RESULTS OF OPERATIONS

Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000

     Oil and natural gas revenues for 2001 decreased 2% to $26.2 million from $26.8 million in 2000. Production volumes for natural gas in 2001 decreased 19% to 4,431.9 MMcf from 5,460.6 MMcf in 2000. Realized average natural gas prices increased 29% to $5.04 per Mcf in 2001 from $3.90 per Mcf in 2000. Production volumes for oil in 2001 decreased 20% to 159.7 MBbls from 198.5 MBbls in 2000. The decrease in oil production was due to the natural decline in production primarily at the Jones Branch wells and the initial Matagorda Project wells offset by the commencement of production of the Pitchfork Ranch well. The decrease in natural gas production was due primarily to the sale of the Metro Project during 2000 and the natural decline in production primarily at the initial Matagorda Project wells offset by the commencement of production at the additional Cedar Point Project wells, the West Bay Project well and the Pitchfork Ranch well. Oil and natural gas revenues include the cash effect of hedging activities as discussed below under "Volatility of Oil and Natural Gas Prices".

      Average oil prices decreased 13% to $24.28 per barrel in 2001 from $27.81 per barrel in 2000.

     The following table summarizes production volumes, average sales prices and operating revenues for the Company's oil and natural gas operations for the years ended December 31, 2000 and 2001:

(1) Including cash impact of hedging.

     Oil and natural gas operating expenses for 2001 decreased 16% to $4.1 million from $4.9 million in 2000. Oil and natural gas operating expenses decreased primarily as a result of the lower production taxes and the implementation of cost reduction measures in fields with decreased production. Operating expenses per equivalent unit in 2001 increased to $0.77 per Mcfe from $0.74 per Mcfe in 2000. The per unit cost increased primarily as a result of an increase in severance taxes and decreased production of natural gas as wells naturally decline.

     Depreciation, depletion and amortization ("DD&A") expense for 2001 decreased 9% to $6.5 million from $7.2 million in 2000. This decrease was primarily due to the seismic and drilling costs added to the proved property cost base.

     General and administrative ("G&A") expense for 2001 increased 6% to $3.3 million from $3.1 million for 2000. The increase in G&A was due primarily to the addition of staff to handle increased drilling and production activities. Stock option compensation expense is a non-cash charge resulting from a decrease during 2001 and an increase during the last six months of 2000 in the stock price underlying the stock options that were repriced in February 2000.

     Interest expense, net of amounts capitalized, for 2001 decreased 47% to $7,000 from $13,003 in 2000.

     Income taxes increased to $5.3 million in 2001 from $1.0 million in 2000. The increase was the result of an adjusted valuation allowance during 2000 on net operating loss carryforwards expected to be realized that resulted in a deferred income tax benefit adjustment of $3.6 million which reduced the Company's effective tax rate to eight percent in 2000.