This discussion should be read in conjunction with the financial statements of the Company and notes thereto. The Company's subsidiaries are defined in Note 1 of the financial statements.

Liquidity And Capital Resources:

Cash flow provided by operations for the year ended December 31, 2008, was $84 million, compared to $95 million in the prior year.

Excluding the effects of significant unforeseen expenses or other income, our cash flow from operations fluctuates primarily because of variations in oil and gas production and prices or changes in working capital accounts. Our oil and gas production will vary based on actual well performance but may be curtailed due to factors beyond our control. Hurricanes in the Gulf of Mexico may shut down our production for the duration of the storm's presence in the Gulf or damage production facilities so that we cannot produce from a particular property for an extended amount of time. In addition, downstream activities on major pipelines in the Gulf of Mexico can also cause us to shut-in production for various lengths of time.

Our realized oil and gas prices vary due to world political events, supply and demand of products, product storage levels, and weather patterns. We sell the vast majority of our production at spot market prices. Accordingly, product price volatility will affect our cash flow from operations. To mitigate price volatility we sometimes lock in prices for some portion of our production through the use of financial instruments.

If our exploratory drilling results in significant new discoveries, we will have to expend additional capital in order to finance the completion, development, and potential additional opportunities generated by our success. We believe that, because of the additional reserves resulting from the successful wells and our record of reserve growth in recent years, we will be able to access sufficient additional capital through additional bank financing.

The Company has in place both a stock repurchase program and a limited partnership interest repurchase program. Spending under these programs in 2008 was $5.03 million. The Company expects to expend substantially less in 2009 because of the drop in energy prices.

The Company currently maintains two credit facilities totaling $360 million, with a combined current borrowing base of $126.37 million. The bank reviews the borrowing base semi-annually and, at their discretion, may decrease or propose an increase to the borrowing base relative to a redetermined estimate of proved oil and gas reserves. Our oil and gas properties are pledged as collateral for the line of credit and we are subject to certain financial covenants defined in the agreement. We are currently in compliance with these financial covenants. If we do not comply with these covenants on a continuing basis, the lenders have the right to refuse to advance additional funds under the facility and/or declare all principal and interest immediately due and payable.

During the second quarter of 2008, the Company's offshore subsidiary arranged a subordinated credit facility with a private lender controlled by a director of the Company. The facility provides availability of $50 million and is secured by properties released by the bank and pledged under this agreement. The current advances under this credit facility are $20 million due January 2010.

It is the goal of the Company to increase its oil and gas reserves and production through the acquisition and development of oil and gas properties. The Company also continues to explore and consider opportunities to

further expand its oilfield servicing revenues through additional investment in field service equipment. However, the majority of the Company's capital spending is discretionary, and the ultimate level of expenditures will be dependent on the Company's assessment of the oil and gas business environment, the number and quality of oil and gas prospects available, the market for oilfield services, and oil and gas business opportunities in general.

Critical Accounting Estimates:

Proved Oil and Gas Reserves

Proved oil and gas reserves directly impact financial accounting estimates, including depreciation, depletion and amortization. Proved reserves represent estimated quantities of natural gas, crude oil, condensate, and natural gas liquids that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under economic and operating conditions existing at the time the estimates were made. The process of estimating quantities of proved oil and gas reserves is very complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions (upward or downward) to existing reserve estimates may occur from time to time.

Depreciation, Depletion and Amortization for Oil and Gas Properties

The quantities of estimated proved oil and gas reserves are a significant component of our calculation of depletion expense and revisions in such estimates may alter the rate of future expense. Holding all other factors constant, if reserves were revised upward or downward, earnings would increase or decrease respectively.

Depreciation, depletion and amortization of the cost of proved oil and gas properties are calculated using the unit-of-production method. The reserve base used to calculate depletion, depreciation or amortization is the sum of proved developed reserves and proved undeveloped reserves for leasehold acquisition costs and the cost to acquire proved properties. The reserve base includes only proved developed reserves for lease and well equipment costs, which include development costs and successful exploration drilling costs. Estimated future dismantlement, restoration and abandonment costs, net of salvage values, are taken into account.

Results of Operations:

2008 as compared to 2007

The Company had net income of $541,000 in 2008 as compared to $7,920,000 in 2007. The significant components of net income are discussed below.

Oil and gas sales were $135,036,000 in 2008 as compared to $122,361,000 in 2007. A chart summarizing oil and gas production and revenue is presented below.

                                                                         Increase
                                           2008            2007         (Decrease)
    Barrels of Oil Produced                  658,000         561,000         97,000
    Average Price Received (rounded)   $       84.43   $       66.94   $      17.49

    Oil Revenue                        $  55,554,000   $  37,553,000   $ 18,001,000

    Mcf of Gas Produced                    8,899,000      11,312,000     (2,413,000 )
    Average Price Received (rounded)   $        8.93   $        7.50   $       1.43

    Gas Revenue                        $  79,482,000   $  84,808,000   $ (5,326,000 )

    Total Oil & Gas Revenue            $ 135,036,000   $ 122,361,000   $ 12,675,000

Oil & gas prices received excluding the impact of derivatives were:

                                                        Increase
                                   2008      2007      (Decrease)
                      Oil Price   $ 95.74   $ 68.07   $      27.67
                      Gas Price   $  9.09   $  6.86   $       2.23

Changes in Production are due to additional production from properties added throughout 2008. The increase in oil production is from our 2008 West Texas properties.

Lease operating expenses increased by 22% to $42,643,000 in 2008 as compared to $34,841,000 in 2007. The difference is attributable to costs associated with properties added during 2008 and repairs made to marginal wells currently economic due to higher product price levels. This increase also reflects the overall price increase in oil field services.

General and administrative expenses increased by 18% to $14,512,000 in 2008 as compared to $12,349,000 in 2007. A large portion of this increase is the result of increased compensation expense. In addition there was approximately $438,000 of due diligence expenses incurred in 2008 related to screening offshore acquisitions.

Depreciation and depletion increased by 21% to $77,869,000 in 2008 from $64,507,000 in 2007. This increase is attributed to the Company's offshore properties coupled with the added properties in our West Texas area.

Interest expense decreased by 28% to $7,967,000 in 2008 from $11,062,000 in 2007 due to decreased average debt coupled with a large decrease in average interest rates. The average interest rates paid on outstanding bank borrowings subject to interest during 2008 and 2007 were 5.64% and 8.77% respectively. As of December 31, 2008 and 2007, the total outstanding borrowings were $124,140,000 and $155,000,000, respectively.

Income tax expense of $59,000 in 2008 represents a 10% effective rate as compared to the effective rate of 33% in 2007. The primary reason for the lower effective rate is that percentage depletion deductions, which create a permanent difference, are more significant as a percentage of book income when book income is lower, as it was in 2008. Current tax expense in 2008 of $1,445,000 was partially offset by a benefit of $1,386,000 due to a decline in deferred tax liability.

The current federal tax expense for 2008 is above the statutory rate primarily due to depletion deductions being lower for tax than for book income purposes. This lower depletion is due to a lower basis in oil and gas properties due to prior year intangible costs having been expensed for tax purposes but capitalized for book. This difference was partially offset by the deduction of current year intangible drilling cost.