Interest expense, net of amounts capitalized, for 2000 decreased 63% to $13,003 from $35,000 in 1999. This decrease was primarily due to higher interest cost in 1999 which was not available to be capitalized.

     Income taxes changed from a $1.1 million benefit in 1999 to a $1.0 million expense in 2000 based on improvements in the results which influence taxable income. The Company also adjusted its valuation allowance during 2000 on net operating loss carryforwards expected to be realized. This change in estimate 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.

     Dividends and accretion of discount on preferred stock decreased to none in 2000 from $2.4 million in 1999 as a result of the redemption of preferred stock in the fourth quarter of 1999. As a result of this redemption, no such future charges will be accrued.

     Net income for 2000 increased to $12.0 million from $1.7 million in 1999 as a result of the factors described above.

LIQUIDITY AND CAPITAL RESOURCES

     The Company has made and is expected to make oil and gas capital expenditures in excess of its net cash flow from operations in order to complete the exploration and development of its existing properties.

     The Company will require additional sources of financing to fund drilling expenditures on properties currently owned by the Company and to fund leasehold costs and geological and geophysical cost on its exploration projects.

     While the Company believes that current cash balances and anticipated 2002 operating cash flow will provide sufficient capital to carry out the Company's 2002 exploration plans, management of the Company continues to seek financing for its capital program from a variety of sources. No assurance can be given that the Company will be able to obtain additional financing on terms that would be acceptable to the Company. The Company's inability to obtain additional financing could have a material adverse effect on the Company. Without raising additional capital, the Company anticipates that it may be required to limit or defer its planned oil and gas exploration and development program, which could adversely affect the recoverability and ultimate value of the Company's oil and gas properties.

     The Company's primary sources of liquidity have included proceeds from the 1997 initial public offering, the December 1999 sale of Subordinated Notes, Common Stock and Warrants, the 1998 sale of shares of Series A Preferred Stock and Warrants, the February 2002 sale of Series B Preferred Stock and Warrants, funds generated by operations, equity capital contributions, borrowings (primarily under revolving credit facilities) and funding under the Palace Agreement that provided a portion of the funding for the Company's 1999, 2000 and 2001 drilling program in return for participation in certain wells.

     Cash flows provided by operations (after changes in working capital) were $2.2 million, $17.1 million and $24.0 million for 1999, 2000 and 2001, respectively. The increase in cash flows provided by operations in 2001 as compared to 2000 was due primarily to the increase in trade accounts payable. The increase in cash flows provided by operations in 2000 as compared to 1999 was due primarily to increases in production and commodity prices.

     The Company budgeted capital expenditures in 2002 of approximately $17.7 million of which $2.8 million is expected to be used to fund 3-D seismic surveys and land acquisitions and $14.9 million of which is expected to be used for drilling activities in the Company's project areas. The Company has budgeted to drill approximately 16 gross wells (seven net) in the Gulf Coast region and 30 gross (15 net) CCBM coalbed methane wells in 2002. The actual number of wells drilled and capital expended is dependent upon available financing, cash flow, availability and cost of drilling rigs, land and partner issues and other factors.

The Company has continued to reinvest a substantial portion of its cash flows into increasing its 3-D prospect portfolio, improving its 3-D seismic interpretation technology and funding its drilling program. Oil and gas capital expenditures were $10.3 million, $19.7 and $38.2 million for 1999, 2000 and 2001, respectively. The Company's drilling efforts resulted in the successful completion of 18 gross wells (3.2 net) in 1999, 24 gross wells (6.6 net) in 2000 and 20 gross wells (5.9 net) in 2001 in the Gulf Coast region. All of the 31 gross wells (12 net) drilled by CCBM are awaiting evaluation before a determination can be made as to their success.

     During November 2000, the Company entered into a one-year contract with Grey Wolf, Inc. for utilization of a 1,500 horsepower drilling rig capable of drilling wells to a depth of approximately 18,000 feet. The contract, which commenced in March 2001, provides for a dayrate of $12,000 per day. The rig was utilized primarily to drill wells in the Company's focus areas, including the Matagorda Project Area and the Cabeza Creek Project Area. The contract contained a provision which would allow the Company to terminate the contract early by tendering payment equal to one-half the dayrate for the number of days remaining under the term of the contract as of the date of termination. The contract expired in February 2002. Steven A. Webster, who is the Chairman of the Board of Directors of the Company, is a member of the Board of Directors of Grey Wolf, Inc.