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.

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.

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.

LIQUIDITY AND CAPITAL RESOURCES

We have made and expect to make capital expenditures in excess of our net cash flows provided by operating activities.

We will require additional sources of financing to fund drilling expenditures on properties we currently own and to fund leasehold costs and geological and geophysical costs on our exploration projects.

While we believe that current cash balances and anticipated cash provided by operating activities for 2004 will provide sufficient capital to carry out our exploration plans for that time period, our management continues to seek financing for our capital program from a variety of sources. We may not be able to obtain additional financing on terms that would be acceptable to us. If we cannot obtain acceptable financing, we anticipate that we may be required to limit or defer our planned natural gas and oil exploration and development program, thereby adversely affecting the recoverability and ultimate value of our natural gas and oil properties. See "Risk Factors -- We have substantial capital requirements that, if not met, may hinder operations."

Our liquidity position has been enhanced by our receipt of approximately $23.5 million in net proceeds from the completion of our 2004 public offering as described in " -- General Overview -- Secondary Common Stock Offering." Our other primary sources of liquidity have included funds generated by operations, proceeds from the issuance of various securities, including our common stock, preferred stock and warrants, and borrowings, primarily under revolving credit facilities and through the issuance of senior subordinated notes.

Cash flows provided by operating activities were $24.0 million, $19.9 million and $35.1 million for 2001, 2002 and 2003, respectively. The decrease in cash flows provided by operating activities in 2002 as compared to 2001 was due primarily to the one-time gains on the sale of an investment in MPC in 2001. This increase in cash flows provided by operations in 2003 as compared to 2002 was due primarily to higher commodity prices and higher trade payables in 2003.

Estimated maturities of long-term debt, including our seismic obligation, are $2.1 million in 2004, $7.1 million in 2005 and the remainder in 2007. The following table sets forth estimates of our contractual obligations as of December 31, 2003:

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