The Wolfcamp Canyon Sands play is the predominant producer in Edwards, Sutton, Schleicher and Crockett Counties in West Texas. There have been over 11,800 Canyon Sands wells drilled to date.

Major canyon fields located in this area are Sawyer Canyon, Ozona Canyon, Ozona Northeast Proper Canyon, Davidson Ranch Canyon, Henderson Canyon and Ozona Northeast Canyon. To date, the combined production from these fields is over 3.8 Tcfe.

The Canyon Sands are a tight sand and siltstone reservoir that requires large fracture stimulation. The large independent companies currently active in the Canyon Sands play include Anadarko Petroleum Corp., Dominion Resources Inc. and Encore Acquisition Company along with several smaller companies, including Approach.

Since 2004, the Company has added approximately 149 Bcfe of proved gas and oil reserves from unconventional reservoir formations.

At December 31, 2006, all of the Company’s proved reserves and production were located in West Texas and substantially all of those reserves and production were located in the Ozona Northeast field. As of such date, the Company owned working interests in 241 gross (226 net) producing wells with an average net production of approximately 22.7 MMcfe/d for the month of December 2006.

At December 31, 2006, the Company’s total proved gas and oil reserves were approximately 149 Bcfe with a reserve life index of approximately 19 years. The Company’s proved reserves are 94% gas and 51% proved developed.

As of July 31, 2007, the Company had identified a total of 833 drilling locations, of which 644 were located in the Ozona Northeast field, 126 in its Cinco Terry project and 63 in its North Bald Prairie prospect in East Texas.

The Company’s net average production at September 30, 2007 was 20.6 MMcfe/d, composed of 19.3 MMcfe/d from Ozona Northeast and 1.3 MMcfe/d from Cinco Terry. The Company drilled 12 Canyon wells in Ozona Northeast in the third quarter of 2007, three of which were awaiting completion at September 30, 2007. The Company drilled six wells in Cinco Terry in the third quarter of 2007, three of which were awaiting completion at September 30, 2007.

The Company drilled one Cotton Valley well, which is awaiting completion, and spudded a second Cotton Valley well, in its East Texas North Bald Prairie prospect in September 2007. The Company expects to complete and turn both of these Cotton Valley wells to sales in the fourth quarter of 2007.

Lease operating expenses increased $31,000, or 1.5%, for the six months ended June 30, 2007 to $2.0 million from 2.0 million for the six months ended June 30, 2006.

Depreciation, depletion and amortization expense decreased $865,000, or 12.4%, to $6.1 million for the six months ended June 30, 2007 from $7.0 million for the six months ended June 30, 2006.

Interest expense increased $246,000, or 14.4%, to $2.0 million for the six months ended June 30, 2007 from $1.7 million for the six months ended June 30, 2006.