Average oil prices increased 3% to $24.94 per bbl in 2002 from $24.28 per bbl in 2001.

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, 2001 and 2002:

Oil and natural gas operating expenses for 2002 increased 19% to $4.9 million from $4.1 million in 2001. 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, 2001 and higher ad valorem taxes. Operating expenses per equivalent unit in 2002 decreased to $0.68 per Mcfe from $0.77 per Mcfe in 2001. The per unit cost decreased primarily as a result of the addition of higher production rate, lower cost per unit wells offset by an increase in ad valorem taxes and decreased production of natural gas as wells naturally decline.

Depreciation, depletion and amortization ("DD&A") expense for 2002 increased 63% to $10.6 million from $6.5 million in 2001. This increase was primarily due to increased production and the additional seismic and drilling costs added to the proved property cost base.

General and administrative ("G&A") expense for 2002 increased 24% to $4.1 million from $3.3 million for 2001. The increase in G&A was due primarily to the addition of contract staff to handle increased drilling and production activities and higher insurance costs.

Interest income for 2002 decreased to $0.1 million from $0.3 million in 2001 primarily as a result of lower interest rates during 2002. Capitalized interest decreased to $3.1 million in 2002 from $3.2 million in 2001 primarily due to lower interest costs during 2002.

Income taxes decreased to $2.8 million in 2002 from $5.3 million in 2001.

Dividends and accretion of discount on preferred stock increased to $0.6 million in 2002 from none in 2001 as a result of the sale of preferred stock in the first quarter of 2002.

Net income for 2002 decreased to $4.8 million from $9.5 million in 2001 primarily as a result of the factors described above.

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 4,432 MMcf from 5,461 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 160 MBbls from 199 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.

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