ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

COMMODITY RISK. Our major market risk exposure is the commodity pricing applicable to our oil and natural gas production. Realized commodity prices received for such production are primarily driven by the prevailing worldwide price for oil and spot prices applicable to natural gas. The effects of such pricing volatility have been discussed above, and such volatility is expected to continue. A 10% fluctuation in the price received for oil and gas production would have an approximate $5.1 million impact on our annual revenues and operating income.

To mitigate some of this risk, we engage periodically in certain limited hedging activities, including price swaps, costless collars and, occasionally, put options, in order to establish some price floor protection. Costs and any benefits derived from these price floors are accordingly recorded as a reduction or increase, as applicable, in oil and gas sales revenue and were not significant for any year presented. The costs to purchase put options are amortized over the option period. We do not hold or issue derivative instruments for trading purposes. Income and (losses) realized by us related to these instruments were $(0.9 million), $(1.8 million), and $(1.0 million) or $(0.12), $(0.46) and $(0.21) per MMBtu for the years ended December 31, 2002, 2003, and 2004, respectively.

INTEREST RATE RISK. Our exposure to changes in interest rates results from our floating rate debt. In regards to our Credit Facility, the result of a 10% fluctuation in short-term interest rates would have impacted 2004 cash flow by approximately $0.2 million.

FINANCIAL INSTRUMENTS & DEBT MATURITIES. Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, bank borrowing, Senior Secured Notes and Senior Subordinated Notes. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the highly liquid nature of these short-term instruments. The fair values of the bank and vendor borrowings approximate the carrying amounts as of December 31, 2004 and 2003, and were determined based upon interest rates currently available to us for borrowings with similar terms. Maturities of the debt are $0.1 million in 2005, $0.0 million in 2006, $18.0 million in 2007 and the balance in 2008.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this item is included elsewhere in this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

In accordance with Exchange Act 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, except as provided below, our disclosure controls and procedures were effective as of December 31, 2004 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

During the course of conducting the December 31, 2004 audit of the consolidated financial statements, several accounting adjustments were identified that individually and in the aggregate were not material. However, these accounting adjustments are an indication of significant deficiencies in our internal control that, upon complete assessment by management on or before May 2, 2005, may become a material weakness. In addition, as a result of our ongoing evaluation of internal control over financial reporting, and in preparation for management's assessment, additional problems may be identified that result in our disclosure controls and procedures not being effective at December 31, 2004 for other reasons.

There has been no material change in our internal control over financial reporting that occurred during the three months ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We are relying on the exemption provided in the Order of the SEC in Release No. 34-50754 (the "Order"). Accordingly, we have not included in this Annual Report on Form 10-K either "Management's Annual Report on Internal Control Over Financial Reporting," required by Item 308(a) of Regulation S-K, or the related "Attestation Report of the Registered Public Accounting Firm,"

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