Depreciation, depletion and amortization ("DD&A") expense for 2003 increased 12% to $11.9 million from $10.6 million in 2002. This increase was primarily due to the increased land, seismic and drilling costs added to the proved property cost base.

General and administrative ("G&A") expense for 2003 increased 37% to $5.6 million from $4.1 million for 2002. The increase in G&A was due primarily to higher incentive compensation of $0.6 million, executive severance of $0.3 million, increased legal and professional fees attributable to special projects and rising insurance costs of $0.1 million.

We recorded a $0.8 million aftertax charge, or $0.05 per fully diluted share, on our minority interest in Pinnacle. Of this charge, $0.2 million, or $0.01 per fully diluted share, relates to a valuation allowance for federal income taxes. It is likely that Pinnacle will continue to record a valuation allowance on the deferred federal tax benefit generated from the operating losses incurred during the early development stages of Pinnacle's coalbed methane project. Concurrently, we will record valuation allowances relative to our share of Pinnacle's financial results.

Income taxes increased to $5.1 million in 2003 from $2.8 million in 2002 due to the increase in pre-tax income.

Dividends and accretion of discount on preferred stock increased to $0.7 million in 2003 from $0.6 million in 2002 as a result of the declaration of dividends on preferred stock in 2003.

Net income for 2003 increased to $8.0 million from $4.8 million in 2002 primarily as a result of the factors described above.

Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001

Oil and natural gas revenues for 2002 increased 2% to $26.8 million from $26.2 million in 2001. Production volumes for natural gas in 2002 increased 8% to 4,801 MMcf from 4,432 MMcf in 2001. Realized average natural gas prices decreased 31% to $3.50 per Mcf in 2002 from $5.04 per Mcf in 2001. Production volumes for oil in 2002 increased 151% to 401 MBbls from 160 MBbls in 2001. The increase in oil production was due primarily to the commencement of production at the Delta Farms #1, Riverdale #2, Staubach #1 and Burkhart #1R wells offset by the natural decline in production of other older wells. The increase in natural gas production was due primarily to the commencement of production at the Delta Farms #1, Riverdale #2, Staubach #1, Burkhart #1R and Pauline Huebner A-382 #1 wells offset by the natural decline in production at other wells, primarily from the initial Matagorda County Project 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 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 our oil and natural gas operations for the years ended December 31, 2001 and 2002:

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