FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1998

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Commodity Risk. The Company’s major market risk exposure is the commodity pricing applicable to its oil and natural gas production. Realized commodity prices received for such production are primarily driven by the prevailing worldwide price for crude oil and spot prices applicable to natural gas. The effects of such pricing volatility have been discussed above, and such volatility is expected to continue.

To mitigate some of this risk, the Company engages periodically in certain limited hedging activities but only to the extent of buying protection price floors for portions of its and the Company managed limited partnerships’ oil and gas production. Costs and any benefits derived from these price floors are accordingly recorded as a reduction or increase, as applicable, in oil and gas sales revenue and were not significant for any year presented. The costs to purchase put options are amortized over the option period. The Company does not hold or issue derivative instruments for trading purposes. The costs related to 1998 hedging activities totaled approximately $377,000, with benefits of approximately $101,000 being received, resulting in a net cash outlay of approximately $276,000 or $0.007 per Mcfe. The costs related to the open contracts totaled approximately $252,000 and had a market value of $267,000 as of December 31, 1998. The costs related to 1997 hedging activities totaled approximately $1,052,000 ($800,000 in 1996) with benefits of approximately $439,000 (none in 1996) being received, resulting in a net cash outlay of approximately $613,000 or $0.014 ($0.041 in 1996) per Mcfe.

Interest Rate Risk. The Company considers its interest rate risk exposure to be minimal as a result of a fixed interest rate on the $115,000,000 Convertible Notes. In regards to its New Credit Facility, the result of a 10% fluctuation in short-term interest rates (approximately 63 basis points) would impact 1999 cash flow by approximately $0.9 million.

Financial Instruments & Debt Maturities. The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, bank borrowings, and convertible notes. The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the highly liquid nature of these short-term instruments. The fair values of the bank borrowings approximate the carrying amounts as of December 31, 1998 and 1997 and were determined based upon interest rates currently available to the Company for borrowings with similar terms. The fair values of the convertible notes were $81.4 million and $113.6 million at December 31, 1998 and 1997, respectively, and were based on quoted market prices as of the respective dates. Bank borrowings under the Company’s new credit facility mature on August 18, 2002. The Company’s $115.0 million convertible notes mature on November 15, 2006.

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