.

Oil and natural gas properties not subject to amortization consist of the cost of unevaluated leaseholds, seismic costs associated with specific unevaluated properties, exploratory wells in progress, and secondary recovery projects before the assignment of proved reserves. These unproved costs are reviewed periodically by management for impairment, with the impairment provision included in the cost of oil and natural gas properties subject to amortization. Factors considered by management in its impairment assessment include drilling results by the Company and other operators, the terms of oil and natural gas leases not held by production, production response to secondary recovery activities and available funds for exploration and development. Of the $42.0 million of unproved property costs at December 31, 2002 being excluded from the amortizable base, $2.7 million, $11.7 million and $6.3 million were incurred in 2000, 2001 and 2002, respectively and $21.3 million was incurred in prior years. These costs are primarily seismic and lease acquisition costs. The Company expects it will complete its evaluation of the properties representing the majority of these costs within the next two to five years.

5. INCOME TAXES

All of the Company's income is derived from domestic activities. Actual income tax expense differs from income tax expense computed by applying the U.S. federal statutory corporate rate of 35% to pretax income as follows:

Deferred income tax provisions result from temporary differences in the recognition of income and expenses for financial reporting purposes and for tax purposes. At December 31, 2001 and 2002, the tax effects of these temporary differences resulted principally from the following:

The December 31, 2001 deferred income tax asset relating to the net operating loss carry forward and the deferred income tax liability relating to oil and natural gas acquisition, exploration and development costs deducted for tax purposes in excess of financial statement DD&A have been revised to reflect the 2001 results of operations as a reduction of the deferred income tax asset relating to the net operating loss carry forward. This revision adjustment resulted in a $1.4 million decrease in the deferred income tax asset relating to net operating loss carry forward and a corresponding decrease to the deferred income tax liability relating to oil and natural gas acquisition, exploration and development costs deducted for tax purposes in excess of financial statement DD&A. The net effect of these revisions resulted in no change to the net deferred income tax liability as reflected on the December 31, 2001 balance sheet.

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