, incorporated by reference to Exhibit 10.11 of Whittier’s  Registration Statement on Form SB-2 filed on August 9, 2005.             |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.8   |   | Executive Employment  Agreement dated June 15, 2005, between Whittier Energy Corporation and  Daniel Silverman, incorporated by reference to Exhibit 10.11 of Whittier’s  Registration Statement on Form SB-2 filed on August 9, 2005.            |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.9   |   | Executive Employment  Agreement dated June 15, 2005, between Whittier Energy Corporation and  Michael B. Young, incorporated by reference to Exhibit 10.11  of Whittier’s Registration Statement on Form SB-2 filed on August 9,  2005. |
|   |   |                                                                                                                                                                                                                                                                       |
| 14.1   |   | Code of Ethics of  Whittier Energy Corporation previously filed as Exhibit 10.9 to Form 10-KSB  for the year ended December 31, 2004.                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                       |
| 21.1   |   | Subsidiaries of Whittier Energy Corporation, incorporated by reference  to Exhibit 21 of Whittier’s Registration Statement on Form SB-2  filed on August 9, 2005.                                                                                      |
|   |   |                                                                                                                                                                                                                                                                       |
| 23.1*  |   | Consent of H.J. Gruy and Associates, Inc.                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                       |
| 23.2*  |   | Consent of WZI, Inc.                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                       |
| 31.1*  |   | Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) under  the Securities Exchange Act.                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                       |
| 31.2*  |   | Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) under  the Securities Exchange Act.                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                       |
| 32.1*  |   | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                       |
| 32.2*  |   | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                         |

 

----

*Filed herewith

 

27

----

 

 

**CONSOLIDATED FINANCIAL STATEMENTSWITHREPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRMYEARS ENDED DECEMBER 31, 2005 AND 2004**

 

**FOR**

 

**WHITTIER ENERGY CORPORATION**

 

----

 

**WHITTIER ENERGY CORPORATION**

 

**CONSOLIDATED FINANCIAL STATEMENTS**

 

**TABLE OF CONTENTS**

 
| Report of  Independent Registered Public Accounting Firm                                                              |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                  |   |
| Consolidated Balance  Sheets as of December 31, 2005 and December 31, 2004                                  |   |
|                                                                                                                  |   |
| Consolidated  Statements of Operations for the years ended December 31, 2005 and 2004                            |   |
|                                                                                                                  |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2005 and 2004                            |   |
|                                                                                                                  |   |
| Consolidated  Statements of Changes in Stockholders’ Equity for the years ended  December 31, 2005 and 2004 |   |
|                                                                                                                  |   |
| Notes to  Consolidated Financial Statements                                                                           |   |
|                                                                                                                  |   |
| Supplemental  Information – Disclosures About Oil and Gas Producing Activities – Unaudited                  |   |

 

----

 

Report of IndependentRegistered Public Accounting Firm

 

Board of Directors andStockholders

Whittier EnergyCorporation

 

We have audited theaccompanying consolidated balance sheets of Whittier Energy Corporation (aNevada corporation) and subsidiaries as of December 31, 2005 and 2004 andthe related consolidated statements of operations, cash flows and changes instockholders’ equity for the years then ended. These financial statements arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. The Company is not required to have, nor were weengaged to perform, an audit of its internal control over financial reporting. Ouraudit 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. Anaudit also includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements*,*****assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Whittier Energy Corporation andsubsidiaries as of December 31, 2005 and 2004, and the results of theiroperations and their cash flows for the years then ended in conformity withaccounting principles generally accepted in the United States of America.

 
| /s/  Grant Thornton LLP |   |
|-------------------------|--------|
|                    |
| Houston,  Texas         |
| March  17, 2006         |

 

F-1

----

 

**WHITTIER ENERGY CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

(In Thousands, Except Share Data)

 
| ** **                                                      | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                                                      | ** ** | ** **                            | ** ** | ** ** | ** ** |
| **Assets**                                                      |       |                                  |       |   |   |
| Current assets:                                                 |       |                                  |       |   |   |
| Cash and cash equivalents                                       |       | $                                     | 5,091      |   | $ | 1,461 |   |
| Accounts receivable, net of allowances                          |       | 11,092                                |       | 2,491 |   |
| Income tax receivable                                           |       | —                                |       | 28 |   |
| Deferred tax asset, commodity price hedging contracts  (Note 4) |       | 2,080                                 |       | 376 |   |
| Prepaid assets                                                  |       | 982                                   |       | 108 |   |
|                                                            |       |                                  |       |   |   |
| Total current assets                                            |       | 19,245                                |       | 4,464 |   |
|                                                            |       |                                  |       |   |   |
| Investments in marketable securities (Note 2)                   |       | 234                                   |       | 1,054 |   |
| Oil and gas properties on the basis of full cost  accounting:   |       |                                  |       |   |   |
| Proved properties, subject to amortization                      |       | 94,111                                |       | 23,360 |   |
| Unproved properties, not subject to amortization                |       | 14,990                                |       | 2,442 |   |
| Other equipment and fixtures                                    |       | 267                                   |       | 119 |   |
| Accumulated depletion, depreciation and amortization            |       | (14,272                               | )          | (6,108 | ) |
| Net oil and gas properties (Note 3)                             |       | 95,096                                |       | 19,813 |   |
| Goodwill (Note 1)                                               |       | 1,485                                 |       | 1,485 |   |
| Other assets                                                    |       | 491                                   |       | 284 |   |
|                                                            |       |                                  |       |   |   |
| Total assets                                                    |       | $                                     | 116,551    |   | $ | 27,100 |   |

 

*Seeaccompanying notes.*

 

F-2

----

 
| ** **                                                                                                                                                                                                                       | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                                                                                                       | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                                                                                                                                                                                                                             |       |                                  |       |   |   |
| **Liabilities and stockholders’ equity**                                                                                                                                                                                    |       |                                  |       |   |   |
| Current liabilities:                                                                                                                                                                                                             |       |                                  |       |   |   |
| Accounts payable                                                                                                                                                                                                                 |       | $                                     | 9,944      |   | $ | 2,814 |   |
| Commodity price hedging contracts, current portion  (Note 10)                                                                                                                                                                    |       | 5,473                                 |       | 1,087 |   |
| Revolving credit facility, current portion (Note 6)                                                                                                                                                                              |       | —                                |       | 1,650 |   |
| Other current liabilities                                                                                                                                                                                                        |       | 353                                   |       | 29 |   |
| Total current liabilities                                                                                                                                                                                                        |       | 15,770                                |       | 5,580 |   |
|                                                                                                                                                                                                                             |       |                                  |       |   |   |
| Revolving credit facility (Note 6)                                                                                                                                                                                               |       | 14,000                                |       | 6,095 |   |
| Convertible subordinated note payable (Note 6)                                                                                                                                                                                   |       | —                                |       | 1,787 |   |
| Asset retirement obligation (Note 5)                                                                                                                                                                                             |       | 488                                   |       | 121 |   |
| Commodity price hedging contracts (Note 10)                                                                                                                                                                                      |       | 2,309                                 |       | 737 |   |
| Deferred income tax liability (Note 4)                                                                                                                                                                                           |       | 23,290                                |       | 834 |   |
| Total liabilities                                                                                                                                                                                                                |       | 55,857                                |       | 15,154 |   |
|                                                                                                                                                                                                                             |       |                                  |       |   |   |
| Commitments and contingencies (Note 11)                                                                                                                                                                                          |       |                                  |       |   |   |
|                                                                                                                                                                                                                             |       |                                  |       |   |   |
| Stockholders’ equity (Note 7):                                                                                                                                                                                              |       |                                  |       |   |   |
| Common stock, $.001 par value, 100,000,000 shares  authorized and 12,515,265 and 3,841,134 shares issued and outstanding as of December 31,  2005 and December 31, 2004, respectively                                  |       | 13                                    |       | 4 |   |
| Additional paid-in capital                                                                                                                                                                                                       |       | 53,446                                |       | 6,661 |   |
| Accumulated other comprehensive income (loss),  unrealized gain (loss) on marketable securities, net of taxes of $35 and  ($64), for the periods ended December 31, 2005 and December 31,  2004, respectively (Note 2) |       | (57                                   | )          | 119 |   |
| Accumulated other comprehensive loss, hedging  contracts, net of taxes of $2,690 and $634 for the periods ended December 31,  2005 and December 31, 2004, respectively (Note 10)                                       |       | (4,389                                | )          | (1,178 | ) |
| Retained earnings                                                                                                                                                                                                                |       | 11,681                                |       | 6,340 |   |
| Total stockholders’ equity                                                                                                                                                                                                  |       | 60,694                                |       | 11,946 |   |
|                                                                                                                                                                                                                             |       |                                  |       |   |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                                  |       | $                                     | 116,551    |   | $ | 27,100 |   |

 

*Seeaccompanying notes.*

 

F-3

----

 

**WHITTIER ENERGY CORPORATION**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

(In Thousands, Except Share Data)

 
| ** **                                | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| ** **                                | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Oil and gas revenues                      |       | $                                          | 26,942     |   | $ | 10,132 |   |
|                                      |       |                                       |       |   |   |
| Costs and expenses:                       |       |                                       |       |   |   |
| Lease operating expenses                  |       | 5,465                                      |       | 2,962 |   |
| Production taxes                          |       | 2,680                                      |       | 1,230 |   |
| Depreciation, depletion, and amortization |       | 8,165                                      |       | 2,446 |   |
| Ineffective portion of hedge contracts    |       | 692                                        |       | — |   |
| General and administrative expenses       |       | 3,439                                      |       | 1,674 |   |
|                                      |       |                                       |       |   |   |
| Total costs and expenses                  |       | 20,441                                     |       | 8,312 |   |
|                                      |       |                                       |       |   |   |
| Income from operations                    |       | 6,501                                      |       | 1,820 |   |
|                                      |       |                                       |       |   |   |
| Other income/(expense):                   |       |                                       |       |   |   |
| Interest and other income                 |       | 98                                         |       | 2 |   |
| Interest expense                          |       | (225                                       | )          | (309 | ) |
| Partnership income                        |       | 285                                        |       | 219 |   |
| Gain from sale of marketable securities   |       | 1,267                                      |       | — |   |
| Impairment of marketable securities       |       | —                                     |       | (645 | ) |
| Litigation settlement income              |       | —                                     |       | 235 |   |
| Other                                     |       | —                                     |       | (12 | ) |
|                                      |       |                                       |       |   |   |
| Other income/(expense)                    |       | 1,425                                      |       | (510 | ) |
|                                      |       |                                       |       |   |   |
| Income before income taxes                |       | 7,926                                      |       | 1,310 |   |
| Income tax expense (benefit)              |       | 2,585                                      |       | (110 | ) |
| Net income                                |       | $                                          | 5,341      |   | $ | 1,420 |   |

 

*Seeaccompanying notes.*

 

F-4

----

 
| ** **                                                              | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                              | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| ** **                                                              | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Basic earnings per share:                                               | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Net income per share                                                    |       | $                                          | 1.31       |   | $ | .39 |   |
| Weighted average number of shares outstanding  (basic)                  |       | 4,081,965                                  |       | 3,612,572 |   |
| ** **                                                              | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Dilutive earnings per share:                                            | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Net income per share                                                    |       | $                                          | .60        |   | $ | .38 |   |
| Weighted average number of shares outstanding  (dilutive)               |       | 8,915,801                                  |       | 3,854,333 |   |
|                                                                    |       |                                       |       |   |   |
| Net income                                                              |       | $                                          | 5,341      |   | $ | 1,420 |   |
| Diluted net income:                                                     | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Interest on convertible subordinated note                               |       | 38                                         |       | 53 |   |
| Diluted net income                                                      |       | $                                          | 5,379      |   | $ | 1,473 |   |
|                                                                    |       |                                       |       |   |   |
| Dilutive securities outstanding:                                        |       |                                       |       |   |   |
| Basic shares outstanding                                                |       | 4,081,965                                  |       | 3,612,572 |   |
| Stock options and warrants                                              |       | 112,324                                    |       | 241,761 |   |
| Convertible subordinated note                                           |       | 164,859                                    |       | — |   |
| Series A Preferred Stock                                           |       | 4,556,653                                  |       | — |   |
|                                                                    |       |                                       |       |   |   |
| Diluted shares outstanding, assuming conversion of  dilutive securities |       | 8,915,801                                  |       | 3,854,333 |   |

 

*Seeaccompanying notes.*

 

F-5

----

 

**WHITTIER ENERGY CORPORATION**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

(In Thousands)

 
| ** **                                                                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
|                                                                                 |       |                                       |       |   |   |
| **Cash flows from operating activities**                                             |       |                                       |       |   |   |
| Net income                                                                           |       | $                                          | 5,341      |   | $ | 1,420 |   |
| Adjustments to reconcile net income to net cash  provided from operating activities: |       |                                       |       |   |   |
| Depreciation, depletion, and amortization                                            |       | 8,165                                      |       | 2,446 |   |
| Deferred income tax provision (benefit)                                              |       | 2,585                                      |       | (110 | ) |
| Gain on the sale of marketable securities                                            |       | (1,267                                     | )          |   |   |
| Partnership income                                                                   |       | (285                                       | )          | (219 | ) |
| Ineffective portion of hedge loss                                                    |       | 692                                        |       |   |   |
| Impairment of marketable securities                                                  |       | —                                     |       | 645 |   |
| Changes in assets and liabilities, net of effects of  acquisitions:                  |       |                                       |       |   |   |
| Allowance for doubtful accounts                                                      |       | —                                     |       | 64 |   |
| Increase in accounts receivable                                                      |       | (4,594                                     | )          | (1,356 | ) |
| Increase in prepaids and other receivables                                           |       | (722                                       | )          | (32 | ) |
| Increase in accounts payable                                                         |       | 6,200                                      |       | 1,510 |   |
| Increase in other current payables                                                   |       | 324                                        |       | 10 |   |
| Net cash provided from operating activities                                          |       | 16,439                                     |       | 4,378 |   |
|                                                                                 |       |                                       |       |   |   |
| **Cash flows from investing activities**                                             |       |                                       |       |   |   |
| Investment in oil and gas properties                                                 |       | (14,620                                    | )          | (10,208 | ) |
| Acquisition of RIMCO Production Company, net of cash  acquired                       |       | (55,377                                    | )          | — |   |
| Proceeds from sale of oil and gas properties                                         |       | 4,119                                      |       | 525 |   |
| Investments in partnerships                                                          |       | (55                                        | )          | (109 | ) |
| Distributions from partnerships                                                      |       | 387                                        |       | 284 |   |
| Proceeds from the sale of marketable securities                                      |       | 1,810                                      |       | 31 |   |
| Net cash used in investing activities                                                |       | (63,736                                    | )          | (9,477 | ) |
|                                                                                      |            |                                            |            |  |  |  |  |

 

*See accompanying notes.*

 

F-6

----

 
| ** **                                                                                  | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
|                                                                                        |       |                                       |       |   |   |
| **Cash flows from financing activities**                                                    |       |                                       |       |   |   |
| Net proceeds from private placement                                                         |       | —                                     |       | 2,283 |   |
| Proceeds from revolving credit facility                                                     |       | 21,000                                     |       | 4,230 |   |
| Payments on revolving credit facility                                                       |       | (14,745                                    | )          | (990 | ) |
| Payments on convertible note                                                                |       | (1,072                                     | )          | — |   |
| Debt issuance costs                                                                         |       | (266                                       | )          | — |   |
| Net proceeds from preferred stock offering                                                  |       | 45,864                                     |       | — |   |
| Proceeds from stock option exercises                                                        |       | 146                                        |       | — |   |
| Net cash provided from financing activities                                                 |       | 50,927                                     |       | 5,523 |   |
|                                                                                        |       |                                       |       |   |   |
| Net increase in cash and cash equivalents                                                   |       | 3,630                                      |       | 424 |   |
| Cash and cash equivalents at beginning of period                                            |       | 1,461                                      |       | 1,037 |   |
|                                                                                        |       |                                       |       |   |   |
| Cash and cash equivalents at end of period                                                  |       | $                                          | 5,091      |   | $ | 1,461 |   |
|                                                                                        |       |                                       |       |   |   |
| **Supplemental cash flow disclosure**                                                       |       |                                       |       |   |   |
| Income taxes paid                                                                           |       | $                                          | 16         |   | — |   |
| Interest paid                                                                               |       | $                                          | 1,021      |   | $ | 397 |   |
|                                                                                        |       |                                       |       |   |   |
| **Supplemental schedule of non-cash investing  and financing activities**              |       |                                       |       |   |   |
| Unrealized (gain)/loss on marketable securities                                             |       | $                                          | 57         |   | $ | (23 | ) |
| Convertible subordinated note issued for purchase of  South Texas Properties                |       | $                                          | —     |   | $ | 1,787 |   |
| Repayment of principal on convertible note using  common stock                              |       | $                                          | 715        |   | — |   |
| Value of stock warrants issued for purchase of South  Texas Properties                      |       | $                                          | —     |   | $ | 135 |   |
| Issuance of common stock in exchange for settlement  of outstanding investment banking fees |       | $                                          | —     |   | $ | 40 |   |
| Exercise of common stock warrant                                                            |       | $                                          | —     |   | $ | 90 |   |

 

*See accompanying notes.*

 

F-7

----

 

**WHITTIER ENERGY CORPORATION**

**CONSOLIDATEDSTATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY**(In Thousands, except per share data)

 
|                                                                                           |   | **Common Stock**   | ** ** | **Paid in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Comprehensive  Income (Loss)** | ** ** | **Total  Stockholders’  Equity** |   |
|------------------------------------------------------------------------------------------------|--------|-------------------------|------------|---------------------------|------------|------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|--------|
|                                                                                           |   | **Shares  Outstanding** | ** ** | **Par  Value**            | ** ** | ** **             | ** ** | ** **                                                | ** ** |                                  |
|                                                                                           |   |                    |       |                      |       |                   |       |                                                      |       |                                  |       |                                  |   |   |   |
| Balance at December 31, 2003                                                              |   | 3,348,765               |       | $                         | 3          |                   | $          | 4,185                                                     |       | $                                     | 4,920      |                                  | $      | (876 | ) |   |   | $ | 8,232 |   |
|                                                                                           |   |                    |       |                      |       |                   |       |                                                      |       |                                  |       |                                  |   |   |   |
| Comprehensive income:                                                                          |   |                    |       |                      |       |                   |       |                                                      |       |                                  |       |                                  |   |   |   |
|                                                                                           |   |                    |       |                      |       |                   |       |                                                      |       |                                  |       |                                  |   |   |   |
| Net income                                                                                     |   | —                  |       | —                    |       | —                 |       | 1,420                                                     |       | —                                |       | $                                     | 1,420  |   | 1,420 |   |
| Unrealized holding gain on available for sale  marketable securities, net of deferred taxes    |   |                    |       |                      |       |                   |       |                                                      |       | 203                                   |       | 203                                   |   | 203 |   |
| Impairment of marketable securities, net of deferred  taxes                                    |   | —                  |       | —                    |       | —                 |       | —                                                    |       | 419                                   |       | 419                                   |   | 419 |   |
| Unrealized loss on fair value of hedging contracts  net of deferred taxes                      |   | —                  |       | —                    |       | —                 |       | —                                                    |       | (805                                  | )          | (805                                  | )      | (805 | ) |
|                                                                                           |   |                    |       |                      |       |                   |       |                                                      |       |                                  |       |                                  |   |   |   |
| Comprehensive income                                                                           |   |                    |       |                      |       |                   |       |                                                      |       |                                  |       | $                                     | 1,237  |   |   |   |
| Common stock issuance in private placement, net of  issuance costs of $133                     |   | 469,938                 |       | 1                         |       | 2,281                  |       | —                                                    |       | —                                |       |                                  |   | 2,282 |   |
| Issuance of common stock warrants in property  acquisition                                     |   | —                  |       | —                    |       | 135                    |       | —                                                    |       | —                                |       |                                  |   | 135 |   |
| Issuance of common stock in exchange for settlement  of outstanding investment banking fees    |   | 7,431                   |       | —                    |       | 40                     |       | —                                                    |       | —                                |       |                                  |   | 40 |   |
| Purchase price adjustment on acquisition of Olympic  Resources                                 |   | —                  |       | —                    |       | (70                    | )          | —                                                    |       | —                                |       |                                  |   | (70 | ) |
| Exercise of common stock Warrant                                                               |   | 15,000                  |       | —                    |       | 90                     |       | —                                                    |       | —                                |       |                                  |   | 90 |   |
|                                                                                           |   |                    |       |                      |       |                   |       |                                                      |       |                                  |       |                                  |   |   |   |
| Balance at December 31, 2004                                                              |   | 3,841,134               |       | $                         | 4          |                   | $          | 6,661                                                     |       | $                                     | 6,340      |                                  | $      | (1,059 | ) |   |   | $ | 11,946 |   |
| Comprehensive income:                                                                          |   |                    |       |                      |       |                   |       |                                                      |       |                                  |       |                                  |   |   |   |
| Net income                                                                                     |   | —                  |       | —                    |       | —                 |       | 5,341                                                     |       | —                                |       | $                                     | 5,341  |   | 5,341 |   |
| Unrealized holding loss on available for sale  marketable securities, net of deferred taxes    |   | —                  |       | —                    |       | —                 |       | —                                                    |       | (176                                  | )          | (176                                  | )      | (176 | ) |
| Unrealized loss on fair value of hedging contracts,  net of deferred taxes                     |   | —                  |       | —                    |       | —                 |       | —                                                    |       | (3,211                                | )          | (3,211                                | )      | (3,211 | ) |
|                                                                                           |   |                    |       |                      |       |                   |       |                                                      |       |                                  |       |                                  |   |   |   |
| Comprehensive income                                                                           |   |                    |       |                      |       |                   |       |                                                      |       |                                  |       | $                                     | 1,954  |   |   |   |
| Common stock converted from preferred stock, net of  issuance costs of $4,100                  |   | 8,529,120               |       | 9                         |       | 45,855                 |       | —                                                    |       | —                                |       |                                  |   | 45,864 |   |
| Issuance of common stock in exchange for payment of  outstanding convertible subordinated note |   | 119,156                 |       | —                    |       | 715                    |       | —                                                    |       | —                                |       |                                  |   | 715 |   |
| Issuance of common stock options to consultants                                                |   |                    |       |                      |       | 51                     |       |                                                      |       |                                  |       |                                  |   | 51 |   |
| Exercise of common stock options and other                                                     |   | 25,855                  |       | —                    |       | 164                    |       | —                                                    |       | —                                |       |                                  |   | 164 |   |
|                                                                                           |   |                    |       |                      |       |                   |       |                                                      |       |                                  |       |                                  |   |   |   |
| Balance at December 31, 2005                                                              |   | 12,515,265              |       | $                         | 13         |                   | $          | 53,446                                                    |       | $                                     | 11,681     |                                  | $      | (4,446 | ) |   |   | $ | 60,694 |   |

 

*Seeaccompanying notes.*

 

F-8

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**WHITTIER ENERGY CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 1 - BACKGROUNDAND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

Whittier Energy Corporation, a Nevada corporation (“Whittier”),is an independent oil and gas exploration and production company engaged in theacquisition, exploration and development of oil and gas properties in thecontinental United States. As of December 31, 2005, Whittier had fivewholly owned subsidiaries, including Whittier Energy Company (“Whittier Energy”),a Nevada corporation, Whittier Operating, Inc. (“Whittier Operating”), aTexas corporation, Olympic Resources (Arizona) Ltd., an Arizona corporation,RIMCO Production Company, Inc. (“RIMCO”), a Delaware corporation, andVaquero Gas Company, Inc. (“Vaquero”), a Texas corporation. WhittierOperating is a direct subsidiary of Whittier Energy and Vaquero is a directsubsidiary of RIMCO. References to the “Company” refer to Whittier and itssubsidiaries.

 

On June 15, 2005,Whittier completed the acquisition of RIMCO Production Company, Inc., aprivately held Delaware corporation, for approximately $57.1 million (the “Acquisition”).The Acquisition was structured as a merger of RPC Acquisition Company, Inc.,a Delaware corporation wholly owned by Whittier, into RIMCO. Upon closing ofthe Acquisition, Whittier became the sole owner of RIMCO. The Acquisitionsubstantially increased Whittier’s properties, production and undevelopedacreage. Whittier was the accounting and legal acquirer of RIMCO. TheAcquisition is further described in Note 12.

 

Contemporaneously withthe Acquisition and to fund a portion of the purchase price, Whittier issuedand sold 852,912 shares of Series A 8% Automatically Convertible PreferredStock (the “Series A Preferred Stock”) for an aggregate offering amount ofapproximately $50 million. The Company’s Series A Preferred Stockautomatically converted into 8,529,120 shares of the Company’s common stock on December 27,2005, in conjunction with the Company’s listing on the NASDAQ National Market (“NASDAQ”).The Company’s issuance and conversion of its Series A Preferred Stock isfurther described in Note 7. Whittier also entered into a new $75 millionrevolving credit facility (the “Credit Facility”) as part of theAcquisition, which is further described in Note 6.

 

On July 1, 2005, theCompany effected a one-for-three reverse split of its authorized andoutstanding shares of common stock. All historical weighted average share andper share amounts have been restated to reflect the reverse stock split.

 

This summary ofsignificant accounting policies of the Company is presented to assist inunderstanding its consolidated financial statements. The consolidated financialstatements and notes are representations of the Company’s management, who isresponsible for ensuring integrity and objectivity in the preparation of theconsolidated financial statements. These accounting policies conform toaccounting principles generally accepted in the United States and have beenconsistently applied in the preparation of the financial statements.

 

Nature ofOperations and Organization

 

The Company’s assetsconsist primarily of operated and non-operated working interests, royaltyinterests, partnership interests, and mineral acreage, focused in the Texas andLouisiana Gulf Coast, South Texas, and the Permian Basin.

 

Principles ofConsolidation and Combination

 

The consolidatedfinancial statements include the accounts of Whittier and its subsidiaries. TheCompany’s operating results for the year ended December 31, 2005 includeRIMCO’s operating results from June 16, 2005 through December 31,2005. All intercompany transactions have been eliminated. The Company accountsfor its investments in oil and gas partnerships and joint ventures using theproportionate consolidation method, whereby its proportionate share of eachentity’s assets, liabilities, revenues, and expenses are included in theappropriate classification in the consolidated financial statements. Investmentinterests in partnerships of less than 20%, where the Company has limitedliability and no significant influence over the investee, are accounted forusing the cost method, whereby the investment is recorded at cost and theinvestment is periodically assessed for impairment. Cash distributions aretreated as return of capital and are only recognized in income when cumulativedistributions exceed the Company’s cost basis in the investment.

 

F-9

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Use of Estimatesin the Preparation of Financial Statements

 

The preparation of thesefinancial statements requires the use of estimates by management in determiningthe Company’s assets, liabilities, revenues and expenses. Actual results coulddiffer from those estimates. Material estimates that are particularlysusceptible to significant change relate to the estimate of the Company’sproved oil and gas reserves prepared by an independent engineering consultant.Such estimates are subject to various uncertainties inherent in the estimationof quantities of proved reserves. Estimated reserves are used in thecalculation of depletion, depreciation and amortization as well as the Company’sassessment of proved oil and gas properties for impairment.

 

Cash and CashEquivalents

 

Cash and cash equivalents include cash on hand and ondeposit, and highly liquid debt instruments with original maturities of threemonths or less.

 

Accounts Receivable

 

The Company carries its accounts receivables at cost,recording allowances for doubtful accounts into earnings when they are deemedto be uncollectible. As of December 31, 2005 and 2004, the Company had recordedan estimated allowance for doubtful accounts of approximately $0 and $64,000,respectively.

 

Marketable Securities

 

The Company classifies its investments in marketablesecurities as available for sale. Such investments are carried in the financialstatements at fair value. Realized gains and losses, determined using thefirst-in, first-out (FIFO) method, are included in earnings, and unrealizedholding gains and losses are excluded from net income (loss) and reported inother comprehensive income (loss). The Company periodically reviews itsinvestments in marketable securities to determine if an other than temporary impairmentexists, recognizing any resulting impairment in earnings in the period such adetermination is made.

 

Goodwill

 

Goodwill represents the excess of costs over the fairvalue of the acquired business assets. Effective January 1, 2002, goodwilland other intangible assets with indefinite lives are no longer amortized. TheCompany evaluates goodwill for impairment on an annual basis by comparing thefair value of its reporting unit to the carrying value of the reporting unit. Managementconsiders the Company to be the reporting unit. For the years ended December 31,2005 and December 31, 2004, respectively, the fair value of the Company’sreporting unit exceeded the recorded carrying value.

 

The carrying amount ofgoodwill for the years ended December 31, 2005 and December 31, 2004 isas follows (in thousands):

 

| ** **                    | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Beginning balance             |       | $                                          | 1,485      |   | $ | 1,485 |   |
| Goodwill acquired during year |       | —                                     |       | — |   |
| Impairment losses             |       | —                                     |       | — |   |
| Ending balance                |       | $                                          | 1,485      |   | $ | 1,485 |   |

 

Oil and GasProperty and Equipment (Full Cost)

 

In conjunction with theAcquisition, the Company adopted the full cost method of accounting for its oiland gas activities. The Company believes that the full cost method ofaccounting more appropriately reflects the operating results of an independentoil and gas producer that expends significant amounts of capital on explorationactivities in order to discover proved reserves. Accordingly, the Companybelieves full cost accounting is the preferred method for the post-acquisitionCompany. Whittier arrived at this conclusion based on a number ofconsiderations, including: 1) the material size of the transaction and RIMCO’shistorical use of full cost accounting; 2) the composition of RIMCO’s acquiredassets; 3) the nature of RIMCO’s prospect generation business and technicalpersonnel; and 4) the Company’s anticipated exploration projects and capitalexpenditures

 

F-10

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subsequent to theAcquisition. Additionally, the full cost method is used by many of Whittier’speers, and management believes the change will enhance the overall transparencyand peer group comparability of the Company’s consolidated financialstatements.

 

Under the full costmethod of accounting, all costs associated with property acquisition,exploration, and development activities are capitalized. Exploration anddevelopment costs include dry hole costs, geological and geophysical costs,direct overhead related to exploration and development activities and othercosts incurred for the purpose of finding oil and gas reserves. Salaries andbenefits paid to employees directly involved in the exploration and developmentof oil and gas properties as well as other internal costs that can bespecifically identified with acquisition, exploration, and developmentactivities are also capitalized. The Company capitalizes interest costs to itsunproved oil and gas properties, as well.

 

All capitalized costs ofproved oil and gas properties, including the estimated future costs to developproved reserves, are amortized on the unit-of-production method using totalestimated proved reserves. Investments in unproved properties and majordevelopment projects are not amortized until proved reserves associated withthe projects can be determined or until impairment occurs. If the results of anassessment indicate that the properties are impaired, the amount of theimpairment is added to the cost to be amortized.

 

The capitalized costs ofthe Company’s oil and gas properties, net of accumulated depreciation,depletion, and amortization, may not exceed the estimated future net cashflows from proved oil and gas reserves discounted at 10 percent, plus thelower of cost or fair market value of unproved properties as adjusted for relatedtax effects (the “Ceiling Limitation”). If capitalized costs exceed the CeilingLimitation, the excess must be charged to expense. Whittier did not have anyadjustment to earnings due to the Ceiling Limitation for the periods presentedherein.

 

Sales of proved andunproved properties are accounted for as adjustments of capitalized costs withno gain or loss recognized, unless such adjustments would significantly alterthe relationship between capitalized costs and proved reserves of oil and gas,in which case the gain or loss is recognized in income. Abandonments ofproperties are accounted for as adjustments of capitalized costs with no lossrecognized.

 

# **Equipmentand Fixtures**

# ** **

Equipment and fixtures are stated at costand depreciated over the estimated useful lives of the assets, which range fromthree to seven years, using the straight-line method. Maintenance and repairs,which neither materially add to the value of the property nor appreciablyprolong its life, are charged to expense as incurred. Gains or losses on thedispositions of property and equipment, other than oil and gas property, arereflected in the Company’s results from operations.

 

# **DeferredIncome Taxes**

# ** **

# **UnderStatement of Financial Accounting Standard (SFAS) No. 109, “Accounting forIncome Taxes,” deferred taxes are determined based on the estimated future taxeffects of differences between the financial statement and tax basis of assetsand liabilities, given the provision of the applicable tax laws in effect atthat time. The Company records a valuation allowance when the Companydetermines it is more likely than not that the deferred tax assets will not berealized. See “Note 4 – Income Taxes.”**

# ** **

# **RevenueRecognition**

# ** **

Crude oil and natural gasrevenues are recognized after production takes place, when the sale iscompleted and the risk of loss transfers to a third party purchaser. TheCompany utilizes the entitlement method to account for its revenues from salesof its oil and gas production. The Company does not have any gas imbalancesrelating to its oil and gas properties. Undistributed oil and gas revenues due tothird parties from the properties the Company operates are included in currentaccounts payable on the Company’s consolidated balance sheet.

 

F-11

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Management of CommodityPrice Risk

 

The Company from time to time enters into commodityprice hedging contracts with respect to its oil and gas production to achieve amore predictable cash flow, as well as reduce its exposure to price volatility.The Company accounts for its hedging contracts in accordance with SFAS No. 133“Accounting for Derivative Instruments and Hedging Activities.”

 

SFAS No. 133, as amended, establishes accountingand reporting standards requiring that every derivative instrument (includingcertain derivative instruments embedded in other contracts) be recorded in thebalance sheet as either an asset or liability measured at its fair valueregardless of the purpose or intent for holding the instrument. The statementrequires that changes in the derivative’s fair value be recognized currently inearnings unless specific hedge criteria are met. Special accounting forqualifying hedges allows a derivative’s gains and losses to offset relatedresults on the hedged item in the income statement, and requires the Company formallydocument, designate and assess the effectiveness of transactions that receivehedge accounting. SFAS No. 133 provides that the effective portion of thegain or loss on a derivative instrument designated and qualifying as a cashflow hedge be reported as a component of other comprehensive income, net ofdeferred taxes, while the ineffective portion is reflected in earnings duringthe applicable period. The effective gain or loss will be reclassified fromother comprehensive income into earnings in the period in which the sales ofthe applicable oil and gas production the hedge relates to are recognized inthe Company’s income statement.

 

Earnings perCommon Share

 

Basic earnings per commonshare is calculated by dividing net income by the aggregate weighted average numberof shares outstanding during the period. Diluted earnings per share considersthe dilutive effect of the average number of common stock equivalents,consisting of the Company’s common stock options, common stock warrants, andcommon stock underlying a convertible note (see Note 6) and Series APreferred Stock (See Note 7), that were outstanding during the periods. TheCompany had a total of 277,183 weighted average common stock equivalentsoutstanding as of December 31, 2005, all of which were dilutive. TheCompany’s total weighted average dilutive and anti-dilutive common stockequivalents outstanding as of December 31, 2004 were 241,761 and 512,358,respectively.

 

All share amounts havebeen adjusted to reflect the Company’s one-for-three reverse split on July 1,2005 (See Note 7).

 

Accounting forStock Based Compensation 

 

The Company accounts forstock based compensation using the intrinsic value method under APB Opinion No. 25,“Accounting for Stock Issued to Employees.” SFAS No. 123, “Accounting forStock-based Compensation” requires that pro forma information regarding netincome and earnings per share be determined as if the Company had accounted forits employee stock options under the fair value method as defined in SFAS No. 123.The Company estimates the fair value for options issued during the period, ifany, as of the date of grant using the Black-Scholes option pricing model byusing weighted average assumptions, volatility factors of the expected marketprice of the Company’s common stock, and the weighted average life expectancyof the options.

 

In December 2003,the Company’s Board of Directors approved a Long Term Incentive Plan (the “Plan”),which was ratified by the Company’s stockholders in July 2004. The Plansets aside a total of 520,000 shares of the Company’s common stock for issuanceto the Company’s officers, directors, employees, and consultants. On October 18,2005, the Company’s stockholders approved expanding the number of shares ofcommon stock available for issuance under the Plan to 1,876,000. During 2004,the Company granted a total of 262,834 options to purchase the Company’s commonstock at an average exercise price of $5.22 per share to certain directors,officers, and employees of the Company, of which 5,000 options were cancelledin May 2004. The options vest ratably over a three-year period from thedate of grant and have a term of five years. The fair market value of theoptions outstanding on the date of grant was estimated to be $1.2 million, or $4.41per share, using the Black-Scholes option pricing model with the followingweighted average assumptions: risk free interest rate of 4%, dividend yield of0%, volatility factors of the expected market price of the Company’s commonstock of 4.74, and a weighted average life expectancy of the options of 3.5years.

 

The Company issued anadditional 447,491 options to various directors, officers, employees andconsultants of the Company during the year ended December 31, 2005, withan average exercise price of $8.16 per share. The fair market value of the

 

F-12

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options on the date ofgrant was estimated to be approximately $1.3 million, or $2.67 per share, usingthe Black-Scholes option pricing model with the following weighted averageassumptions: risk free interest rate of 4.3%, dividend yield of 0%, volatilityfactors of the expected market price of the Company’s common stock of .4, and aweighted average life expectancy of the options of 3 years. The Company granteda total of 702,852 options to various directors, officers, employees andconsultants of the Company on January 24, 2006, with an exercise price of$9.97 per share. The fair market value of the options on the date of grant wasestimated to be approximately $2.2 million, or $3.06 per share, using theBlack-Scholes option pricing model with the following weighted averageassumptions: risk free interest rate of 4.4%, dividend yield of 0%, volatilityfactors of the expected market price of the Company’s common stock of .4, and aweighted average life expectancy of the options of 3 years.

 

For purposes of pro forma disclosures, the estimatedfair value of the options is amortized to expense over the option’s vestingperiod. The Company’s pro forma information, in thousands, is as follows (inthousands, except earnings per share amounts):

 

| ** **                                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
|                                                                                               |       |                                       |       |   |   |
| Net income under APB No. 25                                                                   |       | $                                          | 5,341      |   | $ | 1,420 |   |
|                                                                                               |       |                                       |       |   |   |
| Deduct: Total stock-based compensation expense  determined under the fair value method, net of tax |       | (758                                       | )          | (238 | ) |
|                                                                                               |       |                                       |       |   |   |
| Pro forma net income                                                                               |       | $                                          | 4,583      |   | $ | 1,182 |   |
|                                                                                               |       |                                       |       |   |   |
| Pro forma basic earnings per share                                                                 |       | $                                          | 1.12       |   | $ | .33 |   |
|                                                                                               |       |                                       |       |   |   |
| Pro forma diluted earnings per share                                                               |       | $                                          | .52        |   | $ | .32 |   |
|                                                                                               |       |                                       |       |   |   |
| As reported basic earnings per share                                                               |       | $                                          | 1.31       |   | $ | .39 |   |
|                                                                                               |       |                                       |       |   |   |
| As reported diluted earnings per share                                                             |       | $                                          | .60        |   | $ | .38 |   |

 

New Accounting Standards 

 

In December 2004,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 123(R), “Share–Based Payment,” arevision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R)supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”and amends SFAS No. 95, “Statement of Cash Flows.” SFAS No. 123(R)requires a company to recognize equity based compensation, including stockoption grants, at fair value in the income statement, and discontinuesaccounting for equity based compensation under APB Opinion No. 25, theintrinsic value method. The requirements of this pronouncement are effectivefor fiscal periods beginning after December 15, 2005, for small businessfilers. Whittier currently accounts for equity based compensation using APBOpinion No. 25 under which no compensation cost for employee stock optionshas been recognized. SFAS No. 123(R) also requires the benefits of taxdeductions in excess of recognized compensation cost to be reported as cashflow from financing activities rather than as cash flow from operations, asrequired currently. The Company willadopt SFAS No. 123(R) as of January 1, 2006, utilizing the modifiedprospective method to record compensation expense for the unvested portion ofall grants outstanding as of December 31, 2005 and for all future grants. TheCompany estimates that the adoption of SFAS No. 123(R) will reduce 2006net income by approximately $1.5 million. As of December 31, 2005 thefuture pre-tax expense of nonvested options is $3.0 million to be recognized in2006 through 2008.

 

In December 2004,the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets.”  SFAS No. 153 requires the use of fairvalue measurement for exchanges of non-monetary assets. The statement waseffective for the Company beginning in the

 

F-13

----

 

third quarter of 2005.The adoption of SFAS No. 153 had no impact on the Company’s financialposition or results of operations.

 

 In May 2005,the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections: areplacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154requires voluntary changes in accounting principles to be appliedretrospectively, unless it is impracticable to determine either the periodspecific effects or the cumulative effects of the change. SFAS No. 154’sretrospective application requirement replaces APB 20’s requirement torecognize most voluntary changes in accounting principle by including in netincome of the period of the change the cumulative effect of changing to the newaccounting principle. If retrospective application for all prior periods isimpracticable, the method used to report the change and the reason theretrospective application is impracticable are to be disclosed.

 

Under SFAS No. 154,retrospective application will be the transition method in the unusual event thata newly issued accounting pronouncement does not provide specific transitionguidance. It is expected that most pronouncements will specify transitionmethods other than the retrospective method. SFAS No. 154 is effective foraccounting changes made in fiscal years beginning after December 15, 2005,and the adoption of this statement is expected to have no impact on Whittier’s financialposition or results of operations.

 

In February of 2006,the FASB issued SFAS No. 155 “Accounting for Certain Hybrid FinancialInstruments.”  SFAS No. 155 amends SFASNo. 133, “Accounting for Derivative Instruments and Hedging Activities”and SFAS No. 140 “Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities.” SFAS No. 155 permits fair value remeasurement for any hybridfinancial instrument that contains an embedded derivative that would otherwiserequire bifurcation, clarifies which interest-only strips and principal-onlystrips are not subject to the requirements of SFAS No. 133, establishes arequirement to evaluate interests in securitized financial assets to identifyinterests that are freestanding derivatives or that are hybrid financialinstruments that contain an embedded derivative requiring bifurcation,clarifies that concentrations of credit risk in the form of subordinationare not embedded derivatives and amends SFAS No. 140 to eliminate theprohibition on a qualifying special-purpose entity from holding a derivativefinancial instrument that pertains to a beneficial interest other than anotherderivative financial instrument. SFAS No. 155 is effective for allfinancial instruments aquired or issued after the beginning of an entity’sfirst fiscal year that begins after September 15, 2006. At adoption, anydifference between the total carrying amount of the individual components ofthe existing bifurcated hybrid financial instrument and the fair value of the combinedhybrid financial instrument should be recognized as a cumulative-effectadjustment to beginning retained earnings. Adoption of this statement isexpected to have no impact on the Company’s financial position or results ofoperations.

 

**NOTE 2 -MARKETABLE SECURITIES**

 

The Company’s investmentsin marketable securities are classified as “available-for-sale” in accordancewith SFAS No. 115, “Accounting for Certain Investments in Debt and EquitySecurities.”  As a result, theseinvestments are carried at fair market value as of the relevant balance sheetdates. Unrealized gains and losses are excluded from net income and reported asa separate component of stockholders’ equity as accumulated other comprehensiveincome (loss).

 

F-14

----

 

The carrying amount andestimated market value of the investments as of December 31, 2005 and December 31,2004 are as follows (in thousands):

 
| ** **                            | ** ** | **As of December 31, 2005** | ** ** |
|---------------------------------------|------------|-------------------------------------------------|------------|
| ** **                            | ** ** | **Cost**                                        | ** ** | **Fair Value** | ** ** |
|                                  |       |                                            |       |   |   |
| PYR Energy, Inc., 173,625 Shares |       | $                                               | 328        |   | $ | 234 |   |
|                                  |       |                                            |       |   |   |
| Total                                 |       | $                                               | 328        |   | $ | 234 |   |

 
| ** **                                     | ** ** | **As of December 31, 2004** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **Cost**                         | ** ** | **Fair Value** | ** ** |
|                                           |       |                             |       |   |   |
| Chaparral Resources, Inc., 543,850 Shares |       | $                                | 544        |   | $ | 870 |   |
|                                           |       |                             |       |   |   |
| PYR Energy, Inc., 173,625 Shares          |       | 328                              |       | 184 |   |
|                                           |       |                             |       |   |   |
| Total                                          |       | $                                | 872        |   | $ | 1,054 |   |

 

The Company recognizes any unrealized gain or loss onits marketable securities when the securities are sold or when the Companydetermines that an other than temporary impairment has occurred. During theyear ended December 31, 2005, the Company sold 543,850 shares of Chaparralfor $1,810,595, realizing a gain of $1,266,745. The Company monetized itsinvestment in Chaparral in order to utilize the proceeds for the acquisition,exploration and development of oil and gas properties.

 

The Company is subject to certain trading restrictionsfor its investment in PYR due to SEC regulations regarding stock traded by anaffiliate of a public company, which may limit or prohibit the Company’sability to dispose of its investment in the future. The Company’s President andChief Executive Officer and an independent director currently serve asindependent directors on PYR’s Board of Directors, making them both insiders ofPYR.

 

The Company recorded an unrealized loss as a componentof other comprehensive income (loss) of $57,413, net of deferred income taxes of $35,189 for the year ended December 31,2005 and an unrealized gain of  $118,708,net of deferred taxes of $63,920, for the year ended December 31, 2004. Areconciliation of the pre and after-tax impact of the Company’s marketablesecurities on accumulated other comprehensive income for the periods ended December 31,2005 and 2004, respectively is as follows (in thousands):

 
| ** **                                                    | ** ** | **Pre-tax** | ** ** | **After-tax** | ** ** |
|---------------------------------------------------------------|------------|-------------|------------|---------------|------------|
| Accumulated other comprehensive loss, December 31,  2003      |       | $           | (774       | )             | $          | (503 | ) |
| Reclassified into earnings                                    |       | (24         | )          | (16           | )          |
| Impairment of stock investment                                |       | 645         |       | 419           |       |
| Change in fair market value                                   |       | 336         |       | 219           |       |
| Accumulated other comprehensive gain, December 31,  2004 |       |        | 183        |          |       | 119 |   |
| Reclassified into  earnings                                   |       | (1,267      | )          | (786          | )          |
| Change in statutory tax  rate                                 |       | —      |       | (5            | )          |
| Change in fair market value                                   |       | 992         |       | 615           |       |
| Accumulated other comprehensive loss, December 31,  2005 |       | $           | (92        | )             | $          | (57 | ) |
|                                                               |            |             |            |               |            |  |  |  |  |

 

F-15

----

 

**NOTE 3 - OILAND GAS PROPERTIES, EQUIPMENT AND FIXTURES**

 

Oil and gas properties,equipment and fixtures consist of the following as of December 31, 2005and December 31, 2004, respectively (in thousands):

 
| ** **                                           | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                           | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Oil and Gas Properties                               |       |                                  |       |   |   |
|                                                 |       |                                  |       |   |   |
| Proved oil and gas properties                        |       | $                                     | 94,111     |   | $ | 23,360 |   |
| Unproved oil and gas properties                      |       | 14,990                                |       | 2,442 |   |
|                                                 |       |                                  |       |   |   |
| Total oil and gas assets                             |       | 109,101                               |       | 25,802 |   |
|                                                 |       |                                  |       |   |   |
| Accumulated depreciation, depletion and amortization |       | (14,208                               | )          | (6,074 | ) |
|                                                 |       |                                  |       |   |   |
| Net oil and gas properties                           |       | 94,893                                |       | 19,728 |   |
|                                                 |       |                                  |       |   |   |
| Corporate and Other                                  |       |                                  |       |   |   |
|                                                 |       |                                  |       |   |   |
| Furniture and equipment                              |       | 267                                   |       | 119 |   |
| Accumulated depreciation                             |       | (64                                   | )          | (34 | ) |
|                                                 |       |                                  |       |   |   |
| Total corporate assets                               |       | 203                                   |       | 85 |   |
|                                                 |       |                                  |       |   |   |
| Net oil and gas properties, furniture and equipment  |       | $                                     | 95,096     |   | $ | 19,813 |   |

 

The Company recognized depletion,depreciation and amortization expense of $8,164,632 and $2,445,606 for the yearsended December 31, 2005 and 2004, respectively. The Company’s unevaluatedoil and gas properties include investments in ongoing exploration projects,which are reviewed quarterly to determine if there is an impairment of theircarrying value or if they should be transferred into proved oil and gasproperties.

 

F-16

----

 

 

**NOTE 4 - INCOME TAXES**

 

The provision for incometaxes (benefits) consists of the following:

 
| ** **                                                         | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                         | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                                                         | ** ** | **(in thousands)**               | ** ** |
|                                                               |       |                                  |       |   |   |
| Current income  tax expense (benefit)                              |       | $                                     | 345        |   | $ | — |   |
| Deferred income  tax expense (benefit)                             |       | $                                     | 2,240      |   | $ | (110 | ) |
|                                                               |       |                                  |       |   |   |
| Total income tax  expense (benefit)                                |       | $                                     | 2,585      |   | $ | (110 | ) |
|                                                               |       |                                  |       |   |   |
| Current deferred  tax asset                                        |       |                                  |       |   |   |
| Unrealized  losses on price hedging contracts                      |       | $                                     | 2,080      |   | $ | 376 |   |
|                                                               |       |                                  |       |   |   |
| Total current  deferred tax asset                                  |       | $                                     | 2,080      |   | $ | 376 |   |
|                                                               |       |                                  |       |   |   |
| Non-current deferred  tax assets                                   |       |                                  |       |   |   |
| Unrealized  losses on marketable securities                        |       | $                                     | 36         |   | $ | 162 |   |
| Unrealized  losses on price hedging contracts                      |       | 794                                   |       | 258 |   |
| Temporary  difference in book/tax basis of partnership investments |       | 168                                   |       | 157 |   |
| Net operating  loss carryforwards                                  |       | 1,065                                 |       | 900 |   |
| Valuation  allowance - net operating loss carryforwards            |       | (364                                  | )          | (340 | ) |
| Carryforward of  percentage depletion in excess of basis           |       | 232                                   |       | 128 |   |
| Other                                                              |       | 65                                    |       | 37 |   |
|                                                               |       |                                  |       |   |   |
| Total  non-current deferred tax assets                             |       | $                                     | 1,996      |   | $ | 1,302 |   |
|                                                               |       |                                  |       |   |   |
| Non-current  deferred tax liabilities:                             |       |                                  |       |   |   |
| Excess book  basis over tax basis for oil and gas properties       |       | $                                     | (25,286    | ) | $ | (2,136 | ) |
|                                                               |       |                                  |       |   |   |
| Total  non-current deferred tax liabilities                        |       | $                                     | (25,286    | ) | (2,136 | ) |
|                                                               |       |                                  |       |   |   |
| Net non-current  deferred tax liabilities                          |       | $                                     | (23,290    | ) | $ | (834 | ) |

 

Deferred taxes have beenprovided for the differences between the book and tax basis of oil and gasproperties, principally generated by the current deductibility of intangibledrilling costs allowed for income tax purposes and book and tax basisdifferences related to the acquisition of RIMCO. The Company also provided fordeferred taxes on the unrealized gains and losses on marketable securities,unrealized gains and losses on its commodity pricing hedge instruments, thetemporary differences between the book and tax basis of the Company’sinvestment in partnerships accounted for using the cost method for financialstatement purposes, and percentage depletion carryforwards in excess of basis.

 

Net operating loss (“NOL”)carryforwards included in deferred tax assets in the current period all relateto NOL’s from prior years, including operating losses for the year endedDecember 31, 2003 and approximately $2.5 million in NOL carryforwards that wereacquired as a result of the Company’s merger with Olympic Resources, Ltd. inSeptember 2003. The Company acquired $641,138 in NOL’s as part of the Acquisitionin June 2005. The NOL carryforwards expire between 2017 and 2022 and arepartially restricted from offsetting the future taxable income of the Companydue to Internal Revenue Code (“IRC”) §382 ownership change limitations.

 

F-17

----

 

As of December 31, 2005,the Company had total deferred tax assets from NOL carryforwards of $1,064,539.The Company has recorded a valuation allowance of $363,763, or approximately34%, of its deferred tax asset related to its restricted NOL carryforwards dueto uncertainties regarding the future recoverability of its restricted NOLcarryforwards. The net change in the Company’s valuation allowance fromDecember 31, 2004 to December 31, 2005 was approximately $24,000. The Companyhas recorded the tax benefit of its NOL carryforwards, net of the applicablevaluation allowance, as a deferred tax asset as of December 31, 2005.

 

| ** **                                                                 | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                 | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                                                                 | ** ** | **(in thousands)**               | ** ** |
|                                                                       |       |                                  |       |   |   |
| Effective tax rate  reconciliation:                                        |       |                                  |       |   |   |
|                                                                       |       |                                  |       |   |   |
| Tax expense on  book income computed at statutory rate                     |       | $                                     | 2,695      |   | $ | 459 |   |
| Increases  (decreases) in taxes resulting from:                            |       |                                  |       |   |   |
| State income  taxes, net of federal tax benefit                            |       | 332                                   |       | — |   |
| Percentage  depletion in excess of tax basis                               |       | (433                                  | )          | (89 | ) |
| Change in  valuation allowance related to net operating loss carryforwards |       | 24                                    |       | (481 | ) |
| Domestic  production expense                                               |       | (7                                    | )          | — |   |
| Other                                                                      |       | (26                                   | )          | 1 |   |
|                                                                       |       |                                  |       |   |   |
| Income tax  expense (benefit), as adjusted                                 |       | $                                     | 2,585      |   | $ | (110 | ) |
|                                                                       |       |                                  |       |   |   |
| Effective Tax  Rate                                                        |       | 32.6                                  | %          | (8.4 | )% |

 

**NOTE 5 - ASSET RETIREMENTOBLIGATION**

 

The Company records the fair value of its future assetretirement obligations in accordance with SFAS No. 143, “Accounting for AssetRetirement Obligations.” The Company records the fair value of a liability forlegal obligations associated with the retirement obligations of tangiblelong-lived assets in the period in which it is incurred. When the liability isinitially recorded, the Company increases the carrying amount of the relatedlong-lived asset. Over time, accretion of the liability is recognized eachperiod, and the capitalized cost is depreciated over the useful life of therelated asset. Upon settlement of the liability, the Company either settles theobligation for its recorded amount or incurs a gain or loss.

 

As of December 31, 2005, the Company’s futureabandonment obligation was estimated to be $487,628, including $441,869 incosts capitalized to oil and gas properties subject to depletion and $45,789 incumulative accretion expense. Comparatively, the Company had a total futureabandonment obligation outstanding as of December 31, 2004, of $121,411including $101,380 in costs capitalized to oil and gas properties and $20,031in cumulative accretion expense.

 

Theactivity related to the Company’s future asset retirement obligations for theyears ended December 31, 2005 and 2004 is as follows (in thousands):

 
| ** **                              | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Beginning asset  retirement obligation  |       | $                                          | 121        |   | $ | 69 |   |
| Liabilities  incurred during the period |       | 341                                        |       | 41 |   |
| Liabilities settled during the period   |       | —                                     |       | — |   |
| Accretion  expense                      |       | 26                                         |       | 11 |   |
| Ending asset  retirement obligation     |       | $                                          | 488        |   | $ | 121 |   |

 

F-18

----

 

**NOTE 6 -NOTES PAYABLE**

 

Revolving CreditAgreements

 

In connection with theAcquisition, on June 15, 2005 Whittier entered into its $75 million revolvingCredit Facility with BNP Paribas as the lead bank and administrative agent.Whittier initially borrowed $20 million from the Credit Facility to partiallyfund the Acquisition and to fully repay approximately $8.5 million in principaland accrued interest outstanding on the Company’s previous revolving creditfacility with Compass Bank, as well as $1 million of bank debt held by RIMCO. During2005, the Company repaid $6 million in principal outstanding on the CreditFacility, leaving $14 million in principal outstanding as of December 31, 2005.The borrowing base of the Credit Facility was $26.5 million as of December 31,2005, and is subject to review and adjustment on a semi-annual basis. Redeterminationsof the borrowing base are based upon a number of factors, including commodityprices and reserve levels. Amounts outstanding under the revolver bear interestat specified margins over the London Interbank Offered Rate (“LIBOR”) of 1.50%to 2.25% (6.44% at December 31, 2005). Such margins fluctuate based on theutilization of the Credit Facility. All amounts drawn under the revolver matureJune 15, 2008.

 

The Credit Facility iscollateralized by substantially all of the Company’s assets and the Company issubject to various covenants, representations and warranties. The Company issubject to certain financial covenants pertaining to minimum working capitallevels, minimum coverage of interest expenses, and a maximum leverage ratio. Inaddition, Whittier is subject to covenants limiting dividends and otherrestricted payments, transactions with affiliates, incurrence of debt, changesof control, asset sales, and liens on properties. The primary covenants underthe Credit Facility include the following:

 

•                  The Company will maintain a ratio of total debt to consolidated EBITDAX(net income before interest expenses, taxes, depreciation, depletion,amortization, exploration costs, and other non-cash expenses less non-cashincome and capitalized expenses) for the most recent period of four fiscalquarters of no greater than  3.5 to 1.0, calculatedon a pro-forma basis for the Acquisition; and

 

•                  TheCompany will maintain a current ratio, determined quarterly, of current assetsto current liabilities, inclusive of available borrowing base under the CreditFacility and exclusive of any current portion of principal outstanding underthe Credit Facility, the current fair value of outstanding commodity pricehedging contracts, and the current balance of asset retirement obligationsunder FAS 143, of at least one to one.

 

The Company was incompliance with these covenants as of December 31, 2005 and has classified allof its outstanding indebtedness as long-term. The Company’s next borrowing basereview is scheduled for June 2006.

 

Convertible SubordinatedNote

 

In June 2004, the Companyissued a six-year, approximate $1.8 million subordinated note bearing interestat a rate of 7% per annum and convertible into our common stock at a conversionprice of $6.00 per share to a third party in connection with Whittier’s acquisitionof various operated working interests in three gas fields in South Texas. OnJuly 22, 2005, the holder converted $714,936 of the outstanding principal onthe note into 119,156 shares of Whittier common stock at a conversion price of$6.00 per share. On that same date, Whittier repaid all remaining principal andaccrued interest on the note for approximately $1.1 million in cash.

 

For the year endedDecember 31, 2005, the Company incurred $1,021,323 in interest expense, ofwhich $796,827 was capitalized to its unevaluated oil and gas properties. Forthe year ended December 31, 2004, the Company incurred interest expense of $397,622,of which $89,150 was capitalized to its unevaluated oil and gas properties.

 

F-19

----

 

Anticipated futurematurities of the Company’s outstanding indebtedness as of December 31, 2005 areas follows (in thousands):

 

| **Year** | ** ** | **Amount** | ** ** |
|----------|------------|------------|------------|
| 2006     |       | $          | —     |   |
| 2007     |       | —     |       |
| 2008     |       | 14,000     |       |
|     |       |       |       |
| Total    |       | $          | 14,000     |   |

 

**NOTE 7 - COMMON STOCK AND COMMON STOCK EQUIVALENTS**

 

In July 2005, the Companyeffected a one-for-three reverse stock split. All common stock and common stockequivalents have been retroactively adjusted to reflect the reverse split.

 

In January 2004, theCompany issued 7,431 shares of its common stock valued at $5.40 per share to CKCooper & Company, an investment banking firm, as payment of approximately$40,127 in outstanding investment banking fees related to the merger of OlympicResources Ltd. and Whittier Energy. Alex Montano, a former director of OlympicResources Ltd. prior to the merger, was also a managing director of CK Cooper.

 

In June 2004, the Companyclosed a private placement with accredited investors for 460,000 shares of theCompany’s common stock priced at $5.25 per share and three-year warrants topurchase an additional 460,000 shares of common stock at an exercise price of$7.50 per share. The private offering resulted in net proceeds to the Companyof $2.3 million. The Company also issued 9,938 shares of common stock and arelated warrant to purchase an additional 9,938 shares of common stock at anexercise price of $7.50 per share to a registered broker/dealer as payment forservices rendered as a placement agent in connection with the privateplacement. The Company used a significant portion of the net proceeds from theprivate placement to finance, in part, its June 2004 acquisition of variousoperated working interests in three gas fields in South Texas.

 

In June 2004, the Companyissued to the sellers of certain gas properties a three-year warrant to purchase100,000 shares of the Company’s common stock at an exercise price of $7.50 pershare. The fair market value of the warrant on the date of grant was estimatedto be $135,000 using the Black-Scholes option pricing model with the followingweighted average assumptions: risk free interest rate of 3.26%, dividend yieldof 0%, volatility factors of the expected market price of the Company’s commonstock of 2.13, and a weighted average life expectancy of the options of 1.5years.

 

In September 2004, awarrant for 15,000 shares of the Company’s common stock, issued to the formerPresident and CEO of the Company prior to its acquisition by Whittier Energy,was fully converted into common stock at an exercise price of $6.00 per share.

 

In connection with theAcquisition, in June 2005, Whittier issued and sold 852,912 shares of Series APreferred Stock for an aggregate offering amount of approximately $50 million.Whittier received approximately $45.9 million in proceeds from the offering,net of issuance and registration costs, in which Whittier Ventures, LLC, anaffiliate of the Company, and certain officers and directors participated. TheSeries A Preferred Stock automatically converted into 8,529,120 shares of theCompany’s common stock upon the Company’s listing of its common stock on theNASDAQ National Market on December 27, 2005. As a condition to the offering,the Company agreed to register the common stock underlying the Series APreferred Stock with the U.S. Securities and Exchange Commission (“SEC”) and tomaintain the effectiveness of the registration for two years following itseffective date. The Company filed a registration statement on Form SB-2 withthe U.S. Securities and Exchange Commission to register the common stockunderlying the Series A Preferred Stock, which was declared effective prior toDecember 31, 2005.

 

As described in Note 6,on July 22, 2005, the holder of a $1.8 million convertible note issued by theCompany converted $714,936 of the outstanding principal into 119,156 shares ofWhittier common stock at a conversion price of $6.00 per share.

 

F-20

----

 

On that same date,Whittier repaid all remaining principal and accrued interest on the note forapproximately $1.1 million in cash.

 

The Company’s Board ofDirectors approved a Long Term Incentive Plan in December 2003, which set asidea total of 520,000 shares of the Company’s common stock for issuance to theCompany’s officers, directors, employees, and consultants. The Plan wasratified by the Company’s stockholders at the Company’s annual meeting held inJuly 2004 and further amended in October 2005 in order to expand the number ofshares underlying the Plan to 1,876,000.

 

During the year endedDecember 31, 2004, the Company granted a total of 262,834 options to purchasethe Company’s common stock at an average exercise price of $5.22 per share tocertain employees and directors of the Company, of which 5,000 were cancelledin May 2004. The options vest ratably over a three year period from the date ofgrant and have a term of 5 years. During 2004, 16,500 options to acquire theCompany’s common stock at an exercise price of $5.79 per share expiredunexercised.

 

In April 2005, theCompany granted to certain employees and consultants to the Company a total of40,946 options to purchase the Company’s common stock at an average exerciseprice of $7.75 per share. The options vest ratably over three years and have aterm of five years. In November 2005, the Company issued an additional 456,601options to various employees, directors and consultants of the Company, at anexercise price of $8.20 per share, of which 306,605 options vested immediatelyand 149,956 options vest ratably over three years. The options have a term offive years.

 

In January 2006, theCompany granted a total of 702,852 options to various directors, officers,employees and consultants of the Company, with an exercise price of $9.97 pershare, of which 416,273 options vest ratably over two years and 286,579 optionsvest ratably over three years. The options have a term of five years.

 

During 2005, options toacquire 25,038 shares of the Company’s common stock at an average price of $5.82per share were exercised, generating proceeds of $145,000. An additional 17,632options at an average exercise price of $5.75 expired unexercised and anadditional 4,999 options at an average exercise price of $6.00 were cancelled.

 

F-21

----

 

A summary of the Company’sstock option activity and related information for the periods ended is asfollows:

 

| ** **                                                                             | ** ** | **Shares**     | ** ** | **Weighted**              | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------|------------|---------------------------|------------|
| ** **                                                                             | ** ** | **Underlying** | ** ** | **Average Exercise** | ** ** |
| ** **                                                                             | ** ** | **Options**    | ** ** | **Price**                 | ** ** |
| Options Outstanding as of  December  31, 2003                                     |       | 62,500         |       | $                         | 5.85       |   |
| Options Issued                                                                         |       | 262,834        |       | $                         | 5.22       |   |
| Options Exercised                                                                      |       | —         |       | —                    |       |
| Options Cancelled                                                                      |       | (5,000         | )          | $                         | 5.25       |   |
| Options Expired                                                                        |       | (16,500        | )          | $                         | 5.79       |   |
| Options Outstanding as of  December  31, 2004                                     |       | 303,834        |       | $                         | 5.37       |   |
| Options Issued                                                                         |       | 497,547        |       | $                         | 8.16       |   |
| Options Exercised                                                                      |       | (25,038        | )          | $                         | 5.82       |   |
| Options Cancelled                                                                      |       | (4,999         | )          | $                         | 6.00       |   |
| Options Expired                                                                        |       | (17,632        | )          | $                         | 5.75       |   |
| Options Outstanding as of  December  31, 2005                                     |       | 753,712        |       | $                         | 7.16       |   |
|                                                                                   |       |           |       |                      |       |
| Exercise price range $4.50 – $6.00                                                |       |           |       |                      |       |
| (Average life of 3.1 years, 89,279 exercisable at a weighted average  price of $5.27)  |       | 257,832        |       | $                         | 5.24       |   |
|                                                                                   |       |           |       |                      |       |
| Exercise price range $7.65 – $8.20                                                |       |           |       |                      |       |
| (Average life of 4.7 years, 314,979 exercisable at a weighted average  price of $8.19) |       | 495,880        |       | $                         | 8.16       |   |
|                                                                                   |       |           |       |                      |       |
| Exercisable options                                                                    |       |           |       |                      |       |
| December 31, 2004                                                                      |       | 46,000         |       | $                         | 6.12       |   |
| December 31, 2005                                                                      |       | 404,258        |       | $                         | 6.46       |   |

 

F-22

----

 

The following tablesummarizes all common stock warrants:

 
| ** **                      | ** ** | **Number of** | ** ** | **Exercise** | ** **  |
|---------------------------------|------------|--------------------|------------|--------------|-------------|
| ** **                      | ** ** | **Stock**          | ** ** | **Price**    | ** **  |
| ** **                      | ** ** | **Warrants**       | ** ** | **Range**    | ** **  |
| Outstanding,  December 31, 2003 |       | 55,000             |       | $            | 6.00 - 8.10 |   |
| Issued                          |       | 569,938            |       | 7.50         |        |
| Expired                         |       | (40,000            | )          | 8.10         |        |
| Exercised                       |       | (15,000            | )          | 6.00         |        |
| Outstanding,  December 31, 2004 |       | 569,938            |       | $            | 7.50        |   |
| Issued                          |       | —             |       | —       |        |
| Expired                         |       | —             |       | —       |        |
| Exercised                       |       | —             |       | —       |        |
| Outstanding,  December 31, 2005 |       | 569,938            |       | $            | 7.50        |   |

 

The following tablesummarizes the price ranges of all common stock warrants outstanding as of December31, 2005, all of which were fully vested and exercisable:

 

| **Number of Warrants** | ** ** | **Exercise Price** | ** ** | **Expiration Date** | ** **             |
|----------------------------------|------------|-------------------------|------------|--------------------------|------------------------|
| 569,938                          |       | $                       | 7.50       |                     | 6/17/07 – 6/30/07 |   |
|                                  |            |                         |            |                          |                        |  |

 

**NOTE 8 - RELATED PARTY TRANSACTIONS**

 

The Company’s ChiefOperating Officer, Mr. Daniel Silverman, received a 4.63% net profits interest(“NPI”) in the Company’s investment in the Beaver Dam Creek Field uponcompletion of the transaction in 2002. The NPI entitled Mr. Silverman to 4.63% ofthe Company’s net operational cash flow from the field (i.e. revenues lessoperating costs and capital investment) after deducting related principal andinterest payments under the Company’s Credit Facility described in Note 6. TheCompany did not make any distributions to Mr. Silverman for the NPI in 2003 andpaid Mr. Silverman a total of $16,408 in net profits in 2002. In March 2004,the Company acquired the NPI from Mr. Silverman for $70,000.

 

The Company entered intoa $150,000 consulting agreement with The Whittier Trust Company, an affiliateof Whittier, for the six-month period ended December 31, 2005. Under theagreement The Whittier Trust provided various management advisory servicesincluding financial and market analysis, investor relations and consultationregarding the Company’s disposition of its common stock in Chaparral Resources,Inc.

 

**NOTE 9 - COMMODITY PRICE RISKSAND CONCENTRATIONS OF CREDIT RISK**

 

The Company’s activitiesinclude the selling of oil and gas. Such commodities are subject to significantprice volatility. Consequently, the Company’s revenues will fluctuate based onthe current prices of oil and gas.

 

Financial instrumentsthat potentially subject the Company to concentrations of credit risk consistprincipally of temporary cash investments, trade accounts receivable, andderivative instruments. The Company places its excess cash investments withhigh quality financial institutions. The Company’s receivables relate tocustomers in the oil and gas industry, and as such, the Company is directlyaffected by the economy of the industry. The credit risk associated with thereceivables is minimized by the customer base and monitoring of the customercredit worthiness.

 

F-23

----

 

The Company has notexperienced any significant losses from its receivables or cash investments anddoes not believe it has any significant concentration of credit risk. For theperiod ending December 31, 2005, the Company generated approximately 27%, 13%,11% and 10% of its oil and gas revenues from Shell Trading (US) Company,Phoenix Hydrocarbons, Inc., El Paso Production Oil and Gas Company and NobleEnergy, Inc., respectively. For the period ending December 31, 2004, theCompany generated approximately 36% of its oil and gas revenue from crude oilsales to Shell Trading (US) Company. The Company had no other customersresponsible for a minimum of 10% of its oil and gas revenues for 2004.

 

**NOTE 10 - FINANCIAL INSTRUMENTSAND HEDGING ACTIVITIES**

 

TheCompany held various derivative instruments, including crude oil and naturalgas option agreements known as “swaps” and “collars” during the year ended December31, 2005 and 2004, respectively. Swaps are designed to fix the price ofanticipated sales of future production, while collars are designed to establishfloor and ceiling prices on anticipated sales of future production. The Companyentered into the contracts at the time it acquired certain operated oil and gasproperty interests as a means to reduce the future price volatility on itssales of oil and gas production, as well as to achieve a more predictable cashflow from its oil and gas properties. The Company has designated its pricehedging instruments as cash flow hedges in accordance with SFAS No. 133. Furtherdetails relating to the Company’s hedging activities are as follows:

 

Hedging contracts held asof December 31, 2005:

 
| ** **                                  | ** ** | ** **        | ** ** | **Nymex Contract Price** | ** ** | ** **              | ** ** |
|---------------------------------------------|------------|-------------------|------------|------------------------------------|------------|-------------------------|------------|
| **Contract Period and Type** | ** ** | **Total  Volume** | ** ** | **Floor**                          | ** ** | **Ceiling/Swap  Price** | ** ** | **Fair Value** | ** ** |
|                                        |       |              |       |                               |       |                    |       | **(in thousands)** |   |
| **Crude  Oil Contracts (barrels)**          |       |              |       |                               |       |                    |       |   |   |
| Swap Contracts:                             |       |              |       |                               |       |                    |       |   |   |
| January 2006 –  December 2006          |       | 36,000            |       | N/A                                |       | $                       | 58.00      |   | (182 | ) |
|                                        |       |              |       |                               |       |                    |       |   |   |
| Collar  Contracts:                          |       |              |       |                               |       |                    |       |   |   |
| January 2006 –  December 2006          |       | 96,000            |       | $                                  | 30.00      |                    | $          | 34.25 |   | (2,709 | ) |
| January 2006 –  December 2006          |       | 21,600            |       | $                                  | 49.50      |                    | $          | 68.60 |   | (57 | ) |
| January 2007 –  December 2007          |       | 54,000            |       | $                                  | 47.50      |                    | $          | 69.00 |   | (253 | ) |
| January 2007 –  December 2007          |       | 78,000            |       | $                                  | 47.50      |                    | $          | 69.25 |   | (359 | ) |
|                                        |       |              |       |                               |       |                    |       |   |   |
| **Natural  Gas Contracts (mmbtu)**          |       |              |       |                               |       |                    |       |   |   |
| Swap Contracts:                             |       |              |       |                               |       |                    |       |   |   |
| January 2006 –  March 2006             |       | 90,000            |       | N/A                                |       | $                       | 8.43       |   | (261 | ) |
| April 2006 –  October 2006             |       | 210,000           |       | N/A                                |       | $                       | 7.44       |   | (604 | ) |
| November 2006 –  March 2007            |       | 150,000           |       | N/A                                |       | $                       | 8.16       |   | (488 | ) |
| April 2007 –  October 2007             |       | 210,000           |       | N/A                                |       | $                       | 6.97       |   | (505 | ) |
|                                        |       |              |       |                               |       |                    |       |   |   |
| Collar  Contracts:                          |       |              |       |                               |       |                    |       |   |   |
| January 2006 –  March 2006             |       | 150,000           |       | $                                  | 7.50       |                    | $          | 10.10 |   | (215 | ) |
| April 2006 –  October 2006             |       | 280,000           |       | $                                  | 6.75       |                    | $          | 8.40 |   | (627 | ) |
| January 2006 –  December 2006          |       | 120,000           |       | $                                  | 5.00       |                    | $          | 6.45 |   | (464 | ) |
| November 2006 –  March 2007            |       | 200,000           |       | $                                  | 7.25       |                    | $          | 9.75 |   | (505 | ) |
| April 2007 –  October 2007             |       | 280,000           |       | $                                  | 6.25       |                    | $          | 7.95 |   | (553 | ) |
|                                        |       |              |       |                               |       |                    |       |   |   |
|                                        |       |              |       |                               |       | Total                   |       | $ | (7,782 | ) |
|                                             |            |                   |            |                                    |            |                         |            |  |  |  |  |  |

 

F-24

----

 

Hedging contracts held asof December 31, 2004:

 
| ** **                                  | ** ** | ** **        | ** ** | **Nymex Contract Price** | ** ** | ** **              | ** ** |
|---------------------------------------------|------------|-------------------|------------|------------------------------------|------------|-------------------------|------------|
| **Contract Period and Type** | ** ** | **Total  Volume** | ** ** | **Floor**                          | ** ** | **Ceiling/Swap  Price** | ** ** | **Fair Value** | ** ** |
| ** **                                  | ** ** | ** **        | ** ** | ** **                         | ** ** | ** **              | ** ** | **(in thousands)** | ** ** |
| **Crude  Oil Contracts (barrels)**          |       |              |       |                               |       |                    |       |   |   |
| Swap Contracts:                             |       |              |       |                               |       |                    |       |   |   |
| January 2005 –  December 2005          |       | 36,000            |       | N/A                                |       | $                       | 34.75      |   | $ | (278 | ) |
|                                        |       |              |       |                               |       |                    |       |   |   |
| Collar  Contracts:                          |       |              |       |                               |       |                    |       |   |   |
| January 2005 –  April 2005             |       | 15,000            |       | $                                  | 19.75      |                    | $          | 22.75 |   | (309 | ) |
| January 2005 –  December 2005          |       | 12,000            |       | $                                  | 26.00      |                    | $          | 29.20 |   | (160 | ) |
| April 2005 –  December 2005            |       | 9,000             |       | $                                  | 26.00      |                    | $          | 28.95 |   | (119 | ) |
| January 2005 –  December 2005          |       | 18,000            |       | $                                  | 31.00      |                    | $          | 36.95 |   | (121 | ) |
| January 2006 –  December 2006          |       | 96,000            |       | $                                  | 30.00      |                    | $          | 34.25 |   | (682 | ) |
|                                        |       |              |       |                               |       |                    |       |   |   |
| **Natural  Gas Contracts (mmbtu)**          |       |              |       |                               |       |                    |       |   |   |
| Swap Contracts                              |       |              |       |                               |       |                    |       |   |   |
| January 2005 –  December 2005          |       | 120,000           |       | N/A                                |       | $                       | 6.02       |   | (27 | ) |
|                                        |       |              |       |                               |       |                    |       |   |   |
| Collar  Contracts:                          |       |              |       |                               |       |                    |       |   |   |
| January 2005 –  December 2005          |       | 120,000           |       | $                                  | 4.00       |                    | $          | 7.20 |   | (39 | ) |
| January 2005 –  March 2005             |       | 72,000            |       | $                                  | 6.20       |                    | $          | 8.40 |   | 23 |   |
| April 2005 –  September 2005           |       | 144,000           |       | $                                  | 5.75       |                    | $          | 6.05 |   | (34 | ) |
| October 2005 –  December 2005          |       | 72,000            |       | $                                  | 5.75       |                    | $          | 6.75 |   | (23 | ) |
| January 2006 –  December 2006          |       | 120,000           |       | $                                  | 5.00       |                    | $          | 6.45 |   | (55 | ) |
|                                        |       |              |       |                               |       |                    |       |   |   |
|                                        |       |              |       |                               |       | Total                   |       | $ | (1,824 | ) |

 

F-25

----

 

The Company accounts forits derivatives as cash flow hedging instruments, and recognizes gains orlosses on settlement of its hedging instruments in oil and gas revenues, andchanges in their fair value as a component of other comprehensive income, netof deferred taxes. The Company recognized pre-tax losses in oil and gasrevenues of $4,591,640 and $1,519,775 for the years ended December 31, 2005 and2004, respectively, due to realized settlements of its price hedge contractsduring the respective periods. TheCompany recorded unrealized losses on cash flow hedging contracts of $4,388,588net of deferred taxes of $2,689,779 for the year ended December 31, 2005.Comparatively, the Company recorded unrealized losses of $1,178,036, netof deferred taxes of $634,327, for the year ended December 31, 2004. As ofDecember 31, 2005, the Company anticipates $3,393,245 of unrealized losses, netof deferred taxes of $2,079,731, will be reclassified into earnings during 2006.The Company recorded a loss of $692,440 for the ineffective portion of the cashflow hedges for the year ended December 31, 2005. 

 

The following tabledetails the activity of the cash flow hedges for the period ending December 31,2005 (in thousands).

 

| ** **                                               | ** ** | **Pre tax** | ** ** | **After-tax** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|---------------|------------|
| Accumulated  other comprehensive loss, December 31, 2004 |       | $                | (1,824     | )             | $          | (1,178 | ) |
| Reclassified  into earnings                              |       | 4,592            |       | 2,847         |       |
| Change in  statutory tax rate                            |       | —           |       | 47            |       |
| Change in fair  market value                             |       | (10,539          | )          | (6,534        | )          |
| Ineffective  portion of cash flow hedges                 |       | 692              |       | 429           |       |
| Accumulated  other comprehensive loss, December 31, 2005 |       | $                | (7,079     | )             | $          | (4,389 | ) |

 

The following tabledetails the activity of the cash flow hedges for the period ending December 31,2004 (in thousands).

 

| ** **                                               | ** ** | **Pre tax** | ** ** | **After-tax** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|---------------|------------|
| Accumulated  other comprehensive loss, December 31, 2003 |       | $                | (574       | )             | $          | (373 | ) |
| Reclassified  into earnings                              |       | 1,520            |       | 988           |       |
| Change in fair  market value                             |       | (2,782           | )          | (1,801        | )          |
| Ineffective  portion of cash flow hedges                 |       | 12               |       | 8             |       |
| Accumulated  other comprehensive loss, December 31, 2004 |       | $                | (1,824     | )             | $          | (1,178 | ) |

 

**NOTE 11 -COMMITMENTS AND CONTINGENCIES**

 

The Company entered intoa rental lease for approximately 2,910 square feet of corporate office space inHouston, Texas on April 1, 2004, for a renewable term of 90 months. The leaserequires payments of approximately $5,000 per month. In December 2005, theCompany executed an amendment to the lease, relocating the Company’s officespace to approximately 15,043 square feet within the same building to allow theCompany to consolidate the operations of Whittier and RIMCO within onelocation. The lease, as amended, has a term of 144 months with expenserecognized on a straight-line basis at approximately $24,500 per month. TheCompany has an early cancellation option on the lease at the end of the 72ndmonth and again at the end of the 108th month, as well as apreferential right to lease the space adjoining the lease.

 

As a result of theAcquisition, the Company assumed two office leases held by RIMCO, including arental lease in Avon, Connecticut for 6,900 square feet, which expired inOctober 2005 and an office lease in Houston, Texas for 9,110 square feet, whichexpires in October 2007. The RIMCO Connecticut lease required rental paymentsof $12,075 per month and the RIMCO Houston lease requires payments of $21,350per month. The Company accrued the remaining costs of the RIMCO Houston leaseas part of the purchase price of RIMCO. In March 2006, the Company subleasedthe RIMCO Houston lease for total lease payments of approximately $194,000.

 

F-26

----

 

The Company’s existingfuture minimum annual cash lease payments for the next five years as ofDecember 31, 2005, are as follows (in thousands):

 

| **Year**   | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2006       |       | $          | 77         |   |
| 2007       |       | 267        |       |
| 2008       |       | 322        |       |
| 2009       |       | 322        |       |
| 2010       |       | 322        |       |
| Thereafter |       | 1,072      |       |
|       |       | $          | 2,382      |   |
|            |            |            |            |  |  |

 

In connection with ourJune 2004 acquisition of three gas fields in South Texas, we agreed to drillfour wells over a two-year period and pay certain drilling costs on behalf ofthe seller’s retained working interests in those wells.  Under the termsof the drilling commitment, we agreed to drill two wells each in the Scott& Hopper field and the North Rincon field, or reassign a portion of theundeveloped acreage in each field to the seller of the properties. We havedrilled the first three commitment wells - the Scott & Hopper #4 duringFebruary 2005, the Cameron 137 #3 in June 2005 and the Scott & Hopper #5 inDecember 2005. The Scott & Hopper #4 and #5 wells were both productive,while the Cameron 137 #3 was non-commercial. The Company is currentlyevaluating whether it will drill the final commitment well in the North Rinconfield.

 

**NOTE 12 - ACQUISITION OF RIMCOPRODUCTION COMPANY, INC.**

 

On June 15, 2005,Whittier acquired RIMCO Production Company, Inc., a privately held Delaware corporation,by acquiring all of the outstanding capital stock of RIMCO, for a totalpurchase price of $57.1 million. The Acquisition substantially increasedWhittier’s properties, production and undeveloped acreage. Specifically, Whittieracquired working interests in approximately 116 active wells and one unit in 18producing fields principally located in the Gulf Coast region in Texas,Louisiana, and Alabama, as well as significant undeveloped acreage withmultiple prospects.

 

The Acquisition wasstructured as a merger of RPC Acquisition Company, Inc., a Delaware corporationwholly owned by Whittier, into RIMCO Production Company, Inc. Upon closing ofthe Acquisition, Whittier became the sole owner of RIMCO. The existingshareholders of RIMCO received total consideration of approximately $55 millionin cash. Whittier treated the Acquisition as a stock purchase for federalincome tax purposes and is the accounting and legal acquirer. The Company’sfinancial statements for the year ended December 31, 2005 include RIMCO’soperating results for the period from June 16, 2005 through December 31, 2005.

 

Whittier funded theAcquisition using a combination of net proceeds from a private offering of theCompany’s Series A Preferred Stock (approximately $46 million) and netborrowings from a new revolving Credit Facility entered into on June 15, 2005(approximately $10.5 million). The Company’s Series A Preferred Stock is morefully described in Note 7 and the Company’s Credit Facility is more fullydescribed in Note 6.

 

F-27

----

 

The following tablepresents the allocation of the Company’s $57.1 million purchase price, asadjusted, including professional fees and other related acquisition costs, toRIMCO’s assets acquired and liabilities assumed, based upon their fair values:

 

| ** **                           | ** ** | **As of June 15, 2005** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **(in thousands)**                     | ** ** |
|                                 |       |                                        |       |
| Cash and cash  equivalents           |       | $                                           | 1,727      |   |
| Accounts  receivable                 |       | 4,007                                       |       |
| Current tax  assets                  |       | 665                                         |       |
| Other current  assets                |       | 152                                         |       |
| Oil and gas  properties, evaluated   |       | 55,770                                      |       |
| Oil and gas  properties, unevaluated |       | 16,618                                      |       |
| Other assets                         |       | 13                                          |       |
| Total assets  acquired               |       | 78,952                                      |       |
|                                 |       |                                        |       |
| Accounts payable                     |       | (930                                        | )          |
| Asset retirement  obligation         |       | (258                                        | )          |
| Deferred income  tax liability       |       | (20,660                                     | )          |
|                                 |       |                                        |       |
| Total  liabilities assumed           |       | (21,848                                     | )          |
| Net assets  acquired                 |       | $                                           | 57,104     |   |

 

F-28

----

 

The following unauditedpro forma consolidated results of operations have been prepared as if theAcquisition had occurred as of the beginning of the period being reported (inthousands):

 

| ** **                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| ** **                                 | ** ** | **Unaudited**                              | ** ** | **Unaudited** | ** ** |
|                                       |       |                                       |       |   |   |
| Oil and gas  revenues                      |       | $                                          | 36,860     |   | $ | 27,650 |   |
|                                       |       |                                       |       |   |   |
| Costs and  expenses:                       |       |                                       |       |   |   |
| Lease operating  expenses                  |       | 6,340                                      |       | 6,484 |   |
| Production taxes                           |       | 3,228                                      |       | 1,983 |   |
| Depreciation,  depletion, and amortization |       | 11,637                                     |       | 9,884 |   |
| Ineffective  portion of hedge contracts    |       | 692                                        |       | — |   |
| General and  administrative expenses (1)   |       | 6,288                                      |       | 4,744 |   |
|                                       |       |                                       |       |   |   |
| Total costs and  expenses                  |       | 28,185                                     |       | 23,095 |   |
|                                       |       |                                       |       |   |   |
| Income from  operations                    |       | 8,675                                      |       | 4,555 |   |
| Other income  (expense)                    |       | 1,707                                      |       | (517 | ) |
|                                       |       |                                       |       |   |   |
| Income before  income taxes                |       | 10,382                                     |       | 4,038 |   |
| Provision for  income taxes                |       | 3,427                                      |       | 1,105 |   |
| Net income                                 |       | $                                          | 6,955      |   | $ | 2,933 |   |
|                                       |       |                                       |       |   |   |
| Basic net income  per share                |       | $                                          | 0.56       |   | $ | 0.24 |   |
| Diluted net  income per share              |       | $                                          | 0.55       |   | $ | 0.24 |   |
| Weighted average  shares outstanding:      |       |                                       |       |   |   |
| Basic                                      |       | 12,494                                     |       | 12,142 |   |
| Fully diluted                              |       | 12,771                                     |       | 12,383 |   |

 

----

(1)  General and administrative expenses for theyear ended December 31, 2005 reflect approximately $2.3 million in change ofcontrol costs incurred by RIMCO as a result of the Acquisition.

 

F-29

----

 

**SUPPLEMENTAL INFORMATION –DISCLOSURES ABOUT OIL AND GAS**

**PRODUCING ACTIVITIES - UNAUDITED**

 

The followingsupplemental information regarding the oil and gas activities of the Company ispresented pursuant to the disclosure requirements promulgated by the SEC andSFAS No. 69, “Disclosures About Oil and Gas Producing Activities.”

 

The following estimatesof reserve quantities and related standardized measure of discounted net cashflows are estimates only, and are not intended to reflect realizable values orfair market values of the Company’s reserves. The Company emphasizes thatreserve estimates are inherently imprecise and that estimates of newdiscoveries are more imprecise than producing oil and gas properties.Additionally, the price of oil and gas has been very volatile and downwardchanges in prices can significantly affect quantities that are economicallyrecoverable. Accordingly, these estimates are expected to change as futureinformation becomes available and these changes may be significant.

 

Proved reserves areestimated reserves of crude oil and natural gas that geological and engineeringdata demonstrate with reasonable certainty to be recoverable in future yearsfrom known reservoirs under existing economic and operating conditions. Proveddeveloped reserves are those expected to be recovered through existing wells,equipment and operating methods.

 

The standardized measureof discounted future net cash flows is computed by applying year-end prices ofoil and gas (with consideration of price changes only to the extent provided bycontractual arrangements) to the estimated future production of proved oil andgas reserves, less estimated future expenditures (based on year-end costs) tobe incurred in developing and producing the proved reserves, less estimatedfuture income tax expenses. The estimated future net cash flows are thendiscounted using a rate of 10% a year to reflect the estimated timing of thefuture cash flows.

 

F-30

----

 

**Proved Oil and Gas ReserveQuantities**

**(All within the United States)**

 
| ** **                                   | ** ** | **Oil**      | ** ** | **Gas**      | ** ** |
|----------------------------------------------|------------|--------------|------------|--------------|------------|
| ** **                                   | ** ** | **Reserves** | ** ** | **Reserves** | ** ** |
| ** **                                   | ** ** | **(Bbls.)**  | ** ** | **(Mcf.)**   | ** ** |
| Proved developed  and undeveloped reserves:  |       |         |       |         |       |
|                                         |       |         |       |         |       |
| Balance December  31, 2003                   |       | 1,462,770    |       | 2,988,550    |       |
| Revision of  previous estimates              |       | 109,677      |       | (166,446     | )          |
| Purchases of  minerals in place              |       | 383,099      |       | 3,288,713    |       |
| Extensions,  discoveries and other additions |       | 711          |       | 271,242      |       |
| Sales of  minerals in place                  |       | (42,969      | )          | (28,198      | )          |
| Production                                   |       | (178,303     | )          | (794,831     | )          |
|                                         |       |         |       |         |       |
| Balance December  31, 2004                   |       | 1,734,985    |       | 5,559,030    |       |
| Revision of  previous estimates              |       | 102,566      |       | (712,687     | )          |
| Purchases of  minerals in place              |       | 1,505,593    |       | 12,922,237   |       |
| Extensions,  discoveries and other additions |       | 12,800       |       | 1,071,725    |       |
| Sales of  minerals in place                  |       | (271,299     | )          | (980,390     | )          |
| Production                                   |       | (250,904     | )          | (2,049,265   | )          |
|                                         |       |         |       |         |       |
| Balance December  31, 2005                   |       | 2,833,741    |       | 15,810,650   |       |
|                                         |       |         |       |         |       |
| Proved Developed  Reserves:                  |       |         |       |         |       |
|                                         |       |         |       |         |       |
| Balance December  31, 2003                   |       | 1,462,770    |       | 2,676,060    |       |
| Balance December  31, 2004                   |       | 1,603,964    |       | 4,094,890    |       |
| Balance December  31, 2005                   |       | 2,030,195    |       | 12,455,090   |       |

 

F-31

----

 

**SUPPLEMENTAL INFORMATION – DISCLOSURES ABOUT OILAND GAS**

**PRODUCING ACTIVITIES-UNAUDITED**

***(All Amounts in Thousands)***

 

Capitalized CostsRelating to Oil and Gas Producing Activities (All within the United States)

###  

| ** **                              | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| ** **                              | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Proved oil and  gas properties          |       | $                                          | 94,111     |   | $ | 23,360 |   |
| Unproved oil and  gas properties        |       | 14,990                                     |       | 2,442 |   |
| Accumulated  depreciation and depletion |       | (14,208                                    | )          | (6,074 | ) |
|                                    |       |                                       |       |   |   |
| Net capitalized  cost                   |       | $                                          | 94,893     |   | $ | 19,728 |   |

 

Cost Incurred in Oil andGas Property Acquisition, Exploration, and Development Activities (All withinthe United States)

 
| ** **                                                | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
|                                                      |       |                                       |       |   |   |
| Acquisition  costs – proved oil and gas properties   |       | 56,036                                     |       | 8,134 |   |
| Acquisition  costs – unproved oil and gas properties |       | 16,618                                     |       | 1,694 |   |
| Total  acquisition costs                                  |       | 72,654                                     |       | 9,828 |   |
|                                                      |       |                                       |       |   |   |
| Exploration and  appraisal costs                          |       | 8,156                                      |       | 760 |   |
| Development  costs                                        |       | 6,608                                      |       | 1,775 |   |
|                                                      |       | $                                          | 87,418     |   | $ | 12,363 |   |
|                                                           |            |                                            |            |  |  |  |  |

 

Results of operations for producing activities (All within the United States)

 
| ** **                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                     | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| ** **                                     | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Oil and gas  revenues                          |       | $                                          | 26,942     |   | $ | 10,132 |   |
| Lease operating  expenses                      |       | (5,465                                     | )          | (2,962 | ) |
| Production taxes                               |       | (2,680                                     | )          | (1,230 | ) |
| Depreciation,  depletion, and amortization     |       | (8,165                                     | )          | (2,446 | ) |
| Accretion of  future abandonment obligation    |       | (26                                        | )          | (12 | ) |
|                                           |       |                                       |       |   |   |
| Net results of  operations before income taxes |       | 10,606                                     |       | 3,482 |   |
| Provision for  income taxes                    |       | (4,030                                     | )          | (1,218 | ) |
| Results of  operations                         |       | $                                          | 6,576      |   | $ | 2,264 |   |

 

F-32

----

 

Standardized Measure ofDiscounted Future Net Cash Flows and Changes Therein Relating to Proven Oil andGas Reserves (All within the United States)

 
| ** **                                              | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| ** **                                              | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Future cash  inflows                                    |       | $                                          | 340,294    |   | $ | 107,105 |   |
| Future  development costs                               |       | (16,183                                    | )          | (3,573 | ) |
| Future  production costs                                |       | (115,557                                   | )          | (51,479 | ) |
| Future income  tax expenses                             |       | (69,285                                    | )          | (13,435 | ) |
| Future net cash  flows                                  |       | 139,269                                    |       | 38,618 |   |
| 10% annual  discount for estimated timing of cash flows |       | (52,796                                    | )          | (13,767 | ) |
| Standardized  measure of discounted net cash flows      |       | $                                          | 86,473     |   | $ | 24,851 |   |

 

Principal sources ofchange in the standardized measure of discounted future net cash flows

 
| ** **                                                          | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                          | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| ** **                                                          | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Beginning  balance                                                  |       | $                                          | 24,851     |   | $ | 15,133 |   |
| Oil and gas  sales                                                  |       | (18,797                                    | )          | (5,940 | ) |
| Purchases of  minerals in place                                     |       | 87,224                                     |       | 12,541 |   |
| Sales of  minerals in place                                         |       | (4,697                                     | )          | (581 | ) |
| Extensions and  discoveries                                         |       | 9,505                                      |       | 1,000 |   |
| Net changes in  prices, production cost and future development cost |       | 32,273                                     |       | 7,818 |   |
| Net changes due  to revisions of previous quantity estimates        |       | (9,496                                     | )          | (2,631 | ) |
| Development cost  incurred                                          |       | (6,608                                     | )          | (1,560 | ) |
| Accretion of  discount                                              |       | 3,346                                      |       | 2,125 |   |
| Net change in  income taxes                                         |       | (33,530                                    | )          | (2,549 | ) |
| Other                                                               |       | 2,402                                      |       | (505 | ) |
| Ending balance                                                      |       | $                                          | 86,473     |   | $ | 24,851 |   |

 

F-33

----