It is my pleasure to report to our shareholders on our accomplishments during 2005, a year of record financial performance for our company. During the year we achieved record revenues, margins, cash flows, and earnings, while continuing to keep our debt leverage low.

     Operational highlights included outstanding results with our development drilling program, contributing to a 37% increase in average daily production in the fourth quarter relative to that of the first half of the year. We also added significant and potentially very exciting acreage positions in several unconventional plays, which should complement our successful conventional exploration and development program. Thanks to our successful drilling in 2005, we entered 2006 with production volumes at record levels, providing us with a "running start" as we enter 2006. More specifically, during 2005 we achieved:


          - 200% Reserve Replacement and 10% Reserve Growth to 133 Bcfe

          - 20% Increase in Q4 2005 Avg. Daily Production Volumes over Q4 2004 to a Record 40.8 MMcfe, with Q1 2006 Avg.
            Daily Production also Up 20% over Q1 2005

          - 34% Increase in Revenues to a Record $97 million

          - 45% Increase in Average Gross Profit Per Unit to a Record $6.81 per Mcfe

          - 41% Increase in EBITDA to a Record $82 million

          - 34% Increase in Net Income to a Record $27.5 million


CATALYSTS FOR GROWTH

     Looking forward to 2006, we see two important catalysts for growth. First, we believe that the momentum provided by our successful development drilling program provides us with excellent visibility for meaningful proved developed reserve and production growth during the year.

     Second, we've made seven substantial field discoveries in seven years, and we'll be very disappointed if we don't make another meaningful discovery in 2006, further adding to our already deep inventory of developmental projects. In addition, our growing diversified inventory of unconventional plays complements our conventional projects, and like our high potential exploration
program provides exciting potential for substantially accelerated growth in shareholder net asset value.


First Catalyst: Successful Development Drilling

     As evidenced by our strong production ramp late in the year, our 2005 development drilling program was very efficient. Allocating the drilling capital expenditures to the 23 development wells we drilled during the year, we estimate that our proved developed drilling cost for our 2005 development wells was approximately $2.76 per Mcfe. Given the low production cost nature of our reserves, our wells generate high margins and high present values. As a result, we believe that each dollar we invested in development drilling during 2005 generated roughly $2 in proved developed PV10% value.

     Given that success, during 2006 we expect to invest approximately $73 million in development drilling, up roughly 55% relative to 2005. Assuming our 2006 development drilling generates the same $2.76 per Mcfe proved developed drilling cost as 2005, we would add approximately 26 Bcfe in proved developed reserves in this year, which would be more than double our 2005 production of 11.9 Bcfe.

     Our developmental drilling success was led by the Vicksburg, where we drilled five successful development wells at an estimated proved developed drilling cost of approximately $1.67 per Mcfe. Given the Vicksburg's low operating expense, and the associated high present value of Vicksburg production, we believe that each dollar we invested in drilling our 2005 Vicksburg wells generated more than $3 in proved developed PV10% value. During 2006 we intend to capitalize on this momentum, we now expect to invest over $26 million of our approximately $73 million development drilling budget in the Vicksburg, up more than 35% relative to 2005. Again, assuming last year's performance, the Vicksburg by itself provides us with the opportunity to more than replace our 2006 total company production. Fortunately, our development drilling program has delivered in our other plays as well, particularly the Hunton and the Granite Wash, where we again have a very active program underway. Given this high quality developmental program, we believe the visibility for our growth in proved developed reserves and production during 2006 is better than ever.


Second Catalyst: High Potential Exploration & New Unconventional Plays

     The second catalyst for growth is provided both by our high reserve potential exploration program, and our relatively new inventory of exciting unconventional projects. During 2006 these projects provide our shareholders with exciting option
value for a significant acceleration in our growth in net asset value.

     We currently plan to drill seven high reserve potential wells in 2006, exposing our company to a net reserve potential that is more that double that of our year-end 2005 reserves. This company has a proven track record for making significant field discoveries, though we generally had smaller working interests than we're currently retaining. Over the last seven years we've made seven substantial field discoveries that have already generated approximately 310 Bcfe in gross proved reserve additions, an average of roughly 46 Bcfe per field. Our proved reserves in these fields has been growing over time, as they also have meaningful probable and possible associated reserves that over time have moved into the proved category. Given our historical success at making these field discoveries, and particularly given the quality of the high potential prospects we expect to test this year, I'll be very disappointed if we don't make at least one significant field discovery in 2006. Because our working interests are generally double that of earlier years, field discoveries this year could be substantially more impactful for our shareholders.

     Regarding our unconventional inventory, after commencing our initiative in early 2005 to build a complementary and diversified inventory of unconventional projects, we've now "placed our bets" on four unconventional plays, providing various levels of risk and reward. Of course we've been active in the Granite Wash of the Anadarko Basin for over ten years now, and as evidenced by our recent drilling successes it is very much a proven unconventional play. The last three wells we've completed in our Hobart Granite Wash project have commenced production at initial rates of between 4.0 and 5.1 MMcfed, providing very attractive economics at $7 per Mcf gas prices.

     We also have over 5,000 acres in another relatively proven unconventional play, the Barnett Shale, where activity by other operators is apparently proving up reserve potential on our acreage. However, the most substantial potential upside for our shareholders lies in two unconventional oil shale plays. In one of these, the Bakken of the Williston Basin, we expect to have substantially delineated the drilling economics by year-end. Thus far we're very encouraged, given that the first horizontal well proximal to our Bakken acreage was reportedly completed at an initial rate of approximately 200 barrels of oil per day, despite some apparent operational difficulties. During the second quarter we are commencing the first of at least three Bakken wells in this same area, where we expect to have approximately 75,000 net acres by mid-year. With continued encouragement, we could grow our position further in this play. Given that we should have results from these three horizontal wells by the third quarter, and given the 15 to 25 additional horizontal wells that we expect other operators to drill during the year in the same area, we expect to be well along the way towards a "proof of concept" this year. The potential upside is very significant, with roughly 117 potential drilling locations, and over 200 Bcfe of potential net reserves, we estimate that the unrisked potential net asset value impact could range between $8 and $18 per share, obviously depending on success.


OPTIMIZING OUR PERFORMANCE

     Looking back at 2005, there are things we did well, such as our successful development drilling, and the addition of new inventories of potential locations in various unconventional plays. On the other hand, our exploration finding costs in 2005 were too high, and this is an area that we've excelled in over our 15 plus year history. The Frio makes up a substantial portion of our exploration drilling, historically it's provided us with high rates of return on our drilling investments and several substantial field discoveries. Over time, as we've moved to the southwest in the Frio trend, we've begun targeting deeper, and substantially larger, Lower Frio targets. However, at the same time we've also encountered more "rock risk" - more of our wells are encountering Frio sands with lower porosities and permeabilities than those we encountered when we were drilling primarily in Matagorda and Brazoria counties to the northeast. That being said, there are a number of 100+ Bcfe Lower Frio fields in the area. Further, we've had a track record of discoveries in the trend, including Providence in 2002 and Bouldin Lake last year, and we therefore believe we have an excellent chance of finding another one. Although our high potential Frio program is outstanding, we've adjusted our program this year in order to improve the probability of delivering attractive all-sources finding costs, each and every year. Following is a summary of the various ways we've optimized our strategy in 2006:

          - First, we're capitalizing on our 2005 development drilling success by increasing our 2006 development drilling
           expenditures by roughly 55%. The majority of this capital is going to the same plays that generated our fourth quarter 2005
           surge in production volumes. We believe that this program provides excellent visibility for growth in proved developed
           reserves and production volumes during 2006.

          - Second, we've optimized our non-proved Gulf Coast drilling program by blending in lower risk and moderate reserve
         potential South Louisiana projects with our generally higher risk, but very high reserve potential Gulf Coast Frio program.
         We believe that, in time, we are going to make a very substantial field discovery in the Lower Frio that will have a meaning-
         ful impact on our net asset value. However, the addition of the lower risk moderate reserve potential South Louisiana projects
         improves the probability that we will deliver solid new reserve adds in 2006 at attractive all-sources finding and development
         costs.

          - Third, we've "bolted on" a diversified unconventional program that, like our high reserve potential exploration program,
         provides our shareholders with exciting option value on a potentially substantial acceleration of growth in shareholder net
         asset value.

     In summary, we'll continue to be focused on efficiently converting our deep inventory of non-producing assets to production and cash flow. At the same time, we will continue to keep our inventory deep, providing plenty of fuel for future growth.
As a company, we are in the "sweet spot" for organic growth, and our long-range plan for building shareholder value is very much on track. I believe that 2006 is shaping up to be possibly our most exciting year, ever.

    In closing, I want to thank our dedicated employees, our loyal business partners, and our new and longstanding fellow shareholders. To all of you, I say "THANK YOU." We look forward to reporting on what should be a very memorable year for all of us.
.” You’ve set the stage for what should be an exciting and rewarding 2003 for our shareholders.