which we expect will provide another 31 gross drill sites: five of which were drilled in 2004, 21 of which will target proved undeveloped reserves and five of which will be exploratory.

Initially, we financed our Barnett Shale activities with our available cash on hand. Subsequently, we have financed a portion of our 2004 capital expenditure program for the Barnett Shale area with funds from the October 2004 issuance of the 10% Senior Subordinated Secured Notes. We are exploring a number of financing alternatives which may be used to partially fund our 2005 capital expenditure program for the Barnett Shale area. We may not be able to obtain such financing on terms that acceptable to us, or at all.

In the Barnett Shale area, we drilled six gross wells (2.1 net) in 2003 and 33 gross wells (13.7 net) in 2004, all of which were successful. We plan to drill 37 gross wells (24.0 net) in this area in 2005, subject to obtaining additional financing to supplement our Credit Facility, additional Senior Secured Note financing available and achieving expected operating cash flows. At the end of 2004 our net production had risen to approximately 2.8 MMcfe/d with 38 gross wells on line and another 22 gross wells in various stages of testing, completion and awaiting pipeline hookup. At the end of February 2005 our estimated net production was 3.5 MMcfe/d.

In addition to our drilling activity, we have continued to expand our Barnett Shale acreage position, growing our net leasehold acreage from approximately 4,100 to 30,700 to 35,000 acres, at the end of 2003, 2004 and February 2005, respectively. Similarly, we have increased our estimated number of developmental locations from four to 40 to 41 horizontal locations, at the end of 2003, 2004 and February 2005, respectively and we have increased our estimated number of exploratory drilling locations (horizontal) in the Barnett Shale area from 21 to 152 to 179 locations, at the end of 2003, 2004 and February 2005, respectively.

Pinnacle Gas Resources, Inc.

During the second quarter of 2001, we acquired interests in natural gas and oil leases in Wyoming and Montana in areas prospective for coalbed methane and subsequently began to drill wells on those leases. During the second quarter of 2003, we contributed our interests in certain of these leases to a newly formed company, Pinnacle Gas Resources, Inc. ("Pinnacle"). In exchange for this contribution, we received 37.5% of the common stock of Pinnacle and options to purchase additional Pinnacle common stock. We account for our interest in Pinnacle using the equity method. As a result, our contributed operations and reserves are no longer directly reflected in our financial statements. In March 2004, Credit Suisse First Boston Private Equity Entities (the "CSFB Parties") contributed additional funds of $11.8 million into Pinnacle to fund its 2004 development program, which increased the CSFB Parties' ownership to 66.7% on a fully diluted basis assuming we and RMG each elect not to exercise our available options.

In March 2005, Pinnacle entered into a purchase and sale agreement to acquire additional undeveloped acreage, which would also significantly increase its development program budget in 2005. CCBM and the other Pinnacle shareholders have the option to participate in the equity contribution into Pinnacle needed to finance this acquisition and its development program in 2005. Should we elect to maintain our proportionate ownership interest in Pinnacle, we estimate that we would be required to contribute $2.5 million. If CCBM opts not to participate, its fully diluted ownership in Pinnacle would be reduced. CCBM currently plans to purchase additional Pinnacle capital stock valued at $2.5 million in March 2005, its share of the first installment of the equity capital needed to fund the acquisition and part of the additional development program. There can be no assurance regarding CCBM's level of participation in future equity contributions, if any.

In addition to our interest in Pinnacle, we have maintained interests in approximately 162,489 gross acres at the end of 2004 in the Castle Rock coalbed methane project area in Montana and the Oyster Ridge project area in Wyoming. During 2004, we opted to exercise our right to cancel one-half of the remaining note payable to RMG, or approximately $300,000, in exchange for assigning one-half of our mineral interest in the Oyster Ridge leases to RMG, leaving CCBM with a 25% working interest in this project area. See "Business and Properties--Pinnacle Transaction" for a description of this transaction. Our discussion of future drilling and capital expenditures does not reflect operations conducted through Pinnacle.

Hedging

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 and more recently oil prices have become volatile. 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.

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