estimates prepared by Ryder Scott Company and Fairchild & Wells, Inc., Independent Petroleum Engineers. Reserve engineering is a F-10 subjective process of estimating underground accumulations of hydrocarbons that cannot be measured in an exact manner. The process relies on interpretation of available geologic, geophysical, engineering and production data. The extent, quality and reliability of this data can vary. The process also requires certain economic assumptions regarding drilling and operating expense, capital expenditures, taxes and availability of funds. The SEC mandates some of these assumptions such as oil and natural gas prices and the present value discount rate.

Proved reserve estimates prepared by others may be substantially higher or lower than the Company's estimates. Because these estimates depend on many assumptions, all of which may differ from actual results, reserve quantities actually recovered may be significantly different than estimated. Material revisions to reserve estimates may be made depending on the results of drilling, testing, and rates of production.

You should not assume that the present value of future net cash flows is the current market value of the Company's estimated proved reserves. In accordance with SEC requirements, the Company based the estimated discounted future net cash flows from proved reserves on prices and costs on the date of the estimate.

The Company's rate of recording depreciation, depletion and amortization expense for proved properties is dependent on the Company's estimate of proved reserves. If these reserve estimates decline, the rate at which the Company records these expenses will increase.

The Company's full cost ceiling test also depends on the Company's estimate of proved reserves. If these reserve estimates decline, the Company may be subjected to a full cost ceiling write-down.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include highly liquid investments with maturities of three months or less when purchased.

INVESTMENT IN UNCONSOLIDATED SUBSIDIARY

The Company's investment in Pinnacle is recorded using the equity method of accounting. Under this method, the investment is recorded at cost initially, and the investment is adjusted for the Company's equity in the subsidiary's profit or loss. The investment is further adjusted for additional contributions to and distributions from the subsidiary.

The Company would also record any loss in fair value of the investment other than a temporary decline.

REVENUE RECOGNITION AND NATURAL GAS IMBALANCES

The Company follows the sales method of accounting for revenue recognition and natural gas imbalances, which recognizes over and under lifts of natural gas when sold, to the extent sufficient natural gas reserves or balancing agreements are in place. Natural gas sales volumes are not significantly different from the Company's share of production.

FINANCING COSTS

Long-term debt financing costs of $0.8 million and $0.5 million are included in other assets as of December 31, 2002 and 2003, respectively, and are being amortized using the effective yield method over the term of the loans (through January 31, 2005 for the credit facility and through December 15, 2007 for subordinated notes payable).

SUPPLEMENTAL CASH FLOW INFORMATION

The Statement of Cash Flows for the year ended December 31, 2002 does not reflect the following non-cash transactions: the $2.5 million acquisition of seismic data, the $0.5 million acquisition of oil and natural gas properties through the issuance of common stock, and the $0.6 million reduction of oil and natural gas properties for the amount of insurance recoveries expected to be received related to difficulties encountered in the drilling of a well. The Statement of Cash Flows for the year ended December 31, 2003 does not include the acquisition of $1.2 million of seismic data through the issuance of common stock and the $0.2 million non-cash cumulative effect recorded in connection with the implementation of SFAS No. 143, "Accounting for Asset Retirement Obligations" (See New Accounting Pronouncements).

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