Other income for the year ended December 31, 2001 included a gain on the sale of an investment in Michael Petroleum Corporation ("MPC") of $3.9 million offset by (1) a charge and related legal expenses of $1.4 million in respect of the final settlement of litigation with BNP Petroleum Corporation and (2) a non-cash valuation allowance of $759,000 relating to certain hedge arrangements with Enron North America Corp.

     Net income for 2001 decreased to $9.5 million from $12.0 million in 2000 as a result of the factors described above.

Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999

     Oil and natural gas revenues for 2000 increased 163% to $26.8 million from $10.2 million in 1999. Production volumes for natural gas in 2000 increased 69 percent to 5,460.6 MMcf from 3,235.0 MMcf in 1999. Realized average natural gas prices increased 75% to $3.90 per Mcf in 2000 from $2.23 per Mcf in 1999. Production volumes for oil in 2000 increased 11% to 198.5 MBbls from 179.3 MBbls in 1999. Oil and natural gas production increased primarily as a result of the commencement of production from the Cabeza Creek Project wells, additional Matagorda Project wells, the Cedar Point Project wells, the North La Copita Project wells, the West Bay Project well and higher than anticipated production from wells in which the Company had a back-in working interest after payout, offset by the natural decline of existing wells. Oil and natural gas revenues include the impact of hedging activities as discussed below under "Volatility of Oil and Gas Prices."

     Average oil prices increased 66% to $27.81 per barrel in 2000 from $16.80 per barrel in 1999.

     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, 1999 and 2000:

(1) Including cash impact of hedging.

     Oil and natural gas operating expenses for 2000 increased 63% to $4.9 million from $3.0 million in 1999. Oil and natural gas operating expenses increased primarily as a result of the addition of new oil and gas wells drilled and completed since December 31, 1999 offset by a reduction in costs on older producing fields. Operating expenses per equivalent unit in 2000 increased to $.74 per Mcfe from $.70 per Mcfe in 1999. The per unit cost increased primarily as a result of an increase in severance taxes, increased costs at the Camp Hill Project and decreased production of natural gas as wells naturally decline offset by the addition of new wells with high production rates during 2000.

     Depreciation, depletion and amortization ("DD&A") expense for 2000 increased 67% to $7.2 million from $4.3 million in 1999. This increase was primarily due to the increased amortization of deferred loan costs, increased production and additional seismic and drilling costs offset by the sale of the Metro Project in the second quarter of 2000.

     General and administrative ("G&A") expense for 2000 increased 43% to $3.1 million from $2.2 million for 1999. The increase in G&A was due primarily to the addition of staff to handle increased drilling and production activities. Stock option compensation expense for 2000 is a non-cash charge resulting from the increase during the last six months of 2000 in the stock price underlying the stock options that were repriced in February 2000.