From January 1, 2001 to December 31, 2004, we participated in the drilling and completion of 13 wells (4.5 net) in 17 attempts in this area. We incurred capital expenditures of $7.0 million and drilled six wells (2.4 net) in the Southeast Texas area in 2004 and expect to devote approximately $4.8 million and drill five wells (1.7 net) in this area in 2005. The Liberty Project Area and Cedar Point Project Area have proven to be successful for us, and we expect that the Liberty Project Area will constitute a significant portion of our drilling program for 2005.

Liberty

We have identified and leased prospects ranging from the Frio to the Cook Mountain formations within the 500 square miles of 3-D seismic data in the Liberty Project Area which now covers significant areas of Liberty and Hardin Counties, Texas. Since January 1, 2001, we have been successful on nine of 12 wells drilled. In 2002, we completed one well that produced an average of 9,787 Mcfe per day during the first 90 full days of production. We operate this well and own a 40% working interest. In 2003, we had another drilling success in this area with a well producing an average of 13,030 Mcfe per day during the first 90 full days of production. We operate this well and own a 46.3% working interest.

SOUTH LOUISIANA AREA

The South Louisiana area primarily contains objectives in the Middle and Lower Miocene intervals. We have acquired licenses for approximately 1,887 square miles of 3-D data and approximately 4,752 net acres of leasehold. The 3-D seismic data sets are concentrated in one general area including St. Mary, Terrebonne and LaFourche Parishes.

Currently, we have identified over nine exploratory drilling locations with an additional ten potential extension locations in the South Louisiana area over which we have licenses for 3-D seismic data. Four of the nine exploratory locations we have identified are relatively lower risk and generally shallower with the other five being relatively higher risk and deeper with greater upside potential. From January 1, 2001 to December 31, 2004, we drilled and completed nine wells (2.5 net) on 14 attempts in this area. We incurred capital expenditures of $8.9 million and drilled four wells (1.7 net) in the South Louisiana area in 2004 and expect to devote approximately $17.8 million to drill ten wells (6.0 net) in this area in 2005.

LaRose

During 2002, we successfully drilled and completed an offset well to the discovery well in this area. We operate the two wells and own a 40% working interest. The discovery well produced at an average of 15,581 Mcfe per day during the first 90 full days of production. We plan to participate in one additional well (0.2 net) in the general area during 2005.

BARNETT SHALE TREND

We began active participation in the Barnett Shale play in the Fort Worth Basin on acreage located west of the city of Fort Worth, Texas in mid-2003. In 2003, we acquired leases on approximately 4,100 net acres and invested $0.9 million to drill six wells (2.6 net), two of which were completed and producing and four of which were awaiting pipeline hookup at year end. Net production from the two online wells (0.6 net) was a combined 380 Mcfe per day at year end in 2003.

In February 2004 we purchased specified wells and leases in the Barnett Shale trend in Denton County, Texas from a private company for $8.2 million. These non-operated properties have an average 39 percent working interest. The acquisition included 21 existing gross wells (6.7 net) and interests in approximately 1,500 net acres, which we expect to provide another 31 gross drill sites.

During 2004, we drilled 33 additional wells (13.7 net) and acquired an additional 26,617 net acres, increasing our acreage at the end of 2004 to 30,717 net acres (primarily in Tarrant, Parker, Denton, Johnson, Hill and Erath counties). 17 out of those gross wells were on-line producing at year-end and the remaining 16 wells are awaiting completion and pipeline hookup. 28 of the drilled wells in 2004 were non-operated, with relatively low working interests. In the second half of 2004, we initiated our operated drilling program and we anticipate the majority of our activity going forward will focus on company operated acreage.

We are continuing to expand our leasehold acquisition in this trend. Production at the end of 2004 and at March 1, 2005 was approximately 2,800 Mcfe/d and 3,500 Mcfe/d, respectively. Net proved reserves have grown from 1.6 Bcfe in December 31, 2003 to 31.7 Bcfe at December 31, 2004.

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