acquired these options to protect our cash position against potential margin calls on certain natural gas derivatives due to large increases in the price of natural gas. These options were classified as derivatives. As of December 31, 2003, these options have expired and a charge of $119,000 has been included in other income and expense for the year ended December 31, 2003.

Since year-end 2003, we entered into costless collar arrangements covering 1,641,000 MMBtu of natural gas for April 2004 through March 2005 production comprised as follows: 455,000 MMbtu in the second quarter 2004 with average floor and ceiling prices of $5.00 and $6.17, respectively; 276,000 MMbtu in the third quarter 2004 with average floor and ceiling prices of $4.57 and $7.00, respectively; 465,000 MMbtu in the fourth quarter 2004 with average floor and ceiling prices of. $4.73 and $7.00, respectively; and 450,000 MMbtu in the first quarter 2005 with average floor and ceiling prices of $4.64 and $8.00, respectively. We also entered into swap arrangements covering 18,300 Bbls of crude oil for June 2004 and July 2004 production at an average fixed price of $33.63.

RISK FACTORS

NATURAL GAS AND OIL DRILLING IS A SPECULATIVE ACTIVITY AND INVOLVES NUMEROUS RISKS AND SUBSTANTIAL AND UNCERTAIN COSTS THAT COULD ADVERSELY AFFECT US.

Our success will be largely dependent upon the success of our drilling program. Drilling for natural gas and oil involves numerous risks, including the risk that no commercially productive natural gas or oil reservoirs will be discovered. The cost of drilling, completing and operating wells is substantial and uncertain, and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors beyond our control, including:

• unexpected or adverse drilling conditions;
  
  
• elevated pressure or irregularities in geologic formations;
  
  
• equipment failures or accidents;
  
  
• adverse weather conditions;
  
  
• compliance with governmental requirements; and
  
  
• shortages or delays in the availability of drilling rigs, crews and equipment.

Because we identify the areas desirable for drilling from 3-D seismic data covering large areas, we may not seek to acquire an option or lease rights until after the seismic data is analyzed or until the drilling locations are also identified; in those cases, we may not be permitted to lease, drill or produce natural gas or oil from those locations.

Even if drilled, our completed wells may not produce reserves of natural gas or oil that are economically viable or that meet our earlier estimates of economically recoverable reserves. Our overall drilling success rate or our drilling success rate for activity within a particular project area may decline. Unsuccessful drilling activities could result in a significant decline in our production and revenues and materially harm our operations and financial condition by reducing our available cash and resources. Because of the risks and uncertainties of our business, our future performance in exploration and drilling may not be comparable to our historical performance described in this Form 10-K.

WE MAY NOT ADHERE TO OUR PROPOSED DRILLING SCHEDULE.

Our final determination of whether to drill any scheduled or budgeted wells will be dependent on a number of factors, including:

• the results of our exploration efforts and the acquisition, review and analysis of the seismic data;
  
  
• the availability of sufficient capital resources to us and the other participants for the drilling of the prospects;
  
  
• the approval of the prospects by the other participants after additional data has been compiled;
  
  
• economic and industry conditions at the time of drilling, including prevailing and anticipated prices for natural gas and oil and the availability and prices of drilling rigs and crews; and

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