forward-fixed pricing. Forward pricing is utilized to take advantage of anomalies in the futures market and to hedge a portion of the Company's production deliverability at prices exceeding forecast. All of such hedging transactions provide for financial rather than physical settlement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-General Overview".

   Despite the measures taken by the Company to attempt to control price risk, the Company remains subject to price fluctuations for natural gas sold in the spot market due primarily to seasonality of demand and other factors beyond the Company's control. Domestic oil prices generally follow worldwide oil prices, which are subject to price fluctuations resulting from changes in world supply and demand. The Company continues to evaluate the potential for reducing these risks by entering into, and expects to enter into, additional hedge transactions in future years. In addition, the Company may also close out any portion of hedges that may exist from time to time as determined to be appropriate by management.

   The Company typically uses fixed rate swaps and costless collars to hedge its exposure to material changes in the price of natural gas and crude oil. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated cash flow hedges to forecasted transactions. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged transactions.

   The Company's Board of Directors sets all of the Company's hedging policy, including volumes, types of instruments and counterparties, on a quarterly basis. These policies are implemented by management through the execution of trades by either the President or Chief Financial Officer after consultation and concurrence by the President, Chief Financial Officer and Chairman of the Board. The master contracts with the authorized counterparties identify the President and Chief Financial Officer as the only Company representatives authorized to execute trades. The Board of Directors also reviews the status and results of hedging activities quarterly.

   In November 2001, the Company had costless collars with an affiliate of Enron Corp., designated as hedges, covering 2,553,000 MMBtu of gas production from December 2001 through December 2002. The value of these derivatives at that time was $759,000. Because of Enron's financial condition, the Company concluded that the derivatives contracts no longer qualified for hedge accounting treatment. As required by SFAS No. 133, the value of these derivative instruments as of November 2001 ($759,000) was recorded in accumulated other comprehensive income and will be reclassified into earnings over the original term of the derivative instruments. An allowance for the related asset was charged to other expense. At December 31, 2001, $706,000 remained in accumulated other comprehensive income.

   Total oil purchased and sold under hedging arrangements during 1999, 2000 and 2001 were 45,200 Bbls, 87,900 Bbls and 18,000 Bbls, respectively. Total natural gas purchased and sold under hedging arrangements in 1999, 2000 and 2001 were 2,050,000 MMBtu, 1,590,000 MMBtu and 3,087,000 MMBtu, respectively. The net gains and (losses) realized by the Company under such hedging arrangements were $(412,000) and $(1,537,700) and $2,015,000 for 1999, 2000 and 2001, respectively.

   At December 31, 2001, the Company had no derivative instruments outstanding designated as hedge positions. At December 31, 2000, the Company had outstanding hedge positions covering 1,710,000 MMBtu and 18,000 Bbls. These consisted of 1,080,000 MMBtu with a floor of $4.00 and a ceiling of $5.19 for January through December 2001 production and 630,000 MMBtu at an average fixed price of $6.60 for January through March 2001 production. The 18,000 Bbls of oil hedges had a floor of $30.00 and a ceiling of $32.28 for January through March 2001 production. These instruments had a fair market value of ($3,025,000) at December 31, 2000.

   At March 28, 2002, the Company had outstanding hedge positions covering 1,705,000 MMBtu of natural gas at an average fixed price of $3.19 for April 2002 through December 2002 production. The Company also had outstanding hedge positions covering 18,200 Bbls of oil at an average fixed price of $24.65 for April 2002 through June 2002 production and 54,900 Bbls of oil hedged under a costless collar arrangement at a $22.00 floor and a $25.00 cap for April 2002 through September 2002 production.

Competition and Technological Changes

   The Company encounters competition from other oil and natural gas companies in all areas of its operations, including the acquisition of exploratory prospects and proven properties. The Company's competitors include major integrated oil and natural gas companies and numerous independent oil and natural gas companies, individuals and drilling and income programs. Many of its competitors are large, well-established companies with substantially larger operating staffs and greater capital resources than those of the Company and which, in many instances, have been engaged in the oil and natural gas business for a much longer time than the Company. Such companies may be able to pay more for exploratory prospects and productive oil and natural gas properties and may be able to identify, evaluate, bid for and purchase a greater number of properties and prospects than the Company's financial or human