Camp Hill oil field, areas in 2006. The actual number of wells drilled and capital expended is dependent upon available financing, cash flow, availability and cost of drilling rigs, land and partner issues and other factors. Capital expenditures do not include operating costs such as the steam costs that will be required for the multi-year development of our Camp Hill project, as discussed below.

We have continued to reinvest a substantial portion of our cash flows into increasing our 3-D prospect portfolio, improving our 3-D seismic interpretation technology and funding our drilling program. Oil and gas capital expenditures were $31.9 million, $83.9 million (including the Barnett Shale Acquisition) and $123.4 million (reduced by $11.8 million of proceeds from the aforementioned property sale and a seismic participation) for 2003, 2004 and 2005, respectively. Our efforts resulted in the apparent drilling successes comprised of 35 gross wells (9.4 net) in 2003, including six gross wells (2.1 net) in the Barnett Shale area, 65 gross wells (23.6 net) in 2004, including 33 gross wells (13.7 net) in the Barnett Shale area, and 65 gross wells (35.8 net) in 2005 including 37 gross wells (22.1 net) in the Barnett Shale area.

In September 2005, we entered into an agreement to purchase over an 18 month period a non-exclusive license to certain geophysical data at a cost which will range from $2.0 million to $2.5 million, contingent upon whether we exercise another option to acquire additional data under the agreement.

We have accelerated the development of our Camp Hill project. In August 2005, management proposed the acceleration of the Camp Hill development to our board of directors. Accordingly, a development plan was formally approved by the board for increased drilling activity in the Camp Hill field, beginning with an initial 60-well drilling program. In February 2006, our board of directors formally approved a multi-year plan to fully develop the entire Camp Hill field. In furtherance of this plan, we expect to drill between 35 and 40 gross wells (35 to 40 net) in this area at an estimated cost of $3.2 million during 2006. To fully develop the field, we expect to drill approximately 326 wells from 2006 through 2017, at a total cost of approximately $22 million and total operating costs including steam of approximately $175.0 million. The precise timing and amount of our expenditures on additional well drilling and increased steam injection to develop the proved undeveloped reserves in this project will depend on several factors including the relative prices of oil and natural gas.

Our Board of Directors recently approved a revised development plan for increased drilling activity in two tracts in the Camp Hill field in our East Texas area. During 2005, we have drilled seven gross wells (7.0 net) in this area, all of which are apparent successes. Over the next 18 months, we expect to drill between 55 and 60 gross wells (55 to 60 net), including 35 to 40 gross wells in 2006, in this area at an estimated cost of approximately $4.2 million.

Through the end of 2005, Pinnacle has reported that it has drilled 383 gross wells since inception and estimates that 87.7% of these wells have been completed. Pinnacle reportedly added approximately 20.3 Bcfe of net proved reserves through development drilling through December 31, 2005, excluding the 10.6 Bcfe contributed or acquired at inception. Its gross operated production has increased by approximately 271% since its inception (to approximately 17.8 MMcf/d at December 31, 2005), and its total well count stands at 624 gross operated wells, according to Pinnacle. Because of the nature of coalbed methane wells that require an extended dewatering period before significant natural gas production, Pinnacle has not been able to complete its determination on commerciality of all of these wells.

Off Balance Sheet Arrangements

We currently do not have any off balance sheet arrangements.

Financing Arrangements

First Lien Credit Facility

On September 30, 2004, we entered into a Second Amended and Restated Credit Agreement with Hibernia National Bank and Union Bank of California, N.A. (the “First Lien Credit Facility”), maturing on September 30, 2007. The First Lien Credit Facility provides for (1) a revolving line of credit of up to the lesser of the Facility A Borrowing Base and $75.0 million and (2) a term loan facility of up to the lesser of the Facility B Borrowing Base and $25.0 million (subject to the limit of the borrowing base, which is currently $22.5 million). It is secured by substantially all of our assets and is guaranteed by our subsidiary. The First Lien Credit Facility was amended on July 21, 2005 in connection with our new Second Lien Credit Facility and refinancing discussed in detail below.

The Facility A Borrowing Base is scheduled to be redetermined by the lenders each quarter. On December 31, 2004 and December 31, 2005 the Facility A Borrowing Base was $30.0 million and $22.5 million, respectively, of which $18.0 and zero, respectively, were drawn and outstanding.

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