oil revenues and at the end of 2005 our proved oil and gas reserves also reached a record level.

Due to our drilling success, we produced a record 9.6 Bcfe in 2005 compared to 8.3 Bcfe in 2004. At the end of 2005, we also reached a record estimated proved reserves level of 150.6 Bcfe with 50.9 Bcfe of net additions for the year, replacing 530% of our 2005 production. See “Business and Properties - Natural Gas and Oil Reserve Replacement.”

In 2005, we drilled 65 wells (35.8 net), including 20 wells in the onshore Gulf Coast area, 37 wells in the Barnett Shale play and 8 wells in the Camp Hill field and other East Texas areas, with an apparent success rate of 94% compared to an apparent success rate of 92% in 2004, in which we drilled 71 wells (27.3 net), in the onshore Gulf Coast and Barnett Shale areas combined. Between January 1, 2003 and December 31, 2005, 71% of our wells drilled were exploratory and 29% were developmental. In 2005, 65% of these wells were exploratory and 35% 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 2005, our natural gas and oil revenues reached a record level at $78.2 million, and our net income available to common shareholders was $10.6 million, or $0.45 and $0.44 per basic and fully diluted share, respectively. In 2004, our natural gas and oil revenues were $52.4 million, and our net income available to common shareholders was $10.8 million, or $0.54 and $0.49 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 2005, our realized natural gas price was 29% higher and our realized oil price was 37% higher than in 2004.

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 derivative 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 2006, we expect capital expenditures, excluding capitalized interest and overhead, to be approximately $140.0 to $145.0 million, as compared to $127.0 million in 2005.

In 2006, we plan to drill 26 gross wells (11.7 net) in the onshore Gulf Coast area, 49 gross wells (35.0 net) in our Barnett Shale area and 35 to 40 gross wells (35 to 40 net) in our East Texas area, primarily in our Camp Hill oil field. The actual number of wells drilled will vary depending upon various factors, including the availability and cost of drilling rigs, land and industry partner issues, our cash flow, success of drilling programs, weather delays and other factors. If we drill the number of wells we have budgeted for 2006, depreciation, depletion and amortization, oil and natural gas operating expenses and production are expected to increase over levels incurred in 2005. Our ability to drill this number of wells is heavily dependent upon the timely access to oilfield services, particularly drilling rigs. The shortage of available rigs in 2005 delayed the drilling of several wells, slowing our growth in production.

At December 31, 2005, our net debt-to-total net capitalization ratio (computed as (1) total debt net of cash (‘net debt’) divided by the sum of (2) net debt plus (3) total book equity) was 44%, an increase from the 32% ratio at the end of 2004. This increase was primarily the result of: (1) our July 2005 debt refinancing and borrowings under our $150.0 million Second Lien Credit Facility which generated net proceeds of $72.1 million after (a) retiring $52.9 million of outstanding obligations under our senior subordinated notes and senior secured subordinated notes and (b) repaying the $18.5 million of outstanding indebtedness under our First Lien Credit Facility, (2) partially offset by the $17.0 million of net proceeds from the private placement of 1.2 million shares of common stock in June 2005. The equity and 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. In 2004 and 2005 we completed asset acquisitions in our Barnett Shale project area described below in “—Barnett Shale Activity.”

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