In 2004, we drilled 71 wells (27.3 net), including 38 wells in the onshore Gulf Coast area and 33 wells in the Barnett Shale play, with a success rate of 92% compared to a success rate of 90% in 2003, in which we drilled 39 wells (10.2 net), in the onshore Gulf Coast and Barnett Shale areas combined. Between January 1, 2002 and December 31, 2004, 78% of our wells drilled were exploratory and 22% were developmental. In 2004, 63% of these wells were exploratory and 37% were developmental. This increase in our percentage of developmental wells reflects our increased activity in the Barnett Shale area, which has a relatively higher concentration of development well targets than the onshore Gulf Coast area.

In 2004, our natural gas and oil revenues reached a record level at $51.4 million, and our net income available to common shareholders was $10.5 million, or $0.53 and $0.48 per basic and fully diluted share, respectively. In 2003, our natural gas and oil revenues were $38.5 million, and our net income available to common shareholders was $7.2 million, or $0.50 and $0.43 per basic and fully diluted share, respectively. These increases in natural gas and oil revenues and net income were attributable in part to the record levels of production discussed above and to higher commodity prices.

Our financial results are largely dependent on a number of factors, including commodity prices. Commodity prices are outside of our control and historically have been and are expected to remain volatile. Natural gas prices in particular have remained volatile during the last few years. Commodity prices are affected by changes in market demands, overall economic activity, weather, pipeline capacity constraints, inventory storage levels, basis differentials and other factors. As a result, we cannot accurately predict future natural gas, natural gas liquids and crude oil prices, and therefore, cannot accurately predict revenues. In 2004, including the effects of hedging activities, our realized natural gas price was 14% higher and our realized oil price was 34% higher in 2004 than in 2003.

Because natural gas and oil prices are unstable, we periodically enter into price-risk-management transactions such as swaps, collars, futures and options to reduce our exposure to price fluctuations associated with a portion of our natural gas and oil production and to achieve a more predictable cash flow. The use of these arrangements limits our ability to benefit from potential increases in the prices of natural gas and oil. Our hedging arrangements may apply to only a portion of our production and provide only partial protection against declines in natural gas and oil prices.

We have continued to reinvest a substantial portion of our operating cash flows into funding our drilling program and increasing the amount of 3-D seismic data available to us. In 2005, we expect capital expenditures to be approximately $85 to $90 million, as compared to $82.6 million in 2004.

At December 31, 2004, our debt-to-total book capitalization ratio was 34.3%, an increase from the 30.4% ratio at the end of 2003. This increase was primarily the result of: (1) an increase of $11 million in the amount borrowed under our revolving credit facility, (2) the issuance of the 10% Senior Subordinated Secured Notes and (3) a $1.6 million net increase related to the 9% Senior Subordinated Notes; partially offset by increases in shareholders' equity from (1) the $23.3 million of net proceeds from the public offering in February 2004 and (2) the $7.5 million preferred stock conversion to common stock in the second quarter 2004. The debt changes are described under "--Liquidity and Capital Resources--Financing Arrangements."

Since our initial public offering, we have grown primarily through the exploration of properties within our project areas although we consider acquisitions from time to time and may in the future complete acquisitions that we find attractive.

2004 Public Offering

In the first quarter of 2004, we completed the public offering of 6,485,000 shares of our common stock at $7.00 per share. The offering included 3,655,500 newly issued shares offered by us and 2,829,500 shares offered by certain existing stockholders. Our net proceeds of approximately $23.3 million from this offering were used: (1) to accelerate our drilling program, (2) to retain larger interests in portions of our drilling prospects that we otherwise would sell down (or for which we would seek joint partners), (3) to fund a portion of our activities in the Barnett Shale area and (4) for general corporate purposes. We did not receive any proceeds from the shares sold by the selling stockholders.

Barnett Shale Area

In mid-2003, we became active in the Barnett Shale play located in Tarrant and Parker counties in Northeast Texas. Our activity accelerated as a result of the acquisition on February 27, 2004 of working interests and acreage in certain oil and gas wells located in the Newark East Field in Denton County, Texas in the Barnett Shale trend for $8.2 million (the "Barnett Shale Acquisition"). This acquisition included non-operated working interests in properties ranging from 12.5% to 45% over 3,800 gross acres, or an average working interest of 39%. The acquisition included 21 existing gross wells (6.7 net) and interests in approximately 1,500 net acres,

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