The case proceeded to trial on the counterclaims on December 11, 2000 in the Duval County court. BNP presented evidence that its damages were in the amounts of $19.6 million for the alleged lost sale of the properties, $35 million for loss of the lease development opportunity, and $308 million for loss of the opportunity related to participation in the 3-D seismic project. During the course of the trial, the co-plaintiff presented its motion for summary judgment on the counterclaims based on the doctrine of absolute judicial proceeding privilege. The court partially granted the co-plaintiff's motion for summary judgment as it related to
the filing of a lis pendens, but denied it with regard to the other allegations of BNP on November 12, 2001 in final settlement of the litigation. Upon completion of the trial, the court announced that it would take the case under advisement.

On November 5, 2001, the court filed with the clerk a final judgment that had been signed by the court on October 26, 2001. Pursuant to the terms of the judgment, the Company, and its co-plaintiffs, take nothing on their claims against BNP and are denied any recovery of their interests in the lease, the prospect, or the wells of the Slick Prospect. Instead, the court confirmed title in the lease, prospect, and wells in BNP's affiliate. In addition, the Company and its co-defendants were found to have tortiously and maliciously interfered with two different BNP contracts or prospective contracts and the business of BNP and its affiliate, causing damages with respect to the loss of a sale and the loss of a lease. Under the terms of the Settlement Agreement, the Company paid $472,000 to BNP. The settlement amount, along with the related legal fees, has been included
as other expense in the accompanying financial statements.

In July 2001, the Company was notified of a prior lease in favor of a predecessor of ExxonMobil purporting to be valid and covering the same property as the Company's Neblett lease in Starr County, Texas. The Neblett lease is part of a unit in N. LaCopita Prospect in which the Company owns a non-operating interest. The operator of the lease, GMT, filed a petition for, and was granted, a temporary restraining order against ExxonMobil in the 229th Judicial Court in Starr County, Texas enjoining ExxonMobil from taking possession of the Neblett wells. Pending resolution of the underlying title issue, the temporary restraining order was extended voluntarily by agreement of the parties, conditioned on GMT paying the revenues into escrow and agreeing to provide ExxonMobil with certain discovery materials in this action. ExxonMobil has filed a counterclaim against GMT and all the non-operators, including the Company, to establish the validity of their lease, remove cloud on title, quiet title to the property, and for conversion, trespass and punitive damages. ExxonMobil seek unspecified damages for the lost profits on the sale of the hydrocarbons from this property, and for a determination of whether the Company and the other working interest owners were in good faith or bad faith in trespassing on this lease. If a determination of bad faith is made, the parties will not be able to recover their costs of developing this property from the revenues therefrom. While there is always a risk in
the outcome of the litigation, the Company believes there is no question that the Company acted in good faith and intends to vigorously defend its position. The Company, along with GMT and the other partners, are attempting to negotiate a settlement with ExxonMobil that would allow GMT et al (including the Company) to participate for their respective shares of a working interest in the Neblett unit, and would allow for the recovery of well costs. If the case cannot be settled and the title issue is decided unfavorably, the Company believes that it will ultimately be able to recover its costs as a good faith trespasser. A complete loss of the lease in question would result in the loss to the Company of approximately .6 Bcfe of reported proved reserves as of December 31, 2000 or .9 Bcfe of reported proved reserves as of June 30, 2001. No reserves with respect to these properties were included in the Company's reported proved reserves as of December 31, 2001. At the time of shut in, the Neblett #1 well was producing at the rate of approximately 45 Mcfe per day, the Neblett #2 well was producing at the rate of approximately 90 Mcfe per day and the Neblett #3 well was producing at the rate of approximately 895 Mcfe per day, all net to the Company's interest. The Company believes that an unfavorable outcome in this matter would not have a material impact on its financial statements. The Company has recorded revenues only to the extent of well costs funded by the Company.

     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 provided 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 commenced in February 2001 and 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.

During August 2001, the Company entered into an agreement whereby the lessor will provide to the Company up to $800,000 in financing for production equipment utilizing capital leases. At December 31, 2001, one lease in the amount of $243,369 had been executed under this facility.

At December 31, 2001, the Company was obligated under a noncancelable operating lease for office space. Rent expense for the years ended December 31, 1999, 2000 and 2001 was $108,700, $207,000 and $207,000, respectively. The Company is obligated for remaining lease payments of $225,000 per year through December 31, 2004.