CROFF ENTERPRISES INC
Year End December 31      2001  2002  2003  2004   2005                                                        Operations                                 Oil and Natural Gas   $ 332,573   $ 286,602   $ 392,564   $ 608,132   $ 934,525   Other Revenues    $ 32,652   $ 28,726   $ 23,362   $ (31,970)   $ 33,560   Expenses   $ 303,690   $ 214,416   $ 321,817   $ 434,046   $ 678,198   Net Income   $ 61,535   $ 98,912   $ 94,109   $ 142,116   $ 289,887   Per Common Share(1)   $ 0.06   $ 0.04   $ 0.01   $ (0.13)   $ (0.05)   Working Capital    $ 385,816   $ 419,475   $ 336,471   $ 330,243   $ 625,862    Dividends Per Share   $ NONE   $ NONE   $ NONE   $ NONE   $ NONE                                BALANCE SHEET DATA                            Total Assets    $ 69,124   $ 753,212   $ 898,221   $ 1,088,553   $ 1,807,502   Long Term Debt**   $ --   $ --   $ --   $ --   $ --   Stockholders' equity   $ 67,085   $ 736,408   $ 866,112   $ 1,051,438   $ 1,314,320   ** There were no long-term obligations from 2001-2005.  (1)   The Company allocates its net income between preferred B shares and common shares; accordingly, net income (loss) applicable to common shares varies from a fixed ratio to net income, depending on the source of income and expenses.  Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Critical Accounting Policies and Estimates   The Company's discussion and analysis of its financial condition and results of operation are based upon Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these Financial Statements requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the Financial Statements and the reported amounts of revenues and expenses during the year.  The Company analyzes its estimates, including those related to oil and natural gas revenues, oil and natural gas properties, marketable securities, income taxes and contingencies.  The Company bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates  under different assumptions or conditions.  The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its Financial Statements and the uncertainties that it could impact our results of operations, financial condition and cash flows.  The Company follows the "successful efforts" method of accounting for its oil and gas properties. Under this method, all property acquisition costs and costs of exploratory and development wells are capitalized when incurred, pending determination of whether the well has proven reserves. If an exploratory well does not result in reserves, the capitalized costs of drilling the well, net of any salvage, are charged to expense. The costs of development wells are capitalized, whether the well is productive or nonproductive.  Impairments are recorded when management believes that a property's net book value is not recoverable based on current estimates of expec ted future cash flows.  The Company provides for depreciation and depletion of its investment in producing oil and natural gas properties on the unit-of-production method, based upon estimates of recoverable oil and natural gas reserves from the property.  The Company designated its marketable equity securities as "securities available for sale".   11     Liquidity and Capital Resources   At December 31, 2005, the Company had assets of $1,807,502.  At December 31, 2005, the Company's current assets totaled $1,060,216 compared to current liabilities of $434,354.  Working capital at December 31, 2005 totaled $625,862, an increase of 89% compared to $330,243 at December 31, 2004.  The Company had a current ratio at December 31, 2005 of approximately 2.5:1.  During 2005, net cash provided by operations totaled $412,339, as compared to $207,727 for 2004.  The Company's cash flow from operations is highly dependent on oil and natural gas prices; which were at historic highs in 2005.  The Company had no short-term or long-term debt outstanding at December 31, 2005.   At December 31, 2005, there were no major commitments for capital expenditures. The Company has a commitment for approximately $30,000 on a well in Dewitt County, Texas and for approximately $40,000 on a well in Duchesne County, Utah. Capital expenditures for 2005 totaled $92,228 and were primarily attributable to the acquisition and potential development of the Yorktown leases with re-entry wells in Dewitt County, Texas.  The Company purchased a 25% working interest in the Wiggins well and spent lease and leasehold improvement monies on the Dixel Gips, all in Dewitt County, Texas. The Company believes that borrowings from financial institutions, projected operating cash flows and the cash on hand will be sufficient to cover its working capital requirements for the next 12 months.   While certain costs are affected by the general level of inflation, factors unique to the oil and natural gas industry result in independent price fluctuations. Over the past five years, significant fluctuations have occurred in oil and natural gas prices. Although it is particularly difficult to estimate future prices of oil and natural gas, price fluctuations have had, and will continue to have, a material effect on the Company.  Overall, it is management's belief that inflation is generally favorable to the Company since it does not have significant operating expenses as a percent of revenues.      Results of Operations   Revenues for 2005 totaled $968,085, an increase of 68% from $576,162 in 2004.  Net income for 2005 totaled $289,887 compared to $142,116 for 2004.  The increase in revenue was due almost entirely to major increases in oil and natural gas prices.  Production was relatively constant and reserves increased by about the same amount as the amount produced.  The average sale price of oil in 2005 for the Company was $51.02 per barrel compared to $38.81 per barrel in 2004.   The average sale price of natural gas in 2005 for the Company was $5.93 per Mcf, compared to $4.87 per Mcf in 2004.    Other income, which is composed primarily of interest and dividend income as well as lease bonus payments, increased approximately 440% during 2005 to $33,560 from $6,196 in 2004. Lease operating expenses for 2005, which includes all production related taxes, totaled $272,129 compared to $192,187 for 2004.  This was due to three major increases in expenses. Production related taxes rose to approximately $67,000 due to higher prices. Increased workover expenses were incurred as prices increased work on marginal wells.  The Company also had a full year of production from working interest in wells such as the State Forest in Michigan, which run higher lease operating expenses.   In 2005, the Company incurred more expenses in Dewitt County, Texas, including a well frac, workover costs, re-leasing costs, and fees which totaled approximately $92,000.  In 2004, the Company incurred $30,825 in costs related to its Yorktown Re-entry Program in Dewitt County, Texas.  These costs included professional fees, travel expenses and insurance premiums associated with the acquisition and potential development of these leases in Dewitt County, Texas.  In November 2004, the Company entered into a Prospect Participation Agreement with Tempest related to this program.   General and administrative expense, including rent for 2005, totaled $215,766 which was $55,609 higher than in 2004, when general and administrative expense totaled $160,157.  This increase was due to higher fees for accounting, legal, and similar costs incurred in pursuing the strategic alternatives for the Company and increased compliance costs. Recent Accounting Pronouncements   In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 123R, "Share-Based Payment." This revised standard addresses the accounting for share- based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company's equity instruments or that may be settled by the issuance of such equity instruments. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB 25. Instead, companies will be required to account for such transactions using a fair-value method and recognize the expense in the statements of operations. SFAS 123R became effective for all interim or annual periods beginning after June 15, 2005. SFAS 123R is not expected to have  a material impact on the Company's financial condition or results of operations as the Company currently does not receive employee services in exchange for either equity instruments of the Company or liabilities that are based on the fair value of the Company's equity instruments or that may be settled by the issuance of such equity instruments.   In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29". This standard requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or (2) the transactions lack commercial substance. The Statement is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005.  The Company has not entered into these types of nonmonetary asset exchanges during the last five years.  Accordingly, the adoption of this pronouncement is not expected to have a material impact on the Company's financial condition or results of operations.   In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS No. 154 replaces APB Opinion ("APB") No. 20, "Accounting Changes", and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 will apply to all voluntary changes in accounting principle as well as to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. APB No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle.  SFAS No. 154 requires retrospective application to prior periods' financial statemen ts of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, SFAS No. 154 requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial condition).
12     ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA   Reference is made to the Index to Financial Statements on page F-1 for a listing of the Company's Financial Statements and notes thereto and for the financial statement schedules contained herein.   Management Responsibility for Financial Statements   The Financial Statements have been prepared by management in conformity with accounting principles generally accepted in the United States of America.  Management is responsible for the fairness and reliability of the Financial Statements and other financial data included in this report.  In the preparation of the Financial Statements, it is necessary to make informed estimates and judgments based on currently available information on the effects of certain events and transactions.  The Company maintains accounting and other controls which management believes provide reasonable assurance that financial records are reliable, assets are safeguarded and transactions are properly recorded.  ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE   The Company has had no disagreements on accounting and financial disclosure matters with its registered public accounting firm during 2004, 2005, or from January 1, 2006 through the date of this filing.
The Company's principal executive officer is acting as its  principal financial officer for 2005, and has evaluated the effectiveness of Croff's "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) and 15d-15(c) of the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Annual Report on Form 10-K. Based upon his evaluation, he has concluded that the Company's disclosure controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls, since the date the controls were evaluated.
The Company is not aware of any previously undisclosed, but required information since its last filing; that is not included in this 10-K report.   PART III  ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT  Identification of Directors Officers and Significant Employees The Croff Board consists of Gerald L. Jensen, Dilworth A. Nebeker, Richard H. Mandel Jr., Edwin W. Peiker Jr., and Julian D. Jensen.  Each director will serve until the next annual meeting of shareholders, or until his successor is duly elected and qualified.  The Company has no knowledge of any arrangements or understandings between directors or any other person pursuant to which any person was or is to be nominated or elected to the office of director of the Company.  The following is provided with respect to each officer and director of the Company as of March 1, 2006:  GERALD L. JENSEN, 66, PRESIDENT, DIRECTOR AND ACTING CHIEF FINANCIAL OFFICER   President and Chairman of Croff Enterprises, Inc. since October 1985.  Mr. Jensen has been an officer and director of Jenex Petroleum Corporation, a private oil and natural gas company, for over ten years, and an officer and director of other Jenex companies.  In 2000, Mr. Jensen became Chairman of Provisor Capital Inc., a private finance company.  Mr. Jensen was a director of Pyro Energy Corp., a public company (N.Y.S.E.) engaged in coal production and oil and natural gas, from 1978 until it was sold in 1989.  Mr. Jensen is also an owner of private real estate, finance, and oil and natural gas companies.   RICHARD H. MANDEL, JR., 76, DIRECTOR   Mr. Mandel has been a director of Croff Enterprises, Inc. since 1985.  Since 1982, Mr. Mandel has been President and a Board Member of American Western Group, Inc., an oil and natural gas producing company in Denver, Colorado.  From 1977 to 1984, he was President of Universal Drilling Co., Denver, Colorado.  Prior to 1977, Mr. Mandel worked for The Superior Oil Co., Honolulu Oil Co., and Signal Oil and Gas Co. as an engineer and in management.   DILWORTH A. NEBEKER, 65, DIRECTOR   Mr. Nebeker served as President of Croff from September 2, 1983 to June 24, 1985, and has been a director of Croff since December 1981.  He is presently a consultant. Mr. Nebeker was a lawyer in private practice from 1986 to 2001.  He was a lawyer employed by Tosco Corporation, a public corporation, from 1973 to 1978. He was a lawyer with the Securities and Exchange Commission from 1967 to 1973.  Mr. Nebeker is Chairman of the Croff Audit Committee.   EDWIN W. PEIKER, JR., 74, DIRECTOR   Mr. Peiker currently serves as a director of Croff. In 1986, Mr. Peiker became a Vice President and director  of Royal Gold, Inc., a public company engaged in gold exploration and mining activities.  He was President of Royal Gold, Inc., from 1988 through 1991, and continues to be a director. Prior thereto, he was involved in private investments in oil and natural gas exploration and production. Mr. Peiker was employed in responsible positions with AMAX, Inc., a public corporation, from 1963 to 1983.  Mr. Peiker is a member of the Croff Audit Committee.   JULIAN D. JENSEN, 58, DIRECTOR   Mr. Jensen has been a director of Croff Enterprises, Inc. since November 1991.  Mr. Jensen is the brother of the Company's president and has served as legal counsel to the Company for the past twelve years.  Mr. Jensen has practiced primarily in the areas of corporate and securities law, in Salt Lake City, Utah, since 1975.  Mr. Jensen is currently associated with the firm of Jensen, Duffin & Dibb L.L.P., which acts as legal counsel for the Company.   Compliance with Section 16(a) of the Securities Exchange Act of 1934   Based solely on a review of such forms furnished to the Company and certain written representations from the Executive Officers and Directors, the Company believes that all Section 16(a) filing requirements applicable to its Executive Officers, Directors and greater than ten percent beneficial owners were complied with on a timely basis in 2005.   Audit Committee   The Board has an Audit Committee to assist it in the discharge of its responsibilities including the presentation and disclosures of Croff's financial condition and results of operations and disclosure controls and procedures.  The Audit Committee is presently comprised of Dilworth A. Nebeker and Edwin W. Peiker, Jr. both of whom are independent directors of Croff.  Mr. Nebeker is the Chairman of the Committee and the "Audit Committee Financial Expert."   13     During 2005, the Audit Committee selected and recommended the firm of Causey Demgen & Moore Inc. ("CDM") to act as Croff's auditors for the year to the full Board of Directors.  The Board of Directors and shareholders approved the retention of CDM.  The Audit Committee then negotiated and executed an agreement between Croff and CDM.  The Audit Committee reviewed each of the quarterly Form 10-Q's filed with the SEC during the year 2005.  Members of the Committee discussed each of the filings with management of Croff before the filings were made.  The Committee also discussed Croff's disclosure controls and procedures with management each quarter.   The Audit Committee members have each reviewed this 2005 Form 10-K.  Members of the Committee have discussed the Form 10-K and Financial Statements for the year 2005 with management of Croff.  The Committee has also discussed Croff's disclosure controls and procedures with management.  The Audit Committee met and discussed the Form 10-K and Financial Statements prior to this filing.  The Audit Committee voted to recommend this 2005 Form 10-K and Financial Statements to the Board of Directors for filing with the SEC.   Members of the Audit Committee have discussed the audit and financial statements with the appropriate principal of CDM including those matters required by SAS 61.  They also discussed Croff's disclosure controls and procedures. The Croff Board of Directors have each received a letter from CDM that as of January 11, 2006, CDM were independent accountants with respect to Croff, within the meaning of the Securities Acts administered by the SEC and the requirements of the Independence Standard Board.  ITEM 11. EXECUTIVE COMPENSATION   Remuneration During the fiscal year ended December 31, 2005, there were no officers, employees or directors whose total cash or other remuneration exceeded $80,000.    Summary Compensation Table    2004 Compensation Gerald L. Jensen, President and Chairman. (No other executive salaries)                       2003   2004   2005                Annual Compensation                     Salary   $ 54,000   $ 54,000   $ 54,000    Bonus   $ 0   $ 0   $ 0    Other Annual Compensation   $ 0   $ 0   $ 0                      Long Term  Compensation                  Awards                  Restricted Stock Awards   $ 0   $ 0   $ 0   Payouts                     Number of Shares Covered by Option Grant    0    0    0   Long Term Incentive Plan Payout   $ 0   $ 0   $ 0   All Other Compensation   $ 1,620(1)   $ 1,620(1)   $ 1,620(1)   (1) Company IRA Contribution   Gerald L. Jensen is employed as the President and Chairman of Croff Enterprises, Inc.  Mr. Jensen commits a substantial amount of his time, but not all, to his duties with the Company.  Directors, excluding the President, are not paid a salary by the Company, but are paid $350 for each half-day board meeting and $500 for each full-day board meeting.  The Chairman of the Company's Audit Committee is paid $500 per quarter and the other member of the Audit Committee is paid at the rate of $350 per meeting.   Proposed Remuneration:   During 2006, the Company intends to compensate outside directors at the rate of $350 for a half-day meeting and $500 for a full-day meeting.  The Chairman of the Company's Audit Committee will be paid $500 per quarter and the other member of the Audit Committee will be paid at the rate of $350 per meeting.  Based on the proposed remuneration, for the fiscal year ending December 31, 2006, no officer or director shall receive total cash remuneration in excess of $80,000.   Options, Warrants or Rights   The Company had no outstanding stock options, warrants or rights as of December 31, 2004 or 2005.      14     ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS   The following table sets forth the beneficial ownership of common stock and Preferred B stock of the Company as of December 31, 2005, by (a) each person who owned of record, or beneficially, more than five percent (5%) of the Company's $.10 par value common stock, its common voting securities, and (b) each director and nominee and all directors and officers as a group.      Shares of Common StockOwned Beneficially Percentageof Class ofCommon Stock Shares ofPreferred B Stock Owned Beneficially Percentageof Class BPreferred Stock                       Gerald L. Jensen      3773 Cherry Creek Drive N, #1025      Denver, Colorado 80209  251,988(1) 45.7% 361,659(1) 66.9%   Edwin W. Peiker, Jr.      550 Ord Drive      Boulder, Colorado 80401  4,000 0.7% 0 0%   Dilworth A. Nebeker      10823 Palliser Bay Drive      Las Vegas, Nevada 89141  2,900 0.5% 0 0%   Richard H. Mandel, Jr.      3333 E. Florida #94      Denver, Colorado 80210  13,100 2.4% 8,000 1.5%   Julian D. Jensen      311 South State Street, Suite 380      Salt Lake City, Utah 84111  31,663 5.7% 0 0%   Directors as a Group 303,651 55.0% 369,659 68.4%   (1) Includes 132,130 shares of Common and 240,584 shares Preferred B held by Jensen Development Company and C.S. Finance L.L.C., both of which are wholly owned by Gerald L. Jensen.   ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS   In 2005, the Company's Preferred B Shareholders received a tender offer from Jensen Development Company and C.S. Finance L.L.C., companies wholly owned by Gerald L. Jensen, President and Chairman of the Company. This tender offer is fully described under Item 1of this Form 10-K and is incorporated herein by reference.   The Company currently has an office sharing arrangement with Jenex Petroleum Corporation, hereafter "Jenex", which is owned by the Company's President.  The Company is not a party to any lease, but during 2005 paid Jenex for office space and all office services, including rent, phone, office supplies, secretarial, land, and accounting.  These arrangements were entered into to reduce the Company's overhead and are currently on a month-to-month basis.  The Company's expenses for these services were $50,554, $48,000 and $30,000 for the years ended 2005, 2004 and 2003, respectively.  Although these transactions were not a result of "arms length" negotiations, the Company's Board of Directors believes the transactions are reasonable.   The Company retains the legal services of Jensen, Duffin, & Dibb, LLP. Julian Jensen, a Director of the Company, is a partner of this professional firm.  Legal fees paid to this law firm for the years ending 2005, 2004, and 2003 were $16,920, $2,410 and $2,256, respectively.  The reason for the increase in legal fees in 2005 was the added time and expense related to the strategic alternatives that the Company explored, and increased compliance costs.   The Company has working interests in five Oklahoma natural gas wells, which are operated by Jenex, a company wholly owed by Gerald Jensen, the Company's President.  As part of the 1998 purchase agreement, Jenex agreed to rebate to Croff $150 of operating fees per well, each month, which now totals $750 per month, as long as Jenex operated the wells and Croff retained its interest.   The Company compensated Richard H. Mandel, Jr., a member of its Board of Directors, 1,000 and 2,000 shares of common stock during 2003 and 2004, respectively, for consulting services rendered in connection with the Company's Yorktown Re-entry Program in South Texas.  The common shares were valued at $1.00 per share.  ITEM 14.        PRINCIPAL ACCOUNTANT FEES AND SERVICES   Audit Fees   Causey Demgen & Moore Inc. ("CDM") was recommended by the Audit Committee of the Board and approved by the Company stockholder's for reappointment as the registered public accounting firm for the Company for the fiscal year ended December 31, 2005.  CDM is registered with the Public Company Accounting Oversight Board.  CDM has been acting as independent accountants for the Company for fifteen years.  Aggregate fees for professional services rendered by CDM in connection with its audit of the Company's Financial Statements as of and for the year ended December 31, 2003, and its limited reviews of the Company's unaudited condensed quarterly Financial Statements during 2004 totaled $10,263.  Aggregate fees for professional services rendered by CDM in connection with its audit of the Company's Financial Statements as of and for the year ended December 31, 2004, and its limited reviews of the Company's unaudited condensed quarterly  Financial Statements during 2005 totaled $14,145. During 2004 and 2005, CDM did not perform any additional services for the Company.    15     PART IV  ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES   Financial Statements   See index to Financial Statements, financial statement schedules and supplemental information as referenced in Part II, Item 8, and the financial index on page F-1 hereof, which follow the Exhibits, below.  Reports on Form 8-K:  Form 8-K; March 8, 2005; Item 5 Form 8-K; April 11, 2005; Item 8 Form 8-K; April 15, 2005; Item 5 Form 8-K; April 19, 2005; Item 8 Form 8-K; May 3, 2005; Item 8  Form 8-K; June 9, 2005; Item 5 Other Filings: Schedule 14D9; July 6, 2005 in response to Tender Offer for Preferred B shares. Schedule 14D9/A; July 20, 2005 in response to Tender Offer for Preferred B shares. Schedule 14D9/A; July 20, 2005 in response to Tender Offer for Preferred B shares. Schedule 14D9; July 27, 2005 in response to Tender Offer for Preferred B shares. Exhibit Index Exhibit 31.1 Certification by C.E.O Exhibit 31.2 Certification by C.F.O Exhibit 32.1 Section 906 Certification by C.E.O Exhibit 32.2 Section 906 Certification by C.F.O 16     SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on behalf by the undersigned, thereunto duly authorized.          REGISTRANT:         CROFF ENTERPRISES, INC.                Date: March 28, 2006   By: /s/ Gerald L. Jensen                     Gerald L. Jensen, President,Chief Executive Officer                Date: March 28, 2006   By: /s/ Gerald L. Jensen                     Gerald L. Jensen, President,     Acting Chief Financial Officer        Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the Registrant and in the capacities and on the date indicated have signed this report below.               Date: March 28, 2006   By: /s/ Gerald L. Jensen                     Gerald L. Jensen, Chairman               Date: March 28, 2006   By: /s/ Richard H. Mandel, Jr.                     Richard H. Mandel, Jr., Director               Date: March 28, 2006   By: /s/Edwin Peiker, Jr.                     Edwin Peiker, Jr., Director               Date: March 28, 2006   By: /s/ Dilworth A. Nebeker                     Dilworth A. Nebeker, Director               Date: March 28, 2006   By: /s/ Julian D. Jensen                     Julian D. Jensen, Director     17        Exhibit 31.1   CERTIFICATION PURSUANT TO SECURITIES EXCHANGE ACT OF 1934: RULES 13a-14, 13a-15, 15d-14, and 15d-15 SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002           I, Gerald L. Jensen, certify that :       I have reviewed this annual report on Form 10-K of Croff Enterprises, Inc.;     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;        Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;        I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:         Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;          Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and          Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and         I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:         All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and       Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.                 CROFF ENTERPRISES, INC.        Date: March 28, 2006     By:    /s/   Gerald L. Jensen               Gerald L. Jensen,           Chief Executive Officer                               18     Exhibit 31.2  CERTIFICATION PURSUANT TO SECURITIES EXCHANGE ACT OF 1934: RULES 13a-14, 13a-15, 15d-14, and 15d-15 SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002         I, Gerald L. Jensen, certify that :       I have reviewed this annual report on Form 10-K of Croff Enterprises, Inc.;     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;        Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;        I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:         Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;          Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and          Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and         I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:         All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and       Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.                 CROFF ENTERPRISES, INC.         Date: March 28, 2006    By:   /s/   Gerald L. Jensen                 Gerald L. Jensen,           Acting Chief Financial Officer                                  19     Exhibit 32.1         CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002      In connection with the Quarterly Report of Croff Enterprises, Inc. (the "Company") on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gerald L. Jensen, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:      (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and      (2) I further certify to the best of my knowledge that the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.                CROFF ENTERPRISES, INC.        Date: March 28, 2006    By:    /s/   Gerald L. Jensen               Gerald L. Jensen,           Chief Executive Officer                             20      Exhibit 32.2        CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002     In connection with the Annual Report of Croff Enterprises, Inc. (the "Company") on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gerald L. Jensen, Acting Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:     (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and     (2) I further certify to the best of my knowledge that the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.                CROFF ENTERPRISES, INC.         Date: March 28, 2006   By:   /s/   Gerald L. Jensen                 Gerald L. Jensen,           Acting Chief Financial Officer                              21      CROFF ENTERPRISES, INC.                    FINANCIAL STATEMENTS December 31, 2004 and 2005        With REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM            CROFF ENTERPRISES, INC.    INDEX TO FINANCIAL STATEMENTS, SCHEDULES AND SUPPLEMENTAL INFORMATION     INDEX                                 Page    Part I.     FINANCIAL STATEMENTS                      Report of Registered Public Accounting Firm F-2                   Balance Sheets as of December 31, 2004 and 2005 F-3                  Statements of Operations for the years ended December 31, 2003, 2004 and 2005 F-4                  Statements of Stockholders' Equity for the years ended December 31, 2003, 2004 and 2005 F-5                             Statements of Cash Flows for the years ended December 31, 2003, 2004 and 2005 F-6                Notes to Financial Statements F-7               Part II.   SUPPLEMENTAL INFORMATION                              Disclosures About Oil and Gas Producing Activities – Unaudited F-11     F-1     REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM   Board of Directors and Stockholders Croff Enterprises, Inc.  We have audited the balance sheets of Croff Enterprises, Inc. at December 31, 2004 and 2005, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits.   We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.   In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Croff Enterprises, Inc. as of December 31, 2004 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.   Denver, Colorado  March 17, 2006 CAUSEY DEMGEN & MOORE INC.    F-2     CROFF ENTERPRISES, INC.    BALANCE SHEETS December 31, 2004 and 2005                       2004     2005      Assets:                     Current Assets:                      Cash and cash equivalents    $ 257,667    $ 902,257       Accounts receivable    $ 109,691    $ 157,959                              $ 367,358    $ 1,060,216                         Oil and natural gas properties, at cost, successful efforts method:                                 Proved Properties   $ 952,571   $ 1,016,442                  Unproved Properties   $ 266,548   $ 266,174                          $ 1,219,119   $ 1,282,616                 Accumulated depletion and depreciation    $  (497,924 )    $  (535,330)                              $ 721,195    $ 747,286                                               Total Assets:    $ 1,088,553    $ 1,807,502                                 LIABILITIES AND STOCKHOLDERS' EQUITY                     Current Liabilites:                     Accounts payable    $  28,410    $  37,945       Farmout agreement liability    $  --    $   300,621       Current portion of ARO liability     $ --    $ 23,000       Accrued liabilities     $ 8,705    $ 72,788                              $ 37,115    $ 434,354                                             Long-term portion of ARO liabilities    $ --    $ 58,828                         Stockholders' equity:                      Class A Preferred stock, no par value                         5,000,000 shares authorized, none issued     $ --    $ --        Class B Preferred stock, no par value                         1,000,000 shares authorized, 540,659 shares issued and outstanding     $ 772,929    $ 1,089,233        Common stock, $.10 par value                        20,000,000 shares authorized, 622,143 and 620,643 shares                         issued and outstanding at December 31, 2004 and 2005, respectively     $ 62,214    $ 62,064        Capital in excess of par value     $ 157,927    $ 155,715        Treasury stock, at cost, 53,243 and 69,399                     shares  issued and outstanding at December 31, 2004 and 2005, respectively     $ (83,151)    $ (107,794)        Retained earnings     $ 141,519    $ 115,102                              $ 1,051,438    $ 1,314,320                         TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY    $ 1,088,553    $ 1,807,502                        See accompanying notes to  financial statements.  F-3     CROFF ENTERPRISES, INC.    STATEMENTS OF OPERATIONS For the years ended December 31, 2003, 2004 and 2005                      2003     2004     2005    Revenues                        Oil and natural gas sales     $  437,586    $  615,731     $  934,525   Loss on natural gas "put" contracts    $  (45,022)    $  (7,599)    $ --   Gain (loss) on sale of marketable equity securities     $  19,450    $  (38,166)    $ --   Gain on sale of equipment    $  --    $  --    $ 14,173   Interest income    $  --    $  --    $ 12,057   Other income     $ 3,912    $ 6,196    $ 7,330                           $ 415,926    $ 576,162    $ 968,085                                               Expenses                        Lease operating expense including production taxes    $ 130,793    $ 192,187    $ 272,129   Proposed drilling program     $ 13,780      30,825    $ 52,638   General and administrative     $ 102,244    $ 112,157    $ 165,212   Overhead expense, related party     $ 30,000    $ 48,000    $ 50,554   Accretion expense     $ --    $ --    $ 10,187   Depletion and depreciation     $ 35,000    $ 42,000    $ 45,000                            $ 311,817    $ 425,169    $ 595,720                                                   Pretax income    $ 104,109    $ 150,993    $ 372,365   Provision for income taxes:    $ 10,000    $ 8,877    $ 82,478                       Net income    $  94,109    $ 142,116     $  289,887                                               Net income applicable to preferred B shares    $ 88,385    $ 213,634    $ 316,304                                               Net income (loss) applicable to common shares     $ 5,724    $ (71,518)    $ (26,417)                                               Basic and diluted net income (loss) per common share     $ 0.01    $ (0.13)    $ (0.05)                          See accompanying notes to the financial statements.    F-4    CROFF ENTERPRISES, INC.   STATEMENTS OF STOCKHOLDERS’ EQUITY   For the years ended December 31, 2003, 2004 and  2005     Preferred B stock Common stock Capital in Excess of Treasury  Accumulated otherComprehensive  Retained earnings     Shares Amount Shares Amount Par Value  stock loss (deficit)                                                        Balance at December 31, 2002  540,659  $470,910  629,143   $ 62,914   $456,246  $ (83,151)   $ (65,205) $ (94,706)   Net unrealized gain on marketable equity securities - - - - - - 23,995 -   Net income for the year ended December 31, 2003 - - - - -  - -  94,109    Common stock issued for services  - - 1,000 100 900 - - -    Cancellation of treasury stock  - - (10,000) (1,000) 1,000 - - -    Preferred Stock reallocation  -  88,385 - - (88,385) - - -                 Balance at December 31, 2003 540,659  559,295  620,143   62,014   369,761  (83,151)  (41,210) (597)   Realization of net  loss on marketable equity securities - - - - - - 41,210 -   Net income for the year ended December 31, 2004 - - - - -  - - 142,116    Common stock issued for services  - - 2,000 200 1,800 - - -    Preferred Stock reallocation  -  213,634 - - (213,634) - - -                 Balance at December 31, 2004 540,659  772,929  622,143   62,214   157,927  (83,151) - 141,519   Net income for the year ended December 31, 2005 - - - - -  - - 289,887   Cancellation of treasury stock    - - (1,500) (150) (2,212) - - -    Purchase of treasury stock  - - - - - (24,643) - -    Preferred Stock reallocation  -  316,304 - - - - - (316,304)                 Balance at December 31, 2005 540,659  $1,089,233  620,643   $62,064   $155,715  $(107,794)) - $115,102                   See accompanying notes to financial statements.    F-5     CROFF ENTERPRISES, INC.    STATEMENT OF CASH FLOWS  For the years ended December 31, 2003, 2004 and 2005                       2003      2004   2005    Cash flows from operating activities:                       Net income    $ 94,109    $ 142,116   $ 289,887   Adjustments to reconcile net income to net cash provided by operating activies:                        Depletion, depreciation and accretion       35,000      42,000     55,187   Loss on abandonment        --      --     56,089   Gain on sale of equipment        --      --     (14,173)   Realized loss (gain)     on marketable equity securities      (19,450)      38,166     --   Loss on natural gas "put" contracts      45,022      7,599     --   Other items, net       1,000      2,000     --   Changes in operating assets and liabilities:                       Accounts receivable       (31,583)     (29,160)     (48,268)   Accrued interest on notes receivable      600      --     --    Accounts payable       5,902      7,027     9,535    Accrued liabilities       9,403     (2,021)     64,082                     Net cash provided by operating activities    $ 140,003    $ 207,727   $ 412,339                                              Cash flows from investing activities:                         Purchase of natural gas "put" contracts       (58,041)      --     --   Proceeds from natural gas "put" contracts       5,359       61     --   Purchase of investments        (77,429)      --     --   Proceeds from sale of investments       56,515       128,943     --   Proceeds from sale of equipment        --      --     48,500   Payments from notes receivable      9,318      --     --   Net participation fees received       --      77,500     --   Purchase of treasury stock     --     --     (24,643)   Acquisition of oil and gas properties and improvements      (247,708)      (311,054)     (92,228)                   Net cash used in investing activities    $ (311,986)    $ (104,550)   $ (68,371)                   Cash flows from financing activities                      Proceeds from farmout agreement      --      --     450,000   Costs incurred for the benefit of farmout agreement      --      --     (149,378)   Payments on notes receivable from directors      10,000      --     --                     Net cash provided by financing activities    $ 10,000    $ --   $ 300,622                                              Net increase (decrease) in cash and cash equivalents       (161,983)      103,177     644,590   Cash and cash equivalents at beginning of year       316,473      154,490     257,667                      Cash and cash equivalents at end of year     $  154,490    $  257,667   $  902,257                       Supplemental disclosure of non-cash investing and financing activities:     During the year ended December 31, 2003, the Company had unrealized gains (losses) on available for sale securities in the amount of $23,995.    During the years ended December 31, 2003, and 2004, the Company issued 1,000 and 2,000 shares of its common stock to a Director for services rendered valued at $1,000 and $2,000 respectively. During the year ended December 31, 2005, the Company purchased 1,500 shares of its common stock for $2,362 and the shares were cancelled.      See accompanying notes to financial statements.      F-6      CROFF ENTERPRISES, INC.    NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2003, 2004 and 2005     1. ORGANIZATIONS AND NATURE OF BUSINESS   Croff Enterprises, Inc. ("Croff" or the "Company") is an independent energy company engaged in the business of oil and natural gas production, primarily through ownership of perpetual mineral interests and acquisition of producing oil and natural gas leases.  The Company's principal activity is oil and natural gas production from non-operated properties.  The Company's business strategy is focused on targeting opportunities that are of lower risk with the potential for stable cash flow and long asset life while seeking to keep operating costs low.  The Company acquires and owns producing and non-producing leases and perpetual mineral interests in Alabama, Colorado, Michigan, Montana, New Mexico, North Dakota, Oklahoma, Texas, Utah, and Wyoming.  Over the past eleven years, the Company's primary source of revenue has been oil and natural gas production from leases and producing mineral interests.  Other companies operate almost  all of the wells from which the Company receives revenues and the Company has no control over the factors which determine royalty or working interest revenues, such as markets, prices and rates of production. The Company presently participates as a working interest owner in 33 single wells and in 10 units of multiple wells. The Company holds small royalty interests in approximately 212 wells.   The Company was incorporated in Utah in 1907 as Croff Mining Company.  The Company changed its name to Croff Oil Company in 1952, and in 1996 changed its name to Croff Enterprises, Inc.  The Company continues to operate its oil and natural gas properties as Croff Oil Company.  2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   Producing activities The Company follows the "successful efforts" method of accounting for its oil and gas properties. Under this method, all property acquisition costs and costs of exploratory and development wells are capitalized when incurred, pending determination of whether the well has proven reserves. If an exploratory well does not result in reserves, the capitalized costs of drilling the well, net of any salvage, are charged to expense. The costs of development wells are capitalized, whether the well is productive or nonproductive.   The Company re-entered the Helen Gips #1 well in Dewitt County, Texas, and re-completed the wellbore to the Wilcox formation during 2004. Under the successful efforts method of accounting, the Company has capitalized $65,213 as of December 31, 2004, for costs incurred on this unevaluated exploratory well.  The capitalized costs associated with this unevaluated exploratory well have been excluded from depletion and depreciation during  2004. In 2005, the Helen Gips #1 was deemed noncommercial and was plugged and abandoned, and $52,638 of the capitalized costs was expensed to drilling operations for the year ended December 31, 2005. The amount to be recovered from the tubing of $13,000 remains capitalized at December 31, 2005.  In 2005, the Company purchased a 25% working interest in a lease on which there is an existing re-entry well and a producing well, (A.C. Wiggins). The A.C. Wiggins well was refraced in 2005 and is currently producing gas.   The Company was informed that Tempest Energy Resources, pursuant to its 2004 Participation Agreement, declined to participate in the re-entry program in Dewitt County, Texas.  Although the Company abandoned most of these leases, it did renew several leases for a farmout agreement for the re-entry of the Dixel Gips well, in  December 2005. The Company provided the leases, the re-entry wellbore, geological, engineering and other wellsite improvements for a 20% working interest, carried through completion.  Under the Farmout Agreement, the Farmees pay for drilling and completion and all parties, including the Company, pay for production and equipment. The Dixel Gips well was completed in the first quarter of 2006. It has not been determined if it is a commercial well.   Maintenance and repairs are charged to expense; improvements of property are capitalized and depreciated as described below.   Lease bonuses   The Company defers bonuses received from leasing minerals in which unrecovered costs remain by recording the bonuses as a reduction of the unrecovered costs. Bonuses received from leasing mineral interests previously fully expensed are taken into income. For federal income tax purposes, lease bonuses are regarded as advance royalties (ordinary income).  The Company received lease bonuses totaling $1,101, $3,743 and $2,415, for the years ended December 31, 2003, 2004, and 2005, respectively, which were included in other income.   Depreciation, depletion, and accretion   The Company provides for depreciation and depletion of its investment in producing oil and gas properties on the unit-of-production method, based upon estimates of recoverable oil and gas reserves from the property.   The Company has established a working interest reserve relating to the Asset Retirement Obligation ("ARO") for the four wells that the Company operates. The reserve, based on the estimates of management, complies with the Financial Standards Board Rule 143 (FAS 143). The accretion of $10,187 for the year ended December 31, 2005 represents an increase in the ARO liability based on the discounted cash flow of the future retirement costs.   Recent accounting pronouncements   In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 123R, "Share-Based Payment." This revised standard addresses the accounting for share- based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company's equity instruments or that may be settled by the issuance of such equity instruments. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB 25. Instead, companies will be required to account for such transactions using a fair-value method and recognize the expense in the statements of operations. SFAS 123R became effective for all interim or annual periods beginning after June 15, 2005. SFAS 123R is not expected to have a  material impact on the Company's financial condition or results of operations as the Company currently does not receive employee services in exchange for either equity instruments of the Company or liabilities that are based on the fair value of the Company's equity instruments or that may be settled by the issuance of such equity instruments.   In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29". This standard requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or (2) the transactions lack commercial substance. The Statement is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005.  The Company has not entered into these types of nonmonetary asset exchanges during the last five years.  Accordingly, the adoption of this pronouncement is not expected to have a material impact on the Company's financial condition or results of operations.   F-7      CROFF ENTERPRISES, INC.    NOTES TO FINANCIAL STATEMENTS   For the years ended December 31, 2003, 2004 and 2005     In May 2005 the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS No. 154 replaces APB Opinion ("APB") No. 20, "Accounting Changes", and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 will apply to all voluntary changes in accounting principle as well as to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. APB No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle.  SFAS No. 154 requires retrospective application to prior periods' financial statements  of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, SFAS No. 154 requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial condition).  Revenue recognition   Oil and gas revenues are accounted for using the sales method. Under this method, revenue is recognized based on the cash received rather than the Company's proportionate share of the oil and gas produced.  Oil and gas imbalances and related value at December 31, 2003, 2004 and 2005 were insignificant.   Risks and uncertainties   Historically, oil and gas prices have experienced significant fluctuations and have been particularly volatile in recent years.  Price fluctuations can result from variations in weather, levels of regional or national production and demand, availability of transportation capacity to other regions of the country and various other factors.  Increases or decreases in prices received could have a significant impact on future results.   Comprehensive Income   The Company follows the provisions of SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting comprehensive income.  In addition to net income, comprehensive income includes all changes in equity during a period, except those resulting from investments and distributions to the owners of the Company.  The components of other comprehensive income net of the related tax effects for the twelve months ended December 31, 2003 totaled $23,995, and was related to net unrealized gains (losses) on the Company's marketable equity securities, which were available for sale. The Company liquidated its marketable equity securities and recognized a net realized loss of $38,166 for the year ended December 31, 2004.   Fair value of financial instruments   The carrying amounts of financial instruments including cash and cash equivalents, marketable equity securities, accounts receivable, notes receivable, accounts payable and accrued liabilities approximate fair value as of December 31, 2004 and 2005.   Concentrations of credit risk   Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash, cash equivalents and accounts receivable. The Company places its cash with high quality financial institutions. At times during the year, the balance at any one financial institution may exceed FDIC limits.    Derivative instruments and hedging activities   On March 21, 2003, the Company purchased a series of put contracts for 10,000 MMBTU's per month of natural gas beginning in June 2003 and ending May 2004 at the strike price of $4.75.  The Company paid $58,044 for these twelve contracts.  The Company realized a loss during 2003 and 2004 of $45,022 and $7,599, respectively, related to its purchase of these natural gas "put" contracts.  During the years ended December 31, 2005 and 2004, the Company did not enter into commodity derivative contracts or fixed-price physical contracts to manage its exposure to oil and gas price volatility.   Stock options and warrants   The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123R "Share-Based Payment" related to its stock options and warrants.  Since December 2001, the Company has had no outstanding stock options or warrants.   Cash equivalents   For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with maturity of three months or less to be cash equivalents.   Marketable equity securities   The Company has designated its marketable equity securities as "securities available for sale" pursuant to Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. The net unrealized gains (losses) related to these securities before taxes for December 31, 2003, 2004, and 2005 was $23,995, $0, and $0 respectively and is reflected as accumulated other comprehensive loss. During 2003, 2004 and 2005, a portion of the available-for-sale securities were sold for $56,515, $128,943, and $0 respectively, resulting in a net gain (loss) before taxes of $19,450, $(38,166), $0 respectively, based upon historical cost.   Accounts receivable   The Company considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required. If amounts become un-collectible, they will be charged to operations when that determination is made.   Income taxes   The provision for income taxes is based on earnings reported in the financial statements. Deferred income taxes are provided using a liability approach based upon enacted tax laws and rates applicable to the periods in which the taxes become payable.      F-8      CROFF ENTERPRISES, INC.    NOTES TO FINANCIAL STATEMENTS   For the years ended December 31, 2003, 2004 and 2005   Net income per common share   In accordance with the provisions of SFAS No. 128, "Earnings per Share," basic income per common share amounts were computed by dividing net income after deduction of the net income attributable to the preferred B shares by the weighted average number of common shares outstanding during the period.  Diluted income per common share assumes the conversion of all securities that are exercisable or convertible into either preferred B or common shares that would dilute the basic earnings per common share during the period.   Use of estimates   The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  3. RELATED PARTY TRANSACTIONS   The Company retains the services of a law firm in which a partner of the firm is a director of the Company. Legal fees paid to this firm for the years ended December 31, 2003, 2004 and 2005 amounted to $2,256, $2,410 and $16,920, respectively.   The Company currently has an office sharing arrangement with Jenex Petroleum Corporation, hereafter "Jenex", which is owned by the Company's President.  The Company is not a party to any lease, but paid Jenex for office space and all office services, including rent, phone, office supplies, secretarial, land, and accounting.  The Company's expenses for these services were $30,000, $48,000, and $50,554 for the years ended 2003, 2004 and 2005, respectively.  Although these transactions were not a result of "arms length" negotiations, the Company's Board of Directors believes the transactions are reasonable.   The Company has working interests in five Oklahoma natural gas wells, which are operated by Jenex, a company solely owed by Gerald Jensen, the Company's President.  As part of the 1998 purchase agreement, Jenex agreed to rebate to the Company $150 of operating fees per well, each month, which now totals $750 per month, as long as Jenex operated the wells and the Company's retained its interest.  During the years ending December 31, 2003, 2004 and 2005, $9,000, $9,000, and $9,000 respectively, have been offset against lease operating expense, in this manner.  Total trade accounts receivable from Jenex as of December 31, 2004, and 2005, totaled $21,750 and $35,307, respectively.   The Company compensated, a member of its Board of Directors, 1,000 and 2,000 shares of common stock during 2003 and 2004, respectively, for consulting services rendered in connection with the Company's Yorktown Re-entry Program in south Texas.  The common shares were valued at $1.00 per share  In 2005, the Preferred B Shareholders received a tender offer from Jensen Development Company and C.S. Finance L.L.C., companies wholly owned by Gerald L. Jensen, President and Chairman of the Company. This tender offer is fully described in Footnote 4 below, and incorporated herein by reference.  4. PREFERRED B STOCK TENDER OFFER   In April, 2005, the Company's Board of Directors reviewed the Company's strategic alternatives, including the possible sale or merger of all or part of the Company.  The two objectives were to increase shareholder value and to provide liquidity to the shareholders.  The Board of Directors formed a non-management committee to review the objectives, and any opportunities related to these objectives.  The Preferred B shareholders of the Company received a tender offer from C.S. Finance L.L.C. and Jensen Development Company, "Offerors," two companies wholly owned by Gerald L. Jensen, to purchase all of the outstanding shares of Preferred B stock at $3 per share.   The Offerors Preferred B tender offer was filed with the SEC in June 2005. The Company filed a Form 14D9 with the SEC outlining the position of the non-management committee of the Board of Directors which was neutral as to the tender offer, and advised shareholders to consider the offer based on each individual's situation. The results of the tender offer were reported to the SEC in September 2005.  There were 75,050 shares tendered and accepted prior to the expiration of the tender offer, or 13.9% of the Preferred B stock, at a cost of $225,150. During the tender offer, two Directors tendered all of their shares of Preferred B stock. After the tender offer, a Director sold the majority of his Preferred B shares for a note due in 2006; retaining 8,000 Preferred B shares. Also after the tender offer, a Director, who had tendered one third of his shares, sold the balance of his Preferred B shares for notes payable during 2006 and 2007. These subsequent purchases at $3 per share by C.S. Finance L.L.C. totaled another 33,418 Preferred B shares, of which 29,365 Preferred B shares were purchased from the two Directors. To date, the number of Preferred B shares collectively owned by Gerald L. Jensen, C.S. Finance L.L.C., and Jensen Development Company total 361,659, or 66.9% of the Preferred B shares.  The holders of approximately 94,394 Preferred B shares were unable to be located during the tender offer.  5. STOCKHOLDERS' EQUITY   During 2001, the Board determined that the cash of the Company, which had been building during a period of high oil prices, should be formally allocated between the common stock and the Preferred B stock.  The Board decided to allocate $250,000 cash to the common stock and the balance of cash remaining with the Preferred B stock. The Board then determined that future oil and gas cash flow from the Preferred B assets would be accumulated for Preferred B shareholders.  The Company established separate investment accounts for the Preferred B and common stock investments.   During the year ended December 31, 2005, the Company purchased 1,500 shares of its common stock for $2,362 and the shares were cancelled. In December 2005, the Company purchased on the Over-The-Counter-Bulletin-Board ("OTCBB") 16,156 shares of its common stock for $24,643 which was included in Treasury stock at December 31, 2005. The Company has not repurchased any additional shares of its common stock since December 2005.   The Company has no outstanding stock options, warrants or rights as of December 31, 2004 or 2005.  The Class A Preferred stock was authorized for possible future capitalization and funding purposes of the Company and has not yet been designated as voting or non-voting. Presently, there are no plans or intentions to issue these shares.  In 1996, the Company created a class of Preferred B stock to which the perpetual mineral interests and other oil and gas assets were pledged.  Thus, the Preferred B stock represents the current oil and gas assets of the Company, along with all Preferred B checking and savings accounts and receivables owed to these accounts.  The common stock represents the 2004 Yorktown Re-entry Program and all of the oil and natural gas assets in Dewitt County, Texas, along with all common stock checking and savings accounts and receivables owed to these accounts.   Each common shareholder received an equal number of Preferred B shares, one for one, at the time of this restructuring of the capital of the Company.  The Class B Preferred stock has no par value and limited voting privileges. The Class B Preferred stockholders are entitled exclusively to all dividends, distributions, and other income, which are based directly or indirectly on the  Preferred B oil and natural gas assets. In addition, in the event of liquidation, distribution or sale of the Company, the Class B Preferred stockholders have an exclusive preference to the net asset value of the natural gas and oil assets over all other classes of common and preferred stockholders.   F-9      CROFF ENTERPRISES, INC.    NOTES TO FINANCIAL STATEMENTS   For the years ended December 31, 2003, 2004 and 2005   6. INCOME TAXES   The provisions for income taxes from operations consist of the following:       2003   2004   2005                Federal tax expense   $ 10,000   $ 8,877   $ 72,474   State tax expense   $ --   $ --   $ 10,004                    $ 10,000   $ 8,877   $ 82,478       A reconciliation of the Company's effective income tax rate and the United States statutory rate is as follows:        2003   2004   2005                United States statutory rate     34.00%     34.00%     34.00%   State income taxes, net of Federal income tax benefit     2.55     2.55     2.55   Reduction by valuation allowance (used NOL)     (2.55)     (2.55)     --   Book to tax differences     (24.94)     (28.12)     (14.40)       9.06%   5.88%   22.15%                   At December 31, 2005, the Company had capital loss carry-forwards of approximately $31,000.     7. BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE Basic income (loss) per common share information is based on the weighted average number of shares of common stock outstanding during each year, approximately 566,090, 568,401 and 568,027 shares in 2003, 2004 and 2005 respectively. 8. MAJOR CUSTOMERS Customers which accounted for over 10% of oil and natural gas revenues were as follows for the years ended December 31, 2003, 2004 and 2005:       2003   2004   2005                Jenex Petroleum Corp., a related party     23%     18.1%     25.8%   Merit Energy      *     14.4%     20.1%   Sunoco, Inc.   *   11.9%   12.4%   * less than 10%                       Management believes that the loss of any individual purchaser would not have a long-term material adverse impact on the financial position or results of operations of the Company. F-10      CROFF ENTERPRISES, INC.    SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES - UNAUDITED      In November, 1982, the Financial Accounting Standards Board issued and the SEC adopted Statement of Financial Accounting Standards No. 69 (SFAS 69) "Disclosures about Oil and Gas Producing Activities". SFAS 69 requires that certain disclosures be made as supplementary information by oil and gas producers whose financial statements are filed with the SEC.  The Company bases these disclosures upon estimates of proved reserves and related valuations.  Independent petroleum engineering firms compiled oil and gas reserve and future revenues as of December 31, 2003, 2004 and 2005 for the Company's most significant wells, and consolidated estimates for the balance of the wells.   The standardized measure of discounted future net cash flows relating to proved reserves as computed under SFAS 69 guidelines may not necessarily represent the fair value of the Company's oil and gas properties in the market place. Other factors, such as changing prices and costs and the likelihood of future recoveries differing from current estimates, may have significant effects upon the amount of recoverable reserves and their present value. The standardized measure does not include any "probable" and "possible" reserves, which may exist and may become available through additional drilling activity.  The standardized measure of discounted future net cash flows is developed as follows:  1. Estimates are made of quantities of proved reserves and the future periods during which they are expected to be produced based on year-end economic conditions. 2. The estimated future production of proved reserves is priced on the basis of year-end prices except that future prices of gas are increased for fixed and determinable escalation provisions in contracts (if any). 3. The resulting future gross revenue streams are reduced by estimated future costs to develop and produce the proved reserves, based on year-end cost and timing estimates. 4. A provision is made for income taxes based upon year-end statutory rates. Consideration is made for the tax basis of the property and permanent differences and tax credits relating to proved reserves. The tax computation is based upon future net cash inflow of oil and gas production and does not contemplate a tax effect for interest income and expense or general and administrative costs.  5. The resulting future net revenue streams are reduced to present value amounts by applying a 10% discount factor.     F-11    CROFF ENTERPRISES, INC.    SUPPLEMENTAL INFORMATION - DISCLOSURES   ABOUT OIL AND GAS PRODUCING ACTIVITIES – UNAUDITED      Changes in the standardized measure of discounted future net cash flows are calculated as follows:  1. Acquisition of proved reserves is based upon the standardized measure at the acquisition date before giving effect to related income taxes. 2. Sales and transfers of oil and gas produced, net of production costs, are based upon actual sales of products, less associated lifting costs during the period. 3. Net changes in price and production costs are based upon changes in prices at the beginning and end of the period and beginning quantities. 4. Extensions and discoveries are calculated based upon the standardized measure before giving effect to income taxes. 5. Purchase of reserves are calculations based on increases from the Company's acquisition activities. 6. Revisions of previous quantity estimates are based upon quantity changes and end of period prices. 7. The accretion of discount represents the anticipated amortization of the beginning of the period discounted future net cash flows. 8. Net change in income taxes primarily represents the tax effect related to all other changes described above and tax rate changes during the period. All of the Company's oil and gas producing activities are in the United States. OIL AND GAS PRICES During the year ended December 31, 2005, crude oil and natural gas prices remained highly volatile. The average sale price of oil per barrel in 2005 for the Company was $51.02, compared to $38.81 in 2004. The average sale price of natural gas per Mcf in 2005 for the Company was $5.93 per Mcf, compared to $4.87 per Mcf in 2004. The ultimate amount and duration of oil and gas price fluctuations and their effect on the recoverability of the carrying value of oil and gas properties and future operations is not determinable by management at this time.  F-12      CROFF ENTERPRISES, INC.    SUPPLEMENTAL INFORMATION - DISCLOSURES   ABOUT OIL AND GAS PRODUCING ACTIVITIES – UNAUDITED        RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES   The results of operations for oil and gas producing activities, excluding capital expenditures, impairment charges, corporate overhead and interest expense, are as follows for the years ended December 31, 2003, 2004 and 2005:                       2003      2004   2005    Revenues:                       Oil and natural gas sales    $ 437,586    $ 615,731   $ 934,525   Loss on natural gas "put" contracts      (45,022)      (7,599)     --                          $ 392,564    $ 608,132   $ 934,525                                              Lease operating costs      100,563     148,844     257,813   Production taxes      30,230     43,343     66,954   Depletion, depreciation and accretion      35,000     42,000     55,187   Income tax expense      10,000     8,877     82,478                          $ 175,793   $ 243,064   $ 462,432                                              Results of operations from producing activities (excluding capital expenditures, impairment charges corporate overhead, and interest  expense)    $ 216,771   $ 365,068   $ 472,093                         F-13      CROFF ENTERPRISES, INC.    SUPPLEMENTAL INFORMATION - DISCLOSURES   ABOUT OIL AND GAS PRODUCING ACTIVITIES – UNAUDITED                          2003      2004   2005    Future cash inflows    $ 4,655,000    $ 4,829,000   $ 7,618,000   Future production and development costs      (2,134,000)      (2,259,000)     (2,790,000)                               2,521,000      2,570,000     4,828,000    Future income tax expense      (444,000)      (450,000)     (966,000)                       Future undiscounted net cash flows      2,077,000      2,120,000     3,862,000   10% annual discount for  estimated timing of cash flows       (820,000)      (477,000)     (1,023,000)                                               Standardized measure of discounted future net cash flows    $ 1,257,000    $ 1,643,000   $ 2,839,000                                              The following are the principal sources of  change in the standardized measure of  discounted future net cash flows:                                           Beginning balance    $ 1,019,000    $ 1,257,000   $ 1,643,000                            Evaluation of proved undeveloped  reserves,net of future production  and development costs       (9,000)       --      --   Purchase of proved reserves       450,000      7,000     43,000   Sales and transfer of oil and gas  produced, net of production costs        (307,000)       (405,000)      (607,000)   Net increase (decrease) in prices and costs       385,000      1,022,000     2,207,000   Extensions and discoveries      --      --     60,000   Revisions of previous quantity estimates        58,000      (106,000)     522,500   Accretion of discount      (169,000)      (55,000)     (649,500)   Net change in income taxes       (170,000)      (77,000)     (380,000)   Other      --      --     --                     Ending balance    $ 1,257,000    $ 1,643,000   $ 2,839,000                       F-14      CROFF ENTERPRISES, INC.    SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES – UNAUDITED     PROVED OIL AND GAS RESERVE QUANTITIES  (All within the United States)                         Oil Reserves(Bbls)     Gas Reserves(mcf)                            Balance at December 31, 2002       63,331      457,520                             Revisions of previous estimates      (5,601)      35,359       Extensions, discoveries and other additions      34,036      91,496       Production      (7,656)      (52,998)                                                 Balance at December 31, 2003      84,110       531,377                                            Revisions of previous estimates     4,119     (66,834)                  Extensions, discoveries and other additions     250     2,500                  Production     (8,011)     (59,959)                                             Balance at December 31, 2004      80,468      407,084                                      Revisions of previous estimates     5,434     32,837                  Extensions, discoveries and other additions     (576)     5,293                  Production     (7,630)     (59,403)                                               Balance at December 31, 2005      77,696      385,811                                                    Proved developed reserves                     December 31, 2003       75,904       477,267       December 31, 2004      72,262       352,974       December 31, 2005       77,696      385,811          Costs incurred in oil and gas producing activities for the years ended December 31, 2003, 2004, and 2005 are as follows:         2003      2004   2005                          Property acquisition, exploration and  development costs capitalized     $ 247,708    $ 311,054   $ 92,228   Impairment of property      --      --     52,638   Production costs      130,793      192,187     272,129    Depletion, depreciation, and accretion      35,000      42,000     55,187     F-15      -----END PRIVACY-ENHANCED MESSAGE-----